The State of Oil and Gas Capital Projects

The oil and gas industry has steadily increased its spending on capital projects over the last decade, to approximately $600 billion projected for 2012. As industry spending has grown over the past several decades, capital project management practices have been studied in detail and a number of best practices have been implemented widely. Among these practices are the implementation of rigorous stage gate processes to efficiently move from project inception to execution, heavy emphasis on front end planning, and reliance upon centralized functions to provide core planning and execution skills.

But, as we move into a new era of more complex projects in difficult-to-develop areas such as ultra deepwater, the arctic, heavy oil, and tight oil and gas, firms are beginning to reexamine conventional wisdom around oil and gas capital projects planning and execution. Operators are challenging old assumptions and finding new approaches to reduce execution risk. In particular:

  • Project size and scaling: Can projects be broken into smaller increments to increase development optionality and reduce financial risk?
  • Supply chain strategy: Where are the sustainable global supply chain advantages for manufacturing and for staffing?
  • Cooperation efforts:  Can operators cooperate better to raise baseline elements of large capital projects?
  • Planning:  Is Front End Loading as effective as it can be, or are there alternatives that offer better project efficiencies?
  • Technology monetization:  Can technology be more effectively integrated into capital projects at project inception?
  • Multidisciplinary teaming: Can multidisciplinary teams be better organized around the key elements of major project risks?
  • Centralized vs. business unit organization: What is the right balance between central control and business unit flexibility in terms of project design and execution?

Project size and scaling: is bigger always better?

The industry has grown accustomed to planning and executing large conventional projects in areas such as the North Sea, the Gulf of Mexico, and West Africa. In these regimes, customized mega-facility designs, rigid standards for quality control and assurance, and global supply networks prevail. Typically, a few expensive wells are drilled, at an average cost often exceeding $50mm/well, with well production rates and facilities capacity closely synchronized. Modular designs for components such as subsea production trees and floating production platforms have only slowly become part of the design ecosystem.

Conversely, operators are finding that the development of unconventional resources such as oil sands as well as tight oil and gas plays is benefiting from a more modular approach to capital projects. For example, Cenovus, a major Canadian oil sands producer, is designing its field development around increments of 40,000 barrels of production, with the view that cost efficiency of repeatable designs and their continuous improvement outweigh the cost mismatches between facilities capacity and subsurface production rates.

In the case of unconventional resource development, smaller is currently viewed as better.

 

Supply chain strategy: where are the skills?

Many firms are struggling with creating and implementing an effective supply chain strategy, and trying to balance the savings from centralized procurement of large ticket items with the flexibility from local spending autonomy. No singular effective model has yet emerged. Some firms are developing offshore manufacturing partnerships while others are creating nimble, local supply sources. However, it is clear that the supply of hard goods, such as pipe, steel, and rotating equipment, is becoming secondary to that of skilled professionals and trades.

As costs run up based on escalating supply chain demands in hot basins such as the Bakken in North Dakota, operators have initially reacted by hiring key engineering and labor talent from service firms, thereby reducing the effectiveness of the service providers and exacerbating labor problems for all market participants. Some operators are beginning to question the effectiveness of this in-sourcing strategy and are returning to out-sourcing capabilities from competent service companies. In their opinion, relying upon service firms for specialized skills in areas such as engineering design will in the long run reduce execution risks of capital projects, not increase them.

Additionally, industry participants are beginning to collaborate with universities to provide training for specialized project execution skills. For example, to develop future shale gas expert practitioners, ExxonMobil and General Electric have sponsored a best practices initiative at a consortium of the Colorado School of Mines, Penn State University, and the University of Texas.

More of these efforts will be required to provide capital projects execution skills for unconventional resources, especially as the retirement of 50+ age workers accelerates in the next few years.

 

Participant cooperation efforts: is there genuine common ground to raise the ‘tide for all’?

Proactive sharing of effective capital projects practices across the industry is generally poor. Firms typically compete for resource access and market favor on their ability to execute projects faster and more cost-effectively than their peers. Weak incentives exist to collaborate on best practices. When sharing occurs, it is usually to distribute financial risk via project joint ventures and to provide after-the-fact oversight to partners at major investment milestones.

However, firms are beginning to seek common ground for effective collaboration. For example, the Canadian Oil Sands Innovation Alliance (COSIA), which is composed of 12 major oil sands participants, recognized that environmental challenges, if not addressed, would impede or even halt Canadian oil sands development projects. This consortium was formed with the intent of pooling intellectual property and scientific talent to create and apply solutions to reduce water usage, carbon emissions, and land impact. Such a partnership, with broad constituency and free use by all participants of solutions, is unique to the industry. If successful, COSIA can pave the way for additional cooperative ventures that ‘raise the tide for all oil sands participants’.

