6 minute read 30 Sep 2020
Gas storage tank in petrochemical plant in sunset

How to unlock value in oil and gas capital projects in any environment

By John Hartung

EY Global Oil & Gas Strategy and Transactions Leader and Energy Market Leader, EY-Parthenon

Ace consultant across the energy value chain industry. An expert in servicing clients with in-depth industry knowledge.

Contributors
6 minute read 30 Sep 2020
Related topics Oil and gas

Despite the challenges of COVID-19, low oil and irregular demand, opportunities exist to optimize capital project investments.

Two questions to ask
  • How can energy companies reverse the underperformance of capital projects?
  • What role does digital play in creating value around capital projects? 

Large-scale capital projects underpin the entire global oil and gas industry. Finding, producing and delivering oil and gas would be impossible without these complex, long-term, billion-dollar investments. However, these projects often experience a legacy of cost inefficiencies and overruns and have been further strained by the disruption of COVID-19, low oil prices and irregularity in global demand.

Oil and gas companies already needed to increase productivity and decrease costs for capital projects, but the current environment has challenged all parties to focus even more on value for the foreseeable future.

A legacy of underperformance paired with COVID-19

Even at the most sophisticated companies, the approval of major infrastructure projects such as deep-water wells, long-haul pipelines, liquefied natural gas facilities or petrochemical plants is a risky and often arduous process. Historically, the oil and gas industry has underperformed on capital projects, spending too much time and money to plan, design and build new infrastructure. In 2019, EY analyzed 500 completed oil and gas capital projects of $1b or more from the previous five years. Of the projects analyzed, 60% experienced schedule delays, and 38% had cost overruns. 

Capital project analysis

60%

of the projects analyzed experienced schedule delays, and 38% had cost overruns.

Much of the underperformance can be attributed to the complexity of these projects, which require input, direction and resources from a multitude of often out-of-sync business units and functions. Inefficiencies are also often caused by:

  • An absence of centralized and reliable data
  • Improper processes
  • Manual transfers of data
  • Time lost awaiting confirmation to start the next activity
  • Delays in reporting

Crises like COVID-19 spotlight these pre-existing vulnerabilities and create new complications around the workforce, contracts and vendors, the supply chain and more. The industry’s traditional contracting strategies can also lead to additional value leakage during a crisis.

Oil and gas companies’ siloed approaches and lack of synchronous activities are particularly inefficient in such an uncertain and fast-evolving time. Organizations that hold innovation as a core value are better positioned for such environments.

Digital can boost agility in any environment

Could a new capital projects strategy – one powered by digital technologies that drive collaboration and integration – make a difference? Is it possible to enhance performance across the entire enterprise, to unlock full value across the asset life cycle?

The answer to these questions is a resounding “yes.”

In the June 2020 EY Oil and Gas Digital Transformation and the Workforce survey (pdf), 43% of oil and gas executives identified the increasing availability of big data analytics and insights as one of the top three trends that will positively impact their business growth in the next three years. Furthermore, 58% said the COVID-19 pandemic has increased the urgency of investing in digital technology, and 80% plan to invest at least a moderate amount, relative to their budget, in technology to keep pace with these trends.

Using new and emerging digital technology as the engine, companies can create effective data strategies to redefine their capital project performance – accelerating schedules, optimizing supply chains and reducing time to production. These data strategies also improve the organization’s knowledge management capability and can foster collaboration, which enables them to replicate complicated capital projects. As one IT human resources executive for an integrated oil company noted, “A predictive analytics perspective gives oil and gas access to huge amounts of data. Our ability to tap into that data is really the fuel for transformation.”

A predictive analytics perspective gives oil and gas access to huge amounts of data. Our ability to tap into that data is really the fuel for transformation.
An IT human resources executive
of an integrated oil company

In short, digital technology provides greater insights and control over each project, at every stage of execution. It enables companies to:

  • Calculate thousands of contingencies in minutes, rather than months, to cut planning time almost in half
  • Visualize how people, technology and processes come together in a digital workflow, allowing for seamless and accurate tracking of every critical component of a project across countries and companies
  • Experience unprecedented control of every project underway with real-time analytics for job status and management, allowing for maximum visibility and tracking
  • Quickly see where needed parts and components are located and when they can be delivered on-site with integrated supply chain management through the industrial internet of things; effective sourcing strategies also prevent value leakage and offer reliability across the value chain
  • Minimize impacts from unplanned events through real-time scenario modeling and dynamic scheduling
  • Breaks down barriers between operators, services companies, and contractors by giving access to data and decisions in real-time, reducing safety and operational risk

Important considerations for digital adoption in capital projects

Despite the clear benefits, oil and gas companies have a series of important considerations for how to best integrate digital technology into their capital projects. And there is no one-size-fits-all approach. 

First, the degree of adoption and the choice of technologies may vary widely based on the project or asset itself. For example, an asset of strategic importance or an asset in a high-priority region might have gold-standard adoption with plenty of digitally savvy personnel. But a legacy asset with aging infrastructure may have substantially less digital technology. 

Oil and gas companies are performing asset-by-asset cost benefit analyses to determine when it makes sense to integrate digital — and with which technologies — and when it doesn’t.

Second, our survey found that the core challenges to technology adoption are, for the most part, not technical in nature, but rather, organizational and cultural.  This can be particularly true in capital projects when there are two sets of decision-makers — those in headquarters and those operating the assets. Each of these decision-makers may select and purchase digital technologies for different reasons, and may have misunderstandings regarding the value of these technologies or place differing levels of importance on learning them.

The ability to adopt technologies in a timely manner, train workers to use them, and enable the skill sets in the current workforce all impact whether companies can truly “be digital” versus simply “doing digital.”

Finally, although oil and gas companies are embracing digital, they do not always have the workforce or skills necessary to capture the full value of that investment. For example, 85% of our survey respondents are currently using advanced data analytics in their organization, but only 55% of those say they have the skills necessary to realize the investment value. While companies are great at creating data around capital projects, the time and experience required to analyze and mine that data have been difficult to come by.

In an environment where digital adoption will drive competitive differentiation, companies need to remember that technology investments must be matched with a skilled workforce for maximum value.

Despite these challenges, most oil and gas companies are on the right path and recognize the value and ability for digital to drive better and faster information, improved collaboration, and more efficient decision-making. A clearly defined digital strategy enables organizations to bring teams together and deliver the power of artificial intelligence, machine learning, robotics and other digital skills to support and enhance their workforce. This is what underpins the vision for a holistic and value-driven approach to capital deployment and execution. And ultimately, this is what creates return on capital investment with a focus on creating long-term value.

Summary

Capital projects are necessary for the delivery of oil and gas but are costly and complex. An agile and technologically transformed gas industry can survive the pitfalls created by the COVID-19 crisis and long-term pressures of the energy transition, and address the ingrained inefficiencies native to capital projects. 

About this article

By John Hartung

EY Global Oil & Gas Strategy and Transactions Leader and Energy Market Leader, EY-Parthenon

Ace consultant across the energy value chain industry. An expert in servicing clients with in-depth industry knowledge.

Contributors
Related topics Oil and gas