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Capital projects life cycle - Dealing with risk - EY - Global

Capital projects life cycle

Dealing with risk

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Oil and gas capital project value driver tree

Oil and gas capital project value driver tree

Oil and gas companies must continue to adopt new technologies to mitigate the risk of losing their competitive advantage.

Summary: The oil and gas industry wouldn't exist without risk takers. The key is understanding the consequences of those risks and, better yet, knowing how to avoid them in the first place.

The consequences of risk

What separates success from failure is having a clear definition of what constitutes "acceptable risk" for a project, then avoiding or mitigating the risk that remains. Failing to address risk in a way that is proactive, realistic and transparent can lead to consequences, such as:

  • Regulatory noncompliance: Failure to develop appropriate project controls could result in non-compliance with governance, legal and regulatory standards. Similarly, failure to properly track and adequately forecast costs could result in misstated financial statements or inadequate disclosures in public filings. Non-compliance can lead to fines, forfeitures and business restrictions and could damage the reputation of the company.

  • Damage to reputation: An unexpected event that leads to environmental concerns is a key focus area for governments and the public in general. The recent oil spill in the Gulf of Mexico raised awareness and negatively affected the oil industry in terms of profitability and reputation, leading to increased political risk and resulting legislation undermining asset position, fines and damages from criminal or civil charges. Hence, increased regulations, inspection times and potential liabilities need to be factored into global operations.

  • Loss of competitive advantage: Oil and gas companies must continue to adopt new technologies to mitigate the risk of losing their competitive advantage. This calls for a strategic commitment to research and development, ongoing investments to upgrade existing facilities and development with technology providers.

  • Claims and disputes: Undertaking a comprehensive assessment of contract claims risk requires recognizing the interdependencies of the contracts, people, processes and technology across the program. Contract language and detail should be clear with regard to pricing arrangements, incorporation of critical path method scheduling techniques and allocation of risk. Failure to develop appropriate procurement, invoicing and change management controls could lead to potential claims.

Equally important is evaluating how claims and disputes are reported, as well as how control gaps are identified and risks escalated.

The right information at the right time can turn a risk into an opportunity when the owners properly allocate between themselves and their vendors:

  • Financial risk
  • Risks associated with quality, safety, control and reputation

Survey: rising oil prices, rising capital budgets

Worldwide E&P spending budgets will rise by 10.8% in 2011 to US$489.5b, up from 2010 budgets of US $441.8b, according to Barclays Capital's report, Original E&P Spending Survey. Significant E&P spending increases are expected for the super majors next year, with the big six projected to increase international spending by an average of 18%.

When the E&P budget was based upon an average oil price of $77.32 per barrel, the survey reported that 45% of respondents expected to spend a greater share of their capital expenditure on exploration in 2011.

The survey also reported that the majority of these companies would increase budgets further with oil prices at $90 per barrel. Considering that the current price per barrel was already over $100 in the first quarter of 2011, this forecasts a near-certain increase in capital budgets. For the past five years, the price per barrel has increased an average of 6.25% annually, a trend indicating that the oil and gas market will continue to see increases in the price per barrel and associated investment.

Bypass the pitfalls and manage the risk

Given the range of disparate factors that comprise the oil and gas landscape and the challenges and pitfalls inherent in capital projects, is it possible to develop an integrated project team approach to enable success?

Yes. As long as the framework of the deal and the framework for project management are part of the process from the beginning.

The enemies of a successful project can be costly: excessive unplanned downtime, lack of project controls, missed milestones and overall operational underperformance.

If a capital project is to survive — or, better yet, prevent — the impact of these, it must be grounded in an integrated process with critical success factors built into the DNA of the project management plan.

Oil and gas capital project value
driver tree

Simply put, in order to move toward success, a risk planning process must be implemented as part of the strategic development of the project, defining the issues that must be addressed and completed in order for the capital project to succeed at each stagegate in the supply chain.

Creating value throughout will improve ROI, strengthen the relationship between the owner and engineering and construction companies and help drive a proper balance between owning the risk and reaping the rewards.

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For more information on capital project management contact:

United States:
Jason Brown
 +1 312 879 4377

Mark Costello
 +1 212 773 0142

Bill Hale
 +1 713 750 8383

David Blanc
 +1 713 750 5129

Bradley Farrell
 +61 8 9429 2336

Doug Burcham
 +1 403 206 5304

Great Britain:
Paul Allison
 +44 20 7951 3654

Malcolm Bairstow
 +44 20 7951 3685

Peter Spaans
 +31 88 40 78810



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