(EnergyAsia, September 16 2014, Tuesday) — Nearly two-thirds of the world’s 365 large oil and gas projects being implemented have exceeded their original combined budget of US$1.2 trillion by more than 40%, according to a new report by EY.

Adding to this grim news, Axel Preiss, EY’s Global Oil & Gas Advisory Leader, said rising oil prices alone will not be sufficient to ensure the successful completion of future investments arising from increasing project complexity, poor execution and declining economics.

The consulting firm said that 64% of the multibillion-dollar, technically and operationally demanding projects that it studied continue to exceed budgets, with 73% missing project schedule deadlines.

“On average, current project estimated completion costs were 59% above the initial estimate,” said EY, which found that investors have significantly under-estimated project cost from the start.

The “Spotlight On Megaprojects” report is based on the review of 365 upstream, LNG, pipelines and refining projects each worth at least US$1 billion that have yet to reach the Final Investment Decision (FID) stage.

“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.”

“In the post-FID stage, 65% of the projects analysed were facing cost overruns, with an average escalation of 23% from the approved FID budget.”

While the report examines the impact of cost overruns on current industry performance, Mr Preiss said it suggests that long-term projects face “decreasing” chances of delivery in the future.

He cites certain segments such as deepwater exploration and production, where complexity and risk are “considerably higher”.

“Poor execution can potentially result in the project being economically uncompetitive and negatively impacting an organisation’s overall financial results,” he said.

More than two-thirds of Asia’s megaprojects hit by cost overruns
The proportion of projects facing cost overruns is highest in the Middle East (89%), followed by the Asia-Pacific (68%), Africa (67%), North America (58%), Latin America (57%) and Europe (53%).

These figures tie in with the proportion of projects reporting schedule delays with the Middle East being the highest (87%) followed by Africa (82%), Asia-Pacific (80%), Europe (74%), Latin America (71%) and North America (55%).

The Asia-Pacific region has attracted an influx of megaprojects, largely in the offshore sector, worth a total of US$945 billion over the past few years. Eight-two percent of the liquefied natural gas (LNG) projects have faced cost overruns, followed by upstream (63%) and refining (57%).

Similarly, 84% of the LNG projects reported schedule delays, followed by refining (87%) and upstream (76%).

Barriers to project implementation
EY said its report identified several internal and external factors that determine the success of a megaproject.

“Internal factors include inadequate planning; access to funding; poor procurement of contractors and contractor management; aggressive estimates; optimism bias and changing risk appetite,” it said.

“Many of these areas can be addressed through thorough upfront planning and strong project management and to help improve overall project performance.”

External factors such as regulatory and geopolitical challenges pose the biggest barriers to success as they are largely outside the control of investors.

“In addition, given the scale of the investment, the impact of exchange rate fluctuations and commodity constraints can be severe and lead to megaprojects being delayed or even cancelled,” it said.

Mr Preiss said that investors must provide high levels of transparency, value-adding assurance and proven delivery capabilities to secure funding for megaprojects, resource access rights and corporate approvals.

“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,” he said.

Don’t look to rising oil and gas prices
Mr Preiss said companies should not be counting on oil and gas price increases to support the completion of their projects that in the past helped masked their cost overruns.

“Unconventional discoveries have already had an impact on the economic viability of many megaprojects and securing capital is only going to become more difficult unless companies are able to consistently deliver on deadline and within budget,” he said.