Controllable Errors

World energy prices bring difficult challenges to oil and gas companies, such as how to maintain investment activity in the face of declining revenues. One must remember that there have been periods of low prices before (with the minima in 1968, 1986, and 2009), and the industry found ways to adapt each time. We’re currently seeing a sharp reduction in global investment activity, and focus is moving to only the key projects.

In recent years, there was a period of increased capital investment in Russia, with 45% growth in the last five years. However, such investments are now decreasing and becoming more targeted, although they remain large in scale. And here, companies face typical problems: deadlines are changed, estimates are revised, and some projects remain in the ‘paper’ stage.

The main problem is the quality of large infrastructure project management, and it is one that plagues not just Russian oil companies, but international ones as well. Most global projects face a number of common obstacles that lead to cost overruns, missed implementation deadlines, and even the suspension of implementation. Among the best known examples are the Gorgon project of Chevron in Australia, a project that exceed its budget by 40%; the Kashagan project of joint operator NCOC in Kazakhstan, which overran projected costs by 223%; and the Shell project in Alaska, which was stopped after more than $5 billion was invested into it.

Often an implementation is inefficient because of a variety of external factors beyond the company’s control: changes in the political situation, an increase in prices for materials and equipment, or prohibition of the use of certain technologies. However, there are a number of process and organizational problems that have no less of an impact on the implementation of capital projects. Their main advantage is that they can be managed by the company.

Causes of process problems stem from the early stages. Pressure from shareholders causes time-reduction for detailed consideration and work, which in turn leads to errors in the calculation of business cases and mistakes in planning.

To liaison projects at investment committees, overly optimistic deadline and budget assessments are used, which, in the absence of detailed verification of business cases by independent parties at the planning stage, lead to actual losses during the implementation phase.

Another stumbling block is inefficient operational processes (mainly procurement and logistics) and the decision-liaison processes. For example, during Chevron’s Gorgon project, ships with equipment onboard were left idle in ports for several days due to lack of space for unloading, resulting in a loss of up to $500,000 a day.

The key organizational problem of managing capital projects is the lack of clear responsibility centers for making strategic and operational decisions. This is especially critical in joint ventures and consortia. For example, in the implementation process of the Kashagan project, each partner (Shell, Eni, Total SA, ConocoPhillips, and the government of Kazakhstan) had its own internal audit procedures and internal communications systems. The struggle to find a ‘common denominator’ occurred at numerous managing committees, thereby hindering project implementation.

In many cases, management lacks analytical support for decision making. Can your company get immediate information on the number of staff involved in the project? How much funding has already been spent, what was it used for, and over what time period? Which detailed outcomes of the project have already been achieved? As practice shows, very few businesses know the answers to these questions or have the ability to quickly identify the source of the problem when there are deviations from the plan’s targets.