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The cost of mega projects

Hydrocarbon Engineering,

In a new report, EY has shown that 64% of multi billion dollar, technically and operationally demanding mega projects continue to exceed budgets. The report also shows that 73% of these are also missing project schedule deadlines. ‘Spotlight on mega projects’ examines the performance of 365 mega projects and the impact on the oil and gas industry of these overruns.

EY have said that on average, current project estimated completion costs were 59% over the initial estimate. In absolute terms, the cumulative cost of the projects reviewed for the report has increased to US$ 1.7 trillion from an original estimate of US$ 1.2 trillion, representing an incremental increase of US$ 500 billion.

Axel Preiss, Global Oil 7 Gas Advisory Leader, EY said, ‘while the report looks at current industry performance, longer term industry outlooks suggests that project delivery success is actually decreasing, especially in certain segments of the industry, such as deepwater, where complexity and risk are considerably higher. Poor execution can potentially result in the project being economically uncompetitive and negatively impacting on organisation’s overall financial results.’

Geographical influence

The report looks at the geographical influences that are placed on mega projects. The proportion of projects facing costs overruns is reported to be the highest in the Middle East at 89%. Asia Pacific falls in second with 68%, followed by Africa 67%, North America 58%, Latin America 57% and Europe 53%. These figures tie directly with the proportion of projects reporting schedule delays with the Middle East being the highest at 87%. Africa is second at 82% followed by Asia Pacific 80%, Europe 74%, Latin America 71% and North America 55%.

Underestimating costs

EY has said that project costs are significantly underestimated. From a capital investment perspective, critically, the research by EY shows that in the post Final Investment Decision (FID) stage, 65% of the projects analysed were facing cost overruns, with an average escalation of 23% from the approved FID budget. The reasons for this are varied and may be impacted by the geographic location of the project in question.

Delivery barriers

External and internal factors influence the success of a mega project. Internal factors can include;

  • Inadequate planning.
  • Access to funding.
  • Poor procurement of contractors and contractor management.
  • Aggressive estimates.
  • Optimisation bias.
  • Changing risk appetite.

A variety of the above can be addressed through upfront planning and strong project management, to help improve overall project performance.

External factors such as regulatory issues and geographical challenges are also known to hamper performance. Also, given the scale of a mega project, the impact of exchange rate fluctuations and commodity constraints can be severe and lead to mega projects being delayed or even cancelled. However, with good project management, the impact of external factors can be mitigated.

Preiss continued, ‘in order to secure economically attractive funding for mega projects, resource access rights and corporate approvals, companies need to guarantee high levels of transparency, value adding assurance and proven delivery capabilities. Clearly the external environment and regulatory, and policy related changes are not as easily controlled as the internal project management related issues, but the oil and gas industry can do significantly more to prepare for these issues so that their effects can be adequately managed within the project environment.’

Preiss concluded, ‘companies can no longer rely on oil and gas price increases which in the past have masked many of the consequences of mega project overruns. Unconventional discoveries have already had an impact on the economic viability of many mega projects and securing capital is only going to become more difficult unless companies are able to consistently deliver on deadline and within budget.’

Adapted from press release by Claira Lloyd

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