By Mike Lynn, Deloitte
EACH year, Deloitte releases an oil and gas ‘reality check’ that identifies global challenges and issues for the sector and attempts to predict their direction.
The overarching theme of our 2014 report emphasises expansion and contraction on a number of fronts, but oil and gas megaprojects, and the need to for new project management strategies, is particularly relevant to operators in Australia.
Limited growth prospects with traditional reserves and the economic boom of the early 2000s moved capital expenditure toward new-age projects (eg LNG, gas-to-liquids, deepwater, and Arctic), but a series of delays and cost overruns deflated enthusiasm for these efforts. A case in point is the Gorgon LNG project with its 40 per cent cost blowout and delays.
Flat crude prices and subdued global demand since the GFC are further challenging the development of new-age projects around the world, but the ultimate challenge for them arrived in the form of the US shale boom and the rapid growth of unconventionals.
New-age projects make it possible to access stranded and undeveloped reserves, but they come with higher technical complexity and risks as well as operating challenges.
As a result, the reserve weighted risk score of megaprojects was expected to climb along with the proliferation of new-age projects during the early 2000s.
However, this expectation was never realised, and the direction of capital expenditure, as well as the risk profiles associated with them, changed course after 2006 as the shale-boom got underway in the US.
Multi-billion-dollar investments by US majors and independent E&P companies led to the rapid adoption of these technologies, and enabled companies to focus swiftly on improving efficiency. In addition, shale is primarily an onshore resource.
Thus, megaprojects in the unconventional realm typically present fewer operating challenges than those in the new-age sphere, and they have the additional advantage of being able to use existing infrastructure.
The inclusion of shale efforts effectively lowered the risk profile of the entire megaprojects portfolio by pushing riskier new-age endeavours farther out on the spectrum.
Consequently, the average risk score of megaprojects in the shale era is estimated to be at par with scores in the late 1990s.
The shale era slowed the pace of new-age project development for a number of large US independents which diverted funds from their international portfolios to US shale resources.
Nonetheless, new-age projects are still contributing to growth in oil and gas reserves. Despite the shale boom, the share of new-age projects among global megaproject reserves is estimated to grow, with the longer term picture likely be attributable to faster-than-conventional decline rates in shale fields and limited opportunities in traditional areas.
Importantly, new-age projects also play a key role in the long-term growth strategies of integrated oil companies. However, the long lead times necessary to develop these often jeopardise the near-term economics.
The bottom line, however, is that new-age projects are essential for long-term growth, but their relatively higher risk profiles challenge traditional project management strategies.
When it comes to successfully managing new-age megaproject successfully, there is no one-size-fits-all solution. However blending innovative approaches to project management with selective industry best practices will allow effective risk responses.
Modern project management strategies will increasingly be required if oil and gas companies are to reap the benefits of new-age projects.
Leading industry practices suggest these should, at a minimum, include enhanced upfront engineering and planning, an agile project monitoring and evaluation methodology, increased integration and collaboration between project participants, and a system of emerging technologies, tools and experiential knowledge to promote operational excellence.