Why are the values of large capital projects routinely overestimated?

2016 ◽  
Vol 56 (2) ◽  
pp. 584 ◽  
Author(s):  
Stephen Reid
Keyword(s):  
Portfolio Management ◽  
Oil And Gas ◽  
Capital Expenditure ◽  
Commodity Prices ◽  
Oil And Gas Industry ◽  
Base Case ◽  
Full Spectrum ◽  
Capital Projects ◽  
Track Record ◽  
Project Costs

The values of resources projects are routinely overestimated and poorly understood when projects are sanctioned. The challenge with this is that shareholder funds can be squandered on projects that are less attractive than they are perceived to be. This extended abstract addresses how this happens. Behavioural biases at the organisational, portfolio, and project level lead to the benefits of projects being overestimated. Forecasts of capital expenditure and project timing are routinely optimistic. The author will survey the recent track record of the oil and gas industry in estimating project costs, showing that project costs and timelines are positively skewed; that is, costs and timelines have a greater tendency to be in excess of original estimates. Project valuations are often presented as simple base case and anchored high/low cases. A poor understanding of the full spectrum of value outcomes can remove the chance for the project design to be enhanced and the benefits of flexibility are routinely ignored. Small biases in commodity prices and demand projections can significantly improve the appearance of a project, particularly when these metrics move together. Too much comfort is placed in the FEED processes. There is a way to consider value to enable better decisions to be made when sanctioning resources projects. This approach combines tools and techniques from decision analysis, corporate finance and valuation, portfolio management, data analytics, and behavioural economics to provide tailored insights. The author will work through a case study on how to present value differently.

Better project delivery: Australia's value opportunity

2019 ◽  
Vol 59 (2) ◽  
pp. 709
Author(s):  
Angus Rodger
Keyword(s):  
Large Scale ◽  
Oil And Gas ◽  
Investment Decision ◽  
Oil And Gas Industry ◽  
Safety Net ◽  
Project Delivery ◽  
Capital Projects ◽  
Cost Overruns ◽  
Gas Industry ◽  
Track Record

Has the industry seen the light on project delivery? Numerous signs of improved execution through the downturn in Australia and across the globe suggest oil and gas companies are finally getting it right after a lengthy period of dismal performance. Even before prices went to US$100 per barrel and beyond, the oil and gas industry had a poor track record of delivering major projects. However, higher prices exacerbated the situation, encouraging poor capital discipline and overconfidence in undertaking large-scale, highly complex projects that overstretched the supply chain. The results were delays, cost overruns and billions of dollars in value destroyed. Over the past decade the average project was delivered 6 months late, with costs up 14% compared with the forecast at final investment decision. The top 15 cost blowouts were a cumulative US$80 billion over budget. Much of that was in Australia. But lessons have been learned. Without the safety net of higher prices, the successful execution of capital projects has become of crucial importance to the industry. There is now evidence of post-downturn projects being delivered on time and on budget; in Australasia, recent examples include Greater Western Flank Phase 2 and the Bayu-Undan infill drilling campaign. But do these successes mean execution has really improved? It can be argued these are relatively simple brownfield, subsea developments. When we enter the next investment cycle with bigger projects (Scarborough, Browse and Barossa), will we see the same old mistakes repeated again?

Recovering large Brownfield projects in distress

2014 ◽  
Vol 54 (2) ◽  
pp. 546
Author(s):  
Andrew Stewart
Keyword(s):  
Oil And Gas ◽  
Investment Decision ◽  
Industrial Relations ◽  
Large Body ◽  
Oil And Gas Industry ◽  
Calendar Time ◽  
Full Spectrum ◽  
Track Record ◽  
Design Changes ◽  
Recent Case Study

A large body of knowledge exists about how to plan and establish projects for success; from project management guidelines to staged gate-execution methodologies. Despite such prescriptive means to guarantee project success, the upstream oil and gas industry has a poor track record for delivering large projects. Little guidance exists on how to restore delivery assurance to partially executed projects in distress. Furthermore, recovery efforts for large brownfield projects, mid-way through their execution, are further complicated and highly constrained. Operators and contractors alike are understandably concerned about the high failure rate of projects, particularly as Australia competes for global capital in the final investment decision for a project’s development. Issues cover the full spectrum of safety, cost, schedule, start-up, and operability. Furthermore, unanticipated issues such as industrial relations, resourcing, project controls, estimate basis, and design changes all play a central role in why projects find themselves in distress. In a recent case study, a structured recovery approach restored delivery assurance to a $900 m upstream brownfield project. Despite the numerous challenges encountered during the recovery efforts, the project went on to deliver ahead of its revised cost and schedule commitment, while also achieving outstanding safety performance. The self-governance program was instrumental in restoring delivery performance through responsive decision making that was robust, repeatable and preserved free calendar time for early intervention on high value recovery issues. The journey of recovery also restored a fractured client and contractor relationship by fostering a project delivery environment that was highly collaborative.

