Mega Projects: Cost Overruns In Oil & Gas

Prospective megaprojects in design – a combined group of over $400bn by most estimates – have now been postponed, re-phased, re-cycled or cancelled. Fueled by high oil prices for over a decade, long-cycle industry project portfolios now need to be completely re-modelled to adapt to a structurally lower-price future.

The change is necessary and overdue: megaproject delivery at over $100/bbl was already universally poor due to increasing complexity, scale and input cost inflation. In addition, a small number of megaprojects in a portfolio rapidly dominate capital allocation, cash-flow, internal management resources, and deeply impact all major corporate financial performance indicators. At high oil prices, these projects were a drag on overall outcomes - at low oil prices they now plunge every corporate marker into the red.

For future projects, reduced supplier labor and equipment costs, although necessary, will not be sufficient to solve this issue. Companies’ strongest lever is control over their project choices and functional organizations – they must now extend a similar discipline over all aspects of project execution with the third-parties they depend on for delivery.

Project Owner teams therefore need to have the discipline of standardized professional systems, tools and templates to offer excellence in project execution. Change control, rapid approval and governance processes along with transparent communication and contract performance measurement will be critical for efficient project management.

New project portfolios need to be leaner, more rapid and flexible, and have more disciplined execution to compete in the changing environment. Only these features, in combination with decreased supply chain costs, are likely to be successful in a structurally lower-price world.

Whats Next?
Download the Lower prices demand a hard look at costs whitepaper here