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Managing megaprojects in the oil industry

Hydrocarbon Engineering,

As reserves of oil are inevitably depleted, oil companies are faced with the challenge of finding and exploiting new sources. Driven by the need to keep their Reserve Replacement Ratio, the amount of proven reserves added to a company’s base relative to the amount of oil produced each year, at or above 100%, oil companies are increasingly investing in fields that are very challenging, such as in the Arctic Circle or at ever deeper sites at sea.

Examples include Brazil, which is producing oil from offshore fields lying a mile deep, 180 miles off the coast of Sao Paulo. China also has plans for numerous offshore drilling projects, while Africa, Japan, Thailand and India are all seeing new investment to drill off these coasts. As well as remote and challenging areas, oil companies are also increasingly looking at using new technologies to get at previously inaccessible reserves.

The investment and continuing expenditure needed to develop and produce from these fields puts them in the realm of ‘megaprojects’, costing US$5 billion or more. They require huge supply chains, needing expensive shipping, massive transport networks and thousands of workers.

Finding and developing these new fields is getting harder and costs are escalating as projects take longer than expected and budgets are exceeded. In fact, a high percentage of megaprojects fail to deliver on time or meet approved budgets, with 64% of projects facing cost overruns and 73% reporting delays in the schedule.

A report by global assurance, tax, transaction and advisory services specialists, EY, entitled “Spotlight on oil and gas megaprojects”, found that the major causes of these delays and added costs are non-technical factors such as people, organisation and governance, with other related causes being management processes and contracting and procurement strategies.

Among the many challenges are project complexity and completing projects on time and on budget. For example, Chevron has created a dedicated unit to manage expenses and oversee contractors.

Cost control is another factor, as soaring costs are outpacing foreseeable rises in energy prices. Rising labour costs are also significant, driven by fierce competition for skilled workers and increasing productivity.

Because these projects are so big, complex and inaccessible, needing highly skilled workers, service costs are also rising, with increases of up to 8 percent a year since 2011.

Meeting and managing the challenges

The EY report identified several management areas in which oil companies are failing, including poor procurement of contractors, poor contractor management and ineffective project management. The challenge is to identify the areas of poor performance and put in place management practices that will lead to cost and time reductions and better quality.

One way is to place greater reliance and trust in the suppliers of technical solutions, such as automation and electrical system vendors like ABB. The concept of a main contractor has been familiar to the industry for many years. ABB, for instance, has dedicated main automation contractor (MAC) and main electrical contractor (MEC) teams.

Far from taking control away from the operator or main EPC, this has the benefit of freeing them to focus on their strengths in project construction, while relying on solution vendors and other suppliers to handle the detailed technical integration and commissioning of systems.

Bridging the skills gap

Amongst other things it helps address the skills shortage that the oil and gas industry is suffering. Companies are struggling to secure the capabilities, capacity and expertise required to effectively manage their most challenging projects. Again using a MAC or MEC approach can help provide these skills, which are even scarcer on the engineering front.

One approach to solving these labour challenges is to use a technology company with a broad portfolio. With a project management capability, the company can act as a main electrical or main automation contractor and integrate the technology with a lower risk to cost and schedule.

As technology evolves at a rapid pace, this option becomes ever more attractive, particularly in many oil and gas regions subject to political turmoil, such as Russia, China and the Middle East. As well as the volatile environments this presents for the investment, it also has major implications for manpower, potentially affecting how the facility will operate in the future.

One thing to be determined is the minimum manning required. If the right technology is available from the portfolio of the electrical or automation contractor, this whole issue of manning could be solved by using remotely controlled or automated operation, with potentially huge savings in site operating expenditure (Opex).

Careful selection vital

An essential factor is careful selection of the contractor. Selection of contractors is a key to project success, while poor selection having significant consequences.

One of the major essential attributes a contractor needs is adequate resource and global reach. Their ability to deliver a quality implementation is also a vital consideration. Too frequently, contractor engagement decisions are based heavily on cost, with insufficient emphasis on quality. This is despite the fact that quality has a major effect on project costs and schedules.

The role of these main contractor teams is to help reduce risks and project delays. As an example, a MAC provides project management and supplies expertise, products, systems and services. Another important role is to manage the engineering suppliers to ensure common supply. It is also responsible for ensuring that all parties have the data and information they need to complete their part of the project.

A further advantage of this method of management is that the main contractor can bring its experience to bear to rationalise the requirements of the process by undertaking Initial concept design and front end engineering and design (FEED) studies. The result is often solutions that are more practical and better suited to the actual needs of the installation.

Clearly, MACs and MECs can play a major role in helping oil companies bring these mega projects in on time and budget.

Edited by Claira Lloyd

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