This opinion piece presents the opinions of the author.
Oil and gas companies are increasingly operating in remote or inhospitable locations as they develop reserves in hard-to-reach places. Three years ago, when oil traded above $100 a barrel, this frontier trend was not such an issue with big profits to set against the high cost of development. Today, with prices closer to $50 per barrel, it's much harder to make a far-flung, multi-billion-dollar project add up.
Senior Vice President, Oil, Gas & Chemicals, AECOM
We've seen the natural result: much greater analysis of financial implications, with far fewer major projects progressing through all the various stage gates to reach a final investment decision.
Not every area of risk is given equal assessment, of course. There is a natural tendency to focus on the hydrocarbon process/production heart of a major undertaking, which typically comprises 60 to 90 percent of the capex outlay.
In comparison, the costs, risks and timeline implications of enabling infrastructure tend to be given somewhat less scrutiny. It remains very common for infrastructure to be wrapped up as part of the overall deal when contracts are agreed with major oil and gas engineering, procurement and construction contractors.
It is easy to understand the prevailing logic that leads to this situation. Working with a single large contractor gives the procuring company one throat to choke, as the saying goes. As well as never having to referee blame games between contractors, oil and gas companies can also avoid the need to invest as much of their own time or resources to focus on the infrastructure elements, to select an infrastructure contractor, or to manage the interfaces.
It is becoming apparent, however, that this arms-length attitude is a false economy in today's tough development environment. While it may not feel like the heart of the project, enabling infrastructure has a huge impact on project viability, especially when working in remote locations. Roads, airstrips, ports, water, power, sewerage, housing, offices and other necessary facilities that support a major new plant simply can't be taken for granted.
Instead of running alongside a major project's critical path, enabling infrastructure components are often lying directly in the critical path. If the hydrocarbon plant requires components to arrive by sea, for example, any problems around the construction of dock facilities can delay the entire undertaking.
This is where a specialist infrastructure contractor can add tremendous value. Typically bringing hard-won knowledge of everything from local regulations to physical conditions to the best local building contractors, an infrastructure expert can often speed up project progress, cut costs and reduce risks in the critical early stages of design and construction.
Some of the most progressive oil and gas companies have begun to appreciate the subtleties of infrastructure development in today's challenging project environment. They are realising that provision of adequate infrastructure is not a side issue but a major determinant of overall cost efficiency, and are raising it up their lists of priorities.
As with any branch of engineering, it is much more cost effective to design and build infrastructure right first time than to correct problems of insufficient capacity, poor execution or inefficient design at a later stage. Focus and expertise can help to avoid these kinds of mistakes.
As a result, some oil and gas companies now procure infrastructure (early works and OSBL) for major projects independently of the hydrocarbon components, dealing directly with infrastructure specialists like AECOM. Some pioneers have even selected a preferred infrastructure contractor on a global basis, ensuring that all their projects take proper account of the need for well-designed supporting facilities.
The change is already delivering much needed cost efficiencies in today's low-margin climate. When oil prices rise in the future, and speed of execution becomes a major focus once again, oil and gas companies may also find that dealing directly with infrastructure specialists delivers a quicker result to boot.
Herbert Fry is Senior Vice President – Oil, Gas & Chemicals with AECOM.
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