The decisions made during the early project phases often determine the project’s overall degree of success because this is the time where the least money is spent, but where the project team has the greatest influence. Acknowledging this disproportionate level of influence, it is critical that the industry seek to deliver intelligent cost reduction initiatives in the pre-FID phases focused on efficiency improvements, rather than purely headcount reductions.
On this page, we highlight a series of project improvement initiatives that are aligned to our theme of Oversight.
Leading practice project governance and assurance
For some time now, project teams have seen effective project governance and assurance as a burdensome task with little reciprocal value. However, with the pressure those teams now face, effective project assurance and governance can and should be used to drive project performance and increase stakeholder confidence across all stages of a project life cycle.
Effective and thorough governance of and assurance over project targets and performance have never been more important, particularly prior to FID. Companies have aggressively reduced capital expenditures and the hurdle rates for project approvals, meaning project teams and major suppliers are under huge pressure to advance the project pipeline — but at fundamentally enhanced performance levels (e.g., accelerated schedules, with reduced budgets and greater efficiency).
In this scenario, without appropriate assurance, there is a serious risk of both project and corporate optimism bias, in which the project cost and risk are underestimated, while corporate ability to deliver to target is overestimated. There is also a risk of deterioration in quality.
In addition to avoiding these parallel risks, our experience suggests that improved assurance over project governance and risk management, along with robust economic planning, can enhance whole life asset performance by 15% to 30%, while also improving company culture. As a result, companies are reassessing their in-house project management (as well as that of their supply chain) and establishing improved portfolio management and governance models capable of managing increasingly complex and changing portfolios.
Leading practice assurance and governance frameworks drive integrated team activities with common goals and a clear delineation of roles and responsibilities for all.
Adding specified roles for independent review can help project leadership avoid optimism bias. Further, leading-class organizations are leveraging digital tools across the governance framework to reduce the reporting burden while increasing oversight, control and integration.
Executives across the industry are developing their understanding and control of increasingly diverse portfolios, enabling them to:
- Balance project economics with an increased consideration of risk
- Develop new governance techniques for innovative methods of production
- Manage the risk and reward equation to deliver consistent results
JV relationship optimization
Faced with performance challenges, growing complexity and increased size, oil and gas companies are preferentially seeking to share risks and experience through project joint ventures (JVs), which are now the norm. In fact, our recent study showed as much as 71% of upstream investment is now spent through alliance or JV relationships.
When JVs are managed well, they have the potential to deliver greater value to stakeholders, significantly enhancing the value of portfolios and increasing access to diverse capabilities. This value and access to additional skills and experience is invaluable during the phases leading to FID, when key project design decisions are made and influence over the projects direction are greatest. However, when these relationships go wrong, they can be extremely disruptive, particularly to project schedules and key decision points.
At a high level, JV conflict typically arises due to:
- Distrust and poor working relationships as a result of poor communication and a lack of transparency of management information
- Cultural misalignment, potentially due to geopolitical or strategic differences
- Poor governance through the lack of an effective risk management framework and buy-in to the governance process by partners
Across the industry, the potential advantages of cooperation are well understood, but the management challenges involved in these often complex multiparty, cross-border and cross-cultural relationships are commonly overlooked. Increasing corporate understanding of the financial and operational root causes of JV failure can enable organizations to enhance the speed and impact of project decision-making, improve project team performance and ultimately increase the attractiveness of their projects to potential investors.
Critical to organizations improving JV performance is recognizing the need for robust, fair and transparent JV governance arrangements, including:
- Risk and internal control policy assurance
- Ethics and compliance
- Project commercial management
- Schedule and financial reporting.
Increasingly, organizations are using independent JV reviews to manage reporting and governance requirements across different JV partners. This increases the transparency of data sharing and reduces the need for multiple, single-party reviews that can be costly and disrupt the project. Collectively, these governance measures can help operators and non-operators monitor and enhance compliance, in turn developing a greater level of trust between JV partners and ultimately, improving JV operational effectiveness and project delivery performance.
Recognizing the increased complexity of projects and the increasing specialization of the industry, project leaders should seek to develop more dynamic, flexible JV’s that are able to align to specific project phases and access the diverse skills and expertise they require.
Additionally, projects should encourage the development more JVs within and with the supply chain. Whilst these relationships can be complex and challenging, the outsized potential value they deliver, together with the potential to have suppliers ‘fully invested’ in project success means they are worth the effort.
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