AVOIDING CAPITAL COST BLOWOUTS ON OIL AND GAS PROJECTS

2003 ◽  
Vol 43 (1) ◽  
pp. 665
Author(s):  
R.A. Hogarth
Keyword(s):  
Oil And Gas ◽  
Capital Expenditure ◽  
Mining Industry ◽  
Oil And Gas Industry ◽  
Capital Investments ◽  
Due Diligence ◽  
Capital Projects ◽  
Gas Industry ◽  
Return On Capital ◽  
High Level

Modern corporate practices have been slow to come to grips with the risks of large capital expenditure projects, particularly the processes of due diligence on investment submissions and high level monitoring of project implementation.Unlike the mining sector where major project cost blowouts have received intense public scrutiny, collection of data on this issue is difficult in the oil and gas sector and there remains a reluctance of companies to share horror stories. The increasing trend towards company acquisitions rather than exploration, the rates of return on capital investments reported by oil and gas companies and the data available on this issue within the mining industry point towards a potential problem for the oil and gas industry and one that, with appropriate corporate practice could be more readily identified.This paper puts forward the case for more effective corporate practices in relation to large capital projects in optimising return on capital and discusses the role of project owner senior management and the key factors impacting on capital expenditure blowouts.Effective project due diligence, monitoring of project implementation and integration management are put forward as the three key focuses for Boards and management in ensuring that cost blowouts are avoided.

Agile framework for capital projects

2021 ◽  
Vol 61 (2) ◽  
pp. 422
Author(s):  
Polly Mahapatra ◽  
Paris Shahriari
Keyword(s):  
Oil And Gas ◽  
Hybrid Approach ◽  
Oil And Gas Industry ◽  
Quick Response ◽  
Capital Projects ◽  
Gas Industry ◽  
Response To Change ◽  
The Cost ◽  
Early Phases ◽  
The Ideal

Under the increased pressure of rapidly changing market conditions and disrupting technologies, continuous improvements in efficiency become indispensable for all oil and gas operators. Traditional project management principles in the oil and gas industry employ rigid methods of planning and execution that can sometimes hinder adaptability and a quick response to change. Considering the potential that Agile principles can offer as a solution, the challenge, therefore, is to identify the ideal, hybrid, approach that leverages Agile while incorporating the traditional linear workflow necessitated by the oil and gas industry. This paper seeks to assess pre-existing literature in the application of the Agile principles in the oil and gas industry with a focus on Major Capital Projects (MCPs), backed by the successes experienced as a result of specific pilot projects completed at Chevron’s Australian Business Unit. In particular, this paper will focus on how agility has resulted in improvements to the cost, schedule, teaming and cohesion of MCPs in the early phases as well as key learnings form the pilot agility projects.

scholarly journals DETERMINATION OF THE SUSTAINABILITY OF THE PROJECT PORTFOLIO OF THE OIL AND GAS SECTOR OF THE ECONOMY TO EXTERNAL FACTORS

2021 ◽  
pp. 32-40
Author(s):  
L.S. Leontieva ◽  
◽  
E.B. Makarova ◽  
Keyword(s):  
Oil Recovery ◽  
Portfolio Management ◽  
Oil And Gas ◽  
Oil And Gas Industry ◽  
External Factors ◽  
Project Portfolio ◽  
Project Portfolio Management ◽  
Oil And Gas Companies ◽  
Oil And Gas Sector

