A Review of the Nigerian Energy Industry

Mega-projects bring ‘big headaches’

Oil-rig workers22 January 2014, News Wires – Giant oil and gas extraction projects will be giving oil industry executives headaches for years to come as delays, cost overruns and increasing risks call for new strategies to manage them.

The sheer scale and complexity of such projects is threatening to outgrow the ability of even the largest oil companies to manage them, Reuters reported.

The trials of mega-projects have emerged as a central topic for debate as oil executives gather on the sidelines of the World Economic Forum this week in the Swiss alpine resort of Davos.

Almost all the top companies have seen huge delays and broken budgets at projects ranging from record-breaking Australian liquefied natural gas schemes to the enormous and a technically challenging Kazakhstan oilfield in the freezing Caspian Sea.

“What we see are significant delays in the oil and gas industry as a result of a lack of available skills, bureaucratic barriers and geopolitical challenges,” Reuters quoted Fatih Birol, chief economist at the International Energy Agency, as saying.

“We see almost all big projects delayed.”

Most discussions are set to be moderated by Paolo Scaroni, the chief of Italy’s Eni, a company that for many years was lead operator at the Kashagan field in Kazakhstan, the world’s largest discovery in 30 years and the project boasting the most notorious cost overrun of the last decade.

Kashagan’s initial budget of $10 billion has ballooned to estimates of five times that amount and more. The latest setback to the Kashagan project was late last year, when pipeline leaks halted output just weeks after start-up.

In a similar boat is the Chevron-operated Gorgon LNG facility in Australia. That project is now set to cost $54 billion, up almost $20 billion from initial estimates.

“The increasing scale, costs and risks of oil and gas projects have taken complexity to a new level,” the materials prepared for the chief executives’ meeting say.

“As companies across the spectrum frequently face cost overruns and delays in delivery, successful execution of mega-projects calls for new strategies to manage capital and operational costs,” it says.

It also adds that “mega-complexity” will likely call for new forms of collaboration, although in the case of Kashagan, having almost all the biggest majors on board early did not help. Indeed it has turned the project into a bureaucratic nightmare.

Financing has also posed a problem and forced companies to cancel or re-think major developments. Last year Shell pulled the plug on its $20 billion 140,000-barrel-per-day gas-to-liquids facility in the US due to cost overruns, while BP scaled back an ambitious and innovative extension plan for its Mad Dog development in the Gulf of Mexico.

But company bosses know that while investors look little more than a year or two ahead, the industry’s survival depends on their ability to invest for production that will not come on line for another 10 or 15 years.

“The industry needs to find a solution to get the right supply balance,” says Birol.

– Upstream

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