How to Mitigate the Risk of Value Loss in E&P Mega-Projects (Project Risk)
How to mitigate the risk of value loss in E&P mega-projects; Oil and Gas project economics.
In a keynote presentation at the 2014 Offshore Technology conference (OTC) in Houston, Texas, IPA Manager of Exploration & Production Neeraj Nandurdikar argued that in the last decade poor project execution and/or poor project selection practices have led to a 41 percent loss of project NPV in oil and gas sector. IPA’s analysis indicates that E&P operators are focusing on the wrong value drivers, setting projects up for failure from the beginning.
E&P performance in project management seems to be worse than any other industry IPA study revealed. The analysis suggests an immediate need for a) accepting that there is a problem, b) looking into the root causes, and c) that there might be a need for organizational changes within project development/management of E&P sector.
Few highlights from IPA’s report to 2014 OTC:
- 40% of projects miss their P10-P90 range of reserves
- 60% of projects overrun by more than 20%
- 60% of project chase Schedule as the primary objective over production or cost
- The need for speed does not allow enough time for basis analysis (both in subsurface and facilities)
The report calls for following mitigation actions to be hired by E&P sector to improve project KPIs:
- Building organizational capabilities in project development/execution (focus on early phase)
- Focusing on Integration and Interface Management and timely flow of information
- The need for an Asset Integrator who will be accountable and responsible for business results who has understanding of all the broad aspects of asset development
- Go slow to be able to go fast (focus on early phase, scope definition)
Ironicly, we came to a similar list of learning in our project team in Statoil Canada. Gap analysis of the past 3 years of project development/execution within our oil sands team revealed the need to emphasize on Project Integration and Interface Management. Today there is more emphasize on the role of the Asset Owner in interface management, risk mitigation and setting priorities and of course safe guarding the non-negotiables at the decision-gates.
Getting alignment and harmony within extended project team in a full-matrix organization is not straight forward and that’s what we are constantly working on.
All in all, mega projects within oil and gas sector need a fresh chapter. With billions of spending in the budget (upstream 2014 budget is about $723b) there is huge opportunity for E&P sector to create more value by considering the basics of the project management, looking at the current performance and plan ahead.