The oil and gas sector of the economy in many states remains the main source of foreign exchange and tax revenues to the budget. Moreover, its share, for example, in Russia, accounts for about 12 % of all industrial production. However, this sector, as the practice of world oil prices shows, is experiencing not only a rise, but also a decline. Consequently, the problem of forming a balanced portfolio of oil and gas assets is an object of close attention on the part of national oil and gas companies. The issues of choosing the optimal combination of oil and gas assets in the portfolio are no less urgent, especially among the tasks that all oil and gas companies face, both in Russia and abroad. An investment portfolio or a portfolio of oil and gas assets, which includes new projects for the commissioning of fields, as well as measures to enhance oil recovery, and exploration are objects of real investment. The high volatility of the oil and gas industry is influenced by various factors, including: macroeconomic, innovation risks and a number of others. These circumstances stimulate the sector to increase the resilience of its project portfolios in order to respond flexibly to changes. In an increasingly challenging and uncertain environment, oil and gas companies around the world face constant pressures as difficult strategic decisions and building long-term plans lead to a sustainable portfolio. In order to achieve their goals and maximize profitability, companies should apply certain algorithms in their practice. The article substantiates the role and importance of project portfolio management in achieving the goals of the state and companies in the oil and gas sector. The main goal of the article is to build an algorithm that is aimed both at determining the stability of the portfolio and the ability to flexibly respond to changes in the environment. The scientific novelty of the research lies in the determination of an algorithm for assessing the sustainability of a portfolio of projects of oil and gas companies. Application of this algorithm will allow oil and gas companies to take into account the influence of external factors. The research methodology is based on such methods as analysis of internal regulations and reporting of companies for project portfolio management, risk analysis, project ranking; grouping and classification method.

Ready to collaborate? Operator and supply chain under the spotlight

2017 ◽  
Vol 57 (2) ◽  
pp. 498
Author(s):  
Mike Lynn ◽  
Alan Samuel
Keyword(s):  
Oil And Gas ◽  
Oil And Gas Industry ◽  
Commodity Price ◽  
Capital Projects ◽  
Gas Industry ◽  
New Ways Of Working ◽  
Service Companies ◽  
The North ◽  
The North Sea ◽  
The Uk

In the last 12 months or so, particularly with the drop in oil price, there’s been a lot of speculation about the future of the Australian oil and gas industry. Strenuous efforts are being made to bring down costs, reduce complexity and expedite the completion of major capital projects. Yet with the commodity price looking likely to be subdued for some time, serious questions persist. How can we sustain activity in Australia, secure the investment needed to continue exploration and appraisal drilling, for the next wave of projects? In looking for answers to these challenges, collaboration is a theme that comes up time and time again. But what does it actually mean? What does it look like in practice? Who does it well and how? And which companies are reaping the rewards of great collaboration? To fill this knowledge gap we are launching a survey which will look at many aspects of collaboration in the Australia and compare this with the results of similar surveys conducted in the UK. We will be looking to survey both operators and service companies working in the Australia and find out: What does collaboration mean? What constitutes effective collaboration? How do companies view themselves and each other as collaborators? How does collaboration in Australia compare with companies in the North Sea? We hope a better understanding of collaboration could help companies in Australia continue to improve productivity and efficiency, adopt new ways of working, and truly make the most of Australia’s abundant resources.

2010 PESA industry review–exploration

2011 ◽  
Vol 51 (1) ◽  
pp. 147
Author(s):  
Ciaran Lavin ◽  
Terry Walker ◽  
Yvette Knowles
Keyword(s):  
Global Economy ◽  
Oil And Gas ◽  
Commodity Prices ◽  
Oil And Gas Industry ◽  
Gas Industry ◽  
Seismic Surveys ◽  
Extensive Coverage ◽  
Primary Driver ◽  
Exploration Drilling ◽  
Northwest Australia

An uncertain global economy, offset by strong commodity prices, provided the backdrop to a subdued yet solid level of exploration activity in 2010. The major loci of activity in the Australian oil and gas industry were the Exmouth Plateau, where exploration for conventional gas in support of LNG projects was the primary driver, and the Bowen/Surat Basin, where coal seam gas (CSG) for LNG was the main target. Onshore permit awards dominated new licensing in 2010, with 31 exploration permits awarded over an area of 190,000 km2. The majority of these permits are focused on unconventional gas exploration. Conversely only 14 exploration permits (30,000 km) were awarded offshore, all in northwest Australia. This historically low level can be related to an already extensive coverage of existing permits in the offshore petroleum provinces and delays in the announcement of acreage awards from the 2009(II) acreage release. Twenty-nine 2D seismic surveys were started in 2010, with three still active at the end of the year. Once completed, the 2010 surveys will total nearly 37,000 km of data, with 76% offshore. Twenty-one 3D seismic surveys commenced in 2010, with six still active at year end. The 2010 surveys will ultimately comprise approximately 29,000 km2 of data, with 95% offshore. Northwest Australia dominated seismic activities. Exploration drilling for conventional hydrocarbon resources was relatively subdued in 2010, with 63 wells spudded, compared to 92 wells in 2008 and 74 in 2009. Of the 49 wildcat wells where results are known, 51% reported hydrocarbon discoveries. This was a little less than the 57% in 2009 and up on the 39% in 2008. The discoveries were distributed across most of the traditional petroleum provinces. High levels of CSG drilling continued in 2010, exceeding 2008 activity but less than that of 2009. At least 648 CSG wells were spudded in 2010, mostly in the new heartland plays of the Bowen/Surat, Gunnedah and Clarence-Moreton basins. This compares with more than 600 CSG wells drilled in 2008 and more than 900 in 2009. The first dedicated Australian shale gas exploration drilling took place in 2010. Emerging shale plays in the Cooper and Perth basins were tested.

