Lowering capital costs calls
for holistic approach
Capital project delivery performance remains a sore spot for the oil and gas industry. Oil price volatility has led to increased sensitivity around escalating development costs and their im- pact on overall project viability. The increased complexity and associated cost of most greenfield projects has resulted in many projects being deferred or canceled
in the current low oil price environment. Recalibrating project hurdle
rates has been a crucial exercise in the industry. Projects must be
designed to be less costly and be delivered with greater certainty.
Indeed, the industry’s ability to enhance capital project delivery
and execution performance in an uncertain commodity price future
will be determined largely by the ability of leadership teams to deliver
across the following three areas.
Project governance that provides effective oversight has never been
more important across its life cycle and, in particular, in the early
phases of the project – prior to the final investment decision (FID).
Over the last two years, companies have aggressively reduced
capex and the hurdle rates for approvals, meaning that while project
teams remain under pressure to advance the project pipeline, they
must do so at fundamentally different productivity levels than before.
Under this pressure, there is a serious risk that teams fall into the
trap of underestimating the risks in project development, while also
overestimating their ability to deliver – which in many cases has
been diminished through headcount reductions. This optimism bias
means that without rigorous independent governance, there is a risk
of projects missing FID targets even more frequently.
As a result, there has been a redoubling of focus on governance,
risk management, and robust economic planning to enhance project
and whole life asset performance. Leadership teams have turned a
critical eye to in-house project management capability and sought to
establish improved portfolio management and governance models.
The intention is to create models capable of managing increasingly
complex and changing portfolios with integrated teams driven by
common goals and a clear delineation of roles and responsibilities.
This focus has also unearthed opportunities for leveraging digital
tools to streamline or simplify reporting requirements while increasing oversight, control, and integration. To this end, examples exist of
visualization and gaming technology being used to create interactive
3-D engineering environments, allowing users to virtually navigate
their sites and even operate assets – just like in a video game – prior
to beginning construction or the procurement of major equipment.
As projects have grown in size and complexity, capability has become a major issue for the industry, both to appropriately resource
projects and to fully understand them in a digital age. Challenging
market conditions have caused headcount reductions while companies
have also complained of a decrease in workforce productivity linked
to lower investment in training and an increasingly mobile workforce.
There is a clear business case for these reductions, but there is a
delicate balance to be struck. Organizations are increasingly consider-
ing outsourcing functions, including components of project manage-
ment (PM). In many instances, the required PM expertise could be
delivered more cost effectively through the supply chain and exists in
greater abundance within supply rather than operator organizations.
Separately, despite the fact that oil and gas companies have access to
large amounts of data, the industry lags behind others in the use of
advanced analytics to improve decision-making, optimize workforce
activities, and identify emerging improvement opportunities. This is
particularly true when it comes to large capital projects where analysis
is almost entirely reactive rather than predictive.
There is a huge opportunity for efficiency improvement across a
variety of topics within oil and gas project development, including the
adoption of new technologies. To date, however, the greatest areas of
focus are in standardization and process efficiency.
Significant benefit can be derived from creating repeatable lean
processes through a portfolio of project templates addressing common scenarios and enforcing rigor in decision-making. However, to
eradicate inefficiency and improve productivity across the whole
project organization, it is critical for operators to engage and collaborate with key stakeholders across the project ecosystem. Future
project cost reduction initiatives must be collaborative in nature to
move discussions away from protectionist thinking and empower
EPCs, who hold the key to the greatest cost reduction opportunity,
to propose improvement initiatives.
Standardization of equipment, technology, project management
practices, engineering, and design approaches will also improve
efficiency. Until recently, companies tended to treat each project as
unique rather than taking learnings from previous projects. The result,
of course, is unnecessary complexity and duplication. Minimizing
this can reduce costs significantly, but it will require a holistic and
collaborative, cross-industry approach to deliver meaningful results.
Together, changes in capital project oversight, capability, and effi-
ciency could revolutionize development and execution performance. •