Reimagining the Oil & Gas capital projects framework

Today’s Oil & Gas capital projects require increased focus at the front end to mitigate risks and contain costs.

In brief

• Oil & Gas capital projects are becoming more expensive and complex while investors are ever more vigilant.
• Leaders who focus more on the front end can take steps to make new delivery models more successful.
• EY-Parthenon teams have worked with industry companies to make risk a strategic lever and bring more discipline to capital projects.

The operating environment for Oil & Gas (O&G) is rapidly changing and the way the industry traditionally approaches capital projects no longer lines up with the current risk landscape. O&G infrastructure projects are significantly larger and more complex than in the past. They also face more regulatory, political, labor, supply chain and capital availability pressures.

At the same time, owners face heightened scrutiny on cost, schedule certainty and capital efficiency. Volatile commodity markets, evolving energy demand and a shifting policy environment add to the disruption.

New adaptable delivery models can rebalance risk across the value chain. However, for these models to be successful, leaders need to increase their focus on the area where risk can best be addressed: the front end.

Shifting the risk in O&G capital projects to more flexible models

Historically, major energy (and infrastructure and industrial) developments have leveraged lump-sum turnkey (LSTK) models to protect the owner from risk and provide certainty by transferring delivery risk to engineering, procurement and construction (EPC) contractors. This approach increasingly has proven unsustainable as projects grow larger, more complex and more exposed to regulatory, supply chain and market volatility. Multibillion-dollar disputes and contractor bankruptcies, often associated with major liquefied natural gas (LNG) export projects, underscore the structural strain placed on traditional LSTK models when risk is mispriced or misunderstood.

Now, the industry is shifting away from LSTK structures, driven by contractor resistance, limited EPC balance sheet capacity and heightened uncertainty. Reimbursable, hybrid and “collaborative” models are becoming more prevalent as owners seek flexibility and contractors seek risk transparency and rebalancing. While these models can improve adaptability, they also fundamentally change the risk equation. In these models, risk is harder to price, transfer and far more consequential when not identified and governed early.

Still, the industry has yet to shift to addressing these risks when they can be the most effectively influenced — the front end. Early project decisions have the greatest impact on the successful outcome of the project and too often they are made with incomplete information, limited scenario testing and objectives that are fixed too early and not adaptable to changing market conditions.

As a result, execution models are locked in before risks are fully understood, making downstream mitigation more costly, reactive and disruptive.

Case study: Improving governance and controls in construction of a major gas processing project

A global O&G company was building multibillion-dollar gas processing facilities that included an LNG plant, condensate handling facilities as well as other supporting facilities and utilities. The company contracted an organization for engineering, procurement and construction management (EPCM) services, which included significant incentives aligned to cost and schedule performance.

An EY-Parthenon team reviewed key processes and controls that the company used through the lifecycle of large capital projects. The team focused on:

• The policies and procedures detailing the governance framework for the execution of projects.
• The project planning and scope, design and budget development and the review and approval processes to evaluate compliance with applicable policies, processes and operating guidelines.
• The adherence of the projects, during the execution and construction phase, to established policies and operating guidelines related to project management and controls, including schedule management, change management, budget control, cost tracking, reporting and risk management.
• Risk and opportunity identification, monitoring and resolution.
• Project reporting and communication protocols.

The review showed inefficient processes and inconsistencies in analyzing and reporting cost, managing construction schedules and reporting progress to project executive stakeholders. The review also found inconsistencies in how change orders were tracked.

With this information and the EY-Parthenon team’s experience with leading practices, the client was able to improve management’s ability to analyze and monitor the contractor’s schedule and implement processes and documentation for risk management, change event management and decision-making.

As a result, the company was able to avoid more than US$50 million in wasted costs. It also streamlined project execution processes, leading to more efficient management of the project and cutting several months off the time to complete the project.

How can O&G leaders reimagine their capital projects

In this changing environment, O&G companies need to change how they develop and execute their capital projects. Several steps can help their projects meet the strategic goals of the organization while limiting or eliminating costly surprises.

1. Make front-end quality and decision-making a top priority.
2. Make the capital strategy more adaptive and more disciplined rather than reactive. This includes constantly reviewing the project while it is in process to get ahead of potential changes, then documenting changes when necessary to adapt to any new objectives.
3. Make risk a core strategic lever. Treat it as a design variable that must be thoroughly tested and planned. Foster early identification of potential risks, make them a priority and assign specific people who are responsible for owning and mitigating the risks. Establish governance mechanisms and oversight throughout the project and make sure it is clear who has the responsibility for final decisions on the action to take.
4. Use new and familiar levers to help plan and execute. These can include AI to help deliver data-driven insights into the project, digitalization to help enhance the process and employ standardization and a modular strategy where appropriate to make planning more effective. Engage with contractors early in the process to make sure your expectations are aligned and maintain continuity in delivery teams to keep those expectations on track.

The increasing costs and complexity of capital projects can be a trigger for O&G leaders to make the process more adaptable and disciplined. While addressing these challenges at the front end improves the likelihood of meeting project objectives, meaningful opportunities to mitigate risk and enhance performance persist throughout the project lifecycle to help make sure outcomes are ultimately achieved.