Oil and gas megaproject overruns to cost industry more than US$500b
London, 14 August 2014
Source: EY research and analysis
A new report by EY reveals that almost two thirds (64%) of multibillion-dollar, technically and operationally demanding megaprojects continue to exceed budgets, with three quarters (73%) missing project schedule deadlines. The report - ‘Spotlight on megaprojects’ examines the performance of 365 megaprojects and the impact on the oil and gas industry of these overruns.
On average, current project estimated completion costs were 59% above the initial estimate. In absolute terms, the cumulative cost of the projects reviewed for the report has increased to US$1.7t from an original estimate of US$1.2t, representing an incremental increase of US$500b.
Axel Preiss, EY’s Global Oil & Gas Advisory Leader, says:
“While the report looks at current industry performance, longer-term industry outlooks suggest that project delivery success is actually decreasing, especially in certain segments of the industry, such as deepwater, where complexity and risk are considerably higher. Poor execution can potentially result in the project being economically uncompetitive and negatively impacting an organization’s overall financial results.”
Geographic influence on megaprojects
Geographically, the proportion of projects facing cost overruns is highest in the Middle East (89%), followed by Asia-Pacific (68%), Africa (67%), North America (58%), Latin America (57%) and Europe (53%).
These figures tie in with the proportion of projects reporting schedule delays with the Middle East being the highest (87%) followed by Africa (82%), Asia-Pacific (80%), Europe (74%), Latin America (71%) and North America (55%).
Project costs are significantly underestimated
Critically, from a capital investment perspective, the research shows that in the post-Final Investment Decision (FID) stage, 65% of the projects analyzed were facing cost overruns, with an average escalation of 23% from the approved FID budget. The reasons for this are varied and may be impacted by the geographic location of the project.
Barriers to successful project delivery
There are several internal and external factors that influence the success of a megaproject. Internal factors include inadequate planning; access to funding; poor procurement of contractors and contractor management; aggressive estimates; optimism bias and changing risk appetite. Many of these areas can be addressed through thorough upfront planning and strong project management and to help improve overall project performance.
External factors such as regulatory issues and geopolitical challenges can also hamper performance. In addition, given the scale of the investment, the impact of exchange rate fluctuations and commodity constraints can be severe and lead to megaprojects being delayed or even cancelled. However, with good project management, the impact of external factors can be mitigated.
“In order to secure economically attractive funding for megaprojects, resource access rights and corporate approvals, companies need to guarantee high levels of transparency, value-adding assurance and proven delivery capabilities, says Preiss.
”Clearly the external environment and regulatory- and policy-related changes are not as easily controlled as the internal project management-related issues, but the oil and gas industry can do significantly more to prepare for these issues so that their effects can be adequately managed within the project environment”.
Preiss concludes: “Companies can no longer rely on oil and gas price increases which in the past have masked many of the consequences of megaproject overruns. Unconventional discoveries have already had an impact on the economic viability of many megaprojects and securing capital is only going to become more difficult unless companies are able to consistently deliver on deadline and within budget.”
Note to editors
This report is based on the review of 365 projects with a proposed investment of above US$1b in the upstream, LNG, pipelines and refining segments of the oil and gas industry. Included are projects that have been proposed but have yet to reach the final investment decision (FID) and those that have passed the FID and are in the construction phase but still have yet to begin operations. Of the total number of megaprojects (365), updated cost data and time data was available for 205 and 242 projects, respectively.
EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.
EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.
This news release has been issued by EYGM Limited, a member of the global EY organization that also does not provide any services to clients.
About EY’s Global Oil & Gas Center
The oil and gas sector is constantly changing. Increasingly uncertain energy policies, geopolitical complexities, cost management and climate change all present significant challenges. EY’s Global Oil & Gas Center supports a global network of more than 10,000 oil and gas professionals with extensive experience in providing assurance, tax, transaction and advisory services across the upstream, midstream, downstream and oilfield service sub-sectors. The Center works to anticipate market trends, execute the mobility of our global resources and articulate points of view on relevant key sector issues. With our deep sector focus, we can help your organization drive down costs and compete more effectively. For more information, please visit ey.com/oilandgas.