 

Planning: is Front End Loading Sufficient?

Front End Loading (FEL) is a proven process that emphasizes detailed scenario planning at the initial stages of a project in order to reduce subsequent execution risk. Rigorous application of FEL can add 1-7% to overall project costs, with the benefit of more certain on-time project delivery. FEL drives better alignment of technical and business goals, clearer articulation of project risks, and tighter multidisciplinary team interaction. However, there is a growing view that FEL by itself is insufficient to drive project execution excellence in unconventional domains where modularization, standardization, and project repeatability are critical.

In unconventional development projects, firms are beginning to emphasize continuous improvement and flexible designs to augment FEL practices. A mix of standardized design and innovation is being applied to drive continuous improvement in areas such as well pad design for oil sands. For shale plays, customized well and completions designs are being considered as the next cost breakthrough opportunity in high volume drilling campaigns, replacing standardized designs. Suppliers are now being tasked with contributing to the continuous improvement efforts, emulating successful manufacturing practices from other industries such as automotive.

In summary, FEL, coupled with continuous improvement, appears to offer the next stage of project excellence in unconventional resource development. The benefit of this combined approach, however, is less clear in customized conventional projects.

 

Technology monetization: how much technology risk is enough?

Project managers consistently resist bringing new technologies into project plans and generally incorporate stable, proven solutions. This approach is incongruous with the need to aggressively exploit new technologies to push production frontiers in ultra-deep water, arctic, and unconventionals. The challenge is to selectively apply game-changing technologies while controlling project risks.

Some responses to this challenge include:

  • Incorporating multiple competing technology options into project scenarios, in order to reduce overall execution risk
  • Involving technology considerations at project inception rather than later, to anticipate and remediate implementation issues
  • Leveraging partner technology strengths in joint venture agreements, to maximize collective core competencies
  • Allowing business units to accept greater technology risk, as the ultimate owner of the project outcome and
  • Creating tailored technology delivery teams embedded within the capital projects organization, to ensure reliable maturation and application of critical project technologies

With more dependence on technology enablers in capital projects, operators should seek the right combination of the above actions to control technology execution risk.

 

Multidisciplinary teaming: how best to support the core project team?

The role of technical disciplines, such as engineering and geoscience, on the core project team has been in flux over the past decade. As FEL has become a more prevalent best practice, core teams have refocused their activities on identifying and mitigating major project risks from an integrated project lifecycle point of view. Several changes have resulted.

The core project team has expanded to include new disciplines, such as continuous improvement experts, technology pilot managers, and regulatory management specialists. The emphasis from a project controls point of view has shifted from quality control (e.g. stop! we have a problem!) to quality assurance (i.e., we foresee and avert project issues). Central groups, who in the past raised red flags for project controls violations at critical stage gates, are now working in a more conciliatory manner to ensure that stage gate crossings, while still in compliance, generally encounter ‘green lights’.

Multidisciplinary teams, from regulatory to engineering to geoscience, now meet earlier in the project lifecycle to identify the integrated project risk register, which includes operations, technical, commercial, and economic risks.  This risk register, supported by tailored project management software, is becoming the center of activity for the team.

These risk-focused changes yield more reliable project delivery (i.e., on time and within budget), and reduce rework and delays from unexpected quality assurance issues.

 

The role of the center vs. the managing business unit: what is the optimal balance?

Large conventional offshore and onshore projects drove the development of strong central projects organizations. Firms are now struggling with a paradigm shift, as fast moving unconventional projects with high stakeholder complexity demand a more knowledgeable local business unit contribution.  Business units are taking stronger control of projects, especially around unconventionals, with central projects organizations providing baseline standards, key scarce project skills, and quality assurance guidelines.

The pendulum is shifting away from central control to a more balanced approach between the business unit owners and the central projects groups.

 

Lessons for the future

The landscape of effective capital projects has changed significantly over recent decades as projects have become riskier and project execution resources more scarce. Unconventional resources have introduced new demands and practices. Teams have been reformed to better manage this complexity and associated risks, and the role of the central projects organization is adapting.

However, the pace of change to ensure more reliable project delivery must accelerate in several key areas to keep the industry on track for delivering global production growth. The most critical areas, in our opinion, are as follows:

  • Greater supply chain innovation to resolve scarce labor needs
  • Blending of the FEL and continuous improvement processes to achieve new levels of cost efficiency and reliability
  • Increased technology adaption rates and associated risk-taking to more reliably produce difficult resources
  • Risk-focused management of  multidisciplinary teams, and
  • Improved balance between centralized projects control and build-for-purpose business unit delivery

Continued progress in these dimensions will ultimately improve oil and gas project delivery success for all stakeholders.