There’s an old saying in the newspaper business: If a good story is worth telling once, it’s worth telling twice. But in this case, I’m taking it further and returning to the same subject for the third time this year—soaring costs.

The subject of budget-busting costs and schedule overruns was flagged up in a report by Ernst & Young (E&Y), which highlighted that megaproject budget overruns would cost the oil and gas industry $500 billion extra this year alone.

Although not telling us anything we didn’t already know (see my March and May columns), when you dig into the detail, it makes uncomfortable reading.

How serious a situation must our industry be in when one of the “positives” is that the average megaproject budget overrun in North America is 51%? But that’s the case when you then find out South American megaprojects are on average 102% over budget. The averages for other regions are little better.

Middle Eastern projects come out particularly badly, with a shocking 89% of the region’s projects facing cost overruns and 87% also facing schedule delays.

E&Y studied 205 projects with proposed capital investment of more than $1 billion where cost data were available (out of 365 projects examined overall.
The report’s authors lay the blame largely at the feet of this industry, putting it down mainly to poor portfolio management, inadequate planning, ineffective project management and aggressive estimates.

It does go on to admit that there are other external factors, of course—financial, geopolitical, regulatory and security, to name but a few. But the industry could do “significantly more” to prepare for these, it continued.

In a somewhat forlorn attempt to soften the blow a little, it added that the high number of megaproject overruns “is not particular to the industry” and has been identified in other sectors, including government, real estate construction, mining, and power and utilities.

However, it continued, these repeated failures raise serious questions as to the industry’s ability to develop accurate, unbiased final investment decision (FID) budgets and schedules and stick to them.

A look in the report at the top 20 largest post-FID projects further reveals that 65% of those analyzed were facing cost overruns, with an average escalation of 23% from the approved FID budget.

Worryingly, E&Y’s findings largely fall in line with the observations of another study from three years ago, when the Independent Project Analysis study found that 78% of upstream megaprojects faced either cost overruns or delays. That in itself was already a serious deterioration from 2003, when 50% of projects were over budget or late.

The E&P sector has, thankfully, started to tackle the increased cost environment through budget cuts, standardization initiatives and so on. But it will need to be at its innovative best to successfully—and realistically—deliver its next generation of megaprojects efficiently and on budget. If it does not, investors will simply take their dollars elsewhere.

Comments