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Capital projects life cycle - The pitfalls between concept and commissioning - EY - Global

Capital projects life cycle

The pitfalls between concept and commissioning

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Summary: Knowing what and where the pitfalls are and factoring them into strategic project management is the first step to avoiding them.

Rewards lie between the risks

With the oil and gas industry moving deeper into emerging assets and frontier areas, as well as improved technology plays (such as unconventional), recovering these reserves will require high levels of transparency and investment.

Consequently, we are witnessing a ramp-up of mega projects to commercialize these reserves. These mega projects are generally managed via joint venture arrangements between and among national and international oil and gas companies.

The combination of leading edge technology, new geographies, multibillion dollar capital expenditures and multi-party governance means that these projects require high levels of assurance for cost, timeline and risk management.

Watch out for these pitfalls

The current uncertain economic situation demands a more systematic and pragmatic risk management approach that makes project owners and stakeholders keenly aware of the pitfalls up front.

Following are some of the most common pitfalls that arise in the planning and execution of major capital projects:

  • Finance and credit risk: Align your risk strategy with the changing financial market, otherwise you risk the feasibility of your project and in some cases the financial stability of the company. Project sponsors should take into account the global nature of the business or the current market and credit risks.

  • Schedule delays: There is an adage that says failing to plan is planning to fail. This describes the typical genesis of schedule delays. Plans often leave out the necessary schedule management elements of schedule development, acceptance, progress measurement and reporting and relationships to other project management disciplines. When you don't implement appropriate schedule management and time-tracking tools, you may end up with significant delays and an inability to identify at-risk activities and their impact, areas of uncertainty, insufficient assumptions or potentially deficient scheduling methodologies.

  • Ineffective cost management and lack of financial transparency: Ineffective contract administration and monitoring of contracts both causes and results in a lack of visibility. This complicates the planning of project costs for reporting and budgeting activities. The result is likely to be an inaccurate perspective on the total costs incurred, limited ability to accurately forecast cash flow, budget overruns and the inclusion of unapproved costs.

  • Inertia and a lack of urgency: When a project becomes a process, it can be problematic. It is important to voice concerns regarding the reliability or accuracy of the current cost and schedule estimates at completion, challenge original assumptions and assess if they are still valid. Momentum can be lost if the cumulative impact of missing critical project milestones (regulatory, financial, operational, contractual and long-lead equipment) is not adequately addressed and if management accepts a fatalistic attitude about future impacts.

  • Unclear definition of roles and responsibilities: One of the big pitfalls of a joint venture is unclear governance, which can lead to the project owner taking on unacceptable risks. The cause is typically attributable to a combination of failing to assess the risks thoroughly, clearly defining and communicating all roles and responsibilities for parties involved, and building both contract and governance structures that take risk into account and include adequate controls and monitoring.

  • Operational impact: Operating and maintenance strategies are rarely planned at the design phase and built into the ongoing project management strategy. Once the project team has executed the handoff, the maintenance and support organizations may find that the policy and procedural foundation is missing, the right people aren't in place or are unfamiliar with the landscape and finally systems, technology platforms and software enablers are absent or inadequate.

  • New operational challenges: Companies' increased focus on E&P in deepwater and ultradeepwater areas means more projects in challenging and unfamiliar environments, which can require a new generation of technical and operational solutions as well as different training and support for personnel in the field. The costs and physical dangers involved far exceed previous levels and add to owners' risk, all with little or no assurance that prices will continue to justify heavy investments in these areas.

  • Asset integrity: An aging infrastructure can pose serious operational threats to companies and jeopardize their public reputations and business relationships. These structures require continuous inspection, monitoring, maintenance and repair, and may not comply with current environmental standards and regulations.

  • Cross-border controls: Projects that involve entities from more than one country carry special considerations, requiring that processes and controls be adaptable to local markets, business customs and international compliance standards. This is one key point in the project life cycle where the relationship between owning risks and reaping reward may diverge.

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