“The future of oil and gas supply amidst persistent cost overrun: A review”

By

Evans Akwasi GyasiPhD Researcher

(Warwick University, UK)

E.A.Gyasi@warwick.ac.uk

Outline

Introduction

Cost overrun

Method

Findings and Results

Conclusion

Introduction About 81% of world energy demand

is on fossil fuel (IEA 2012, WEO 2012)

Current Oil demand is 92m/pbl (IEA 2013).

Average daily global oil production is approximately 88m/pbl (OGJ 2013, and EIA 2013).

Critical Issues

Peak Oil Threat-(oil running out?)

Strict laws, rules and regulations (e.g.

BP-US)

Environmental concerns (“going

green”)

High risks and complexities (deep

waters)

Demand and Supply Gap (Forecast)

Trend and future outlook

Action point

The need for different methods of oil and

gas production

Need for more innovation and technology

Efficiency in production to maximise supply

Manage and control Cost Overrun-(focus)

Cost overrun

Definition: The amount by which the

actual cost of a project exceeds

its budget (Sheldom and Peng 1972).

Types include OPEX, CAPEX etc.

CAPEX overrun (Research

Focus)

Operator

Oil Field

Start Year &Estimate($)

End Year Final cost($)

%Overrun

Shell Sakhalin

2003 10b 2007

22b 120%

Agip Kashagan

2005 7b 2009

14.9b 112%

Shell Bonga 2001 2.7b 2005

4b 48%

**Petrobras

Upstream

2010 125.8b 2012

141.8b

12%

Suncor

Calgary (OS)

2011 36.7b 2011

39.6b 7.9%

The Threat

8 out of every 10 upstream oil and gas project

overrun its cost (CAPEX)

Global Cost overrun(CAPEX) is 40%.

Oil producing regions, recorded overruns are

as high as 50-100% (Canada, Brazil, Nigeria

etc.)

Threat to Future projects and profit

Why bother?

Impact on oil production

Impact on oil prices and demand

Impact on global economic growth

Impact on shareholders and operators profit

Impact on host country royalties tax

So what?

A call to manage energy projects efficiently

There is the need for pragmatic approach to

control CAPEX overrun.

Current level of overrun (40%) requires a

quick response

Method

Qualitative Systematic Review method-

preliminary tool(gap)

Survey Analysis was used for the work

Survey focus (5 oil regions)

Respondents(Project Managers, Cost

Engineers, Contractors and Service

providers.

Findings and ResultsCost Overrun Causes Impact/severity (%)

Frequent design and scope changes  23.9%

Incorrect planning and scheduling by contractors 17.8%

Delay in material procurement 11.8%

Fluctuation in prices of materials 9%

Underestimation of project duration 7.5%

Contract mismanagement 7.5%

Unforeseen conditions (risk) 7.5%

Practice of assigning contract to lowest bidder  6%

Shortage of site workers 4.5%

Lack of communication 4.5%

Discussion 1/31. Frequent design and scope changes and Incorrect planning and scheduling by contractors representing 23.9 and 17.8%.Reasons

Incomplete requirement capture

Environmental changes (bad weather)

Geographical location

Business change

Discussion 2/32. Delays in materials procurement (11.8%) and price fluctuations (9%) are dominant factors in especially Africa and other parts of the world eg. Nigeria, Angola, Canada (Suncor Calgary oil sand overrun) etc.

Reasonsorganizational weaknesses suppliers' defaults governmental regulations transportation delays

Lack of clarity with respect to supplier

offer & materials specifications

Level of Approving authority

Exchange rates

Global economic instability

Discussion 3/3

Underestimation of project duration

Contract mismanagement

Unforeseen conditions (risk)

Practice of assigning contract to lowest bidder 

Shortage of site workers

Lack of communication

ConclusionThere is a link between oil and gas

project performance and cost overrun factors

Finding efficient ways to control cost overrun would increase profit margins and increase investment for alternative energy source by operators in the industry.

Current energy environment demands efficiency cost management for business survival, therefore cost control is a necessity.

Future WorksIs starting point towards developing a validated

model that would help predict project cost accurately

Findings can be helpful in other industries such as

military, construction, ship building, highways, and

multi-complex project companies.

Lessons will be learnt from other industries to help in

the modelling process.