MULTI-CLIENT COLLABORATIVE R&D CONTRIBUTING TO NATIONAL PROSPERITY: A TALE OF TWO INDUSTRIES

1998 ◽  
Vol 38 (1) ◽  
pp. 794
Author(s):  
J. Cucuzza
Keyword(s):  
Oil And Gas ◽  
Industrial Relations ◽  
Cost Effective ◽  
Oil And Gas Industry ◽  
Common Interest ◽  
Research Association ◽  
Short Term ◽  
Business Units ◽  
Track Record ◽  
Business Goals

The business landscape has undergone some significant changes over the last several years. Accompanying these changes has been an alignment of corporate R&D with business goals. This has resulted in significant downsizing of corporate research laboratories and the devolving responsibility for R&D matters to operating sites or business units. The downside of this is that the operations are now more than ever focussing on productivity, industrial relations and other essential short-term profitability-motivated issues. Consequently, the changing environment is creating cultures that value and reward short-term results. This short-termism has important implications to industry and the research community.One of the more successful and cost-effective mechanisms by which Australia can enhance its R&D base and consequent prosperity is through collaborative R&D. The Australian Minerals Industries Research Association (AMIRA), together with its oil and gas Division APIRA, has demonstrated over the years how effective this can be. AMIRA's raison d'etre is to assist the resource industries improve their technology position through collaborative R&D. It achieves this by working closely with researchers and industry to identify areas of common interest, develop research proposals, and seek financial support for these proposals from industry. Once a project commences, the Association administers the financial and reporting aspects, as well as monitoring progress, organising progress review meetings and assisting in technology transfer. AMIRA/APIRA has the track record, the systems and expertise to facilitate and manage collaborative R&D focussing on industry needs.The evolution of the Australian collaborative R&D environment in the oil and gas and minerals sectors has been significantly different. The oil and gas industry, particularly in exploration, does not have a history of strong collaborative R&D in Australia. The reasons for this are varied and can be found in the different corporate cultures between mineral and oil and gas companies.

Business environment review 2020

2021 ◽  
Vol 61 (2) ◽  
pp. 347
Author(s):  
Simon Molyneux
Keyword(s):  
Carbon Emissions ◽  
Oil And Gas ◽  
Supply And Demand ◽  
Petroleum Industry ◽  
Commodity Prices ◽  
Oil And Gas Industry ◽  
Business Environment ◽  
Gas Industry ◽  
The Impact ◽  
Oil Gas

The petroleum (oil, gas and LNG) business environment in 2020 was adverse. Two factors disrupted the foundations of the global oil and gas industry. First, the COVID-19 global pandemic caused an unprecedented reduction of demand that combined with high levels of production resulted in oversupply of oil, gas and LNG. This gap between supply and demand resulted in a collapse in commodity prices, reduced revenues and cancelling or deferral of investment. Second, societal awareness of the impact of climate change on planet Earth increased. Pressure to reduce carbon emissions and a concomitant societal-shift against carbon-emissions intensive petroleum-based forms of energy generation intensified. Many major players in the petroleum industry re-framed their strategies to focus on energy supply in general and in some cases plan to cease their exploration, development and production activities in the coming decades. In Australia, in part global factors manifested in the deferral of investment decisions on three LNG investments. The Australian Government signalled that gas developments would be a critical part of Australia’s post-COVID recovery and that management of abandonment and decommissioning liabilities would be a factor in the approval of transactions leading to a change in ownership. This paper will describe each of the factors faced by the industry in 2020 and frame the issues facing the petroleum industry in 2021 and beyond.

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