Is the Era of Oil and Gas Megaprojects Over?

Is the Era of Oil and Gas Megaprojects Over?
To survive the lower-for-longer price market, oil and gas companies need to rethink their strategies for major offshore projects.

With oil prices still trading around the $50/barrel mark, oil and gas companies will likely revisit costly field development projects, as BP plc did late last year with Mad Dog 2 development project.

The company was able to reduce project costs through system optimization, collaboration with co-owners, simplification of the design using industry-led solutions and competitive bidding to capture deflationary pricing. BP also changed the development concept which can take advantage of standardized designs, BP spokesperson Jason Ryan told Rigzone. The Mad Dog 2 design now looks more similar to field development projects pursued in the past, Caitlin Shaw, research director with Wood Mackenzie, said.

Does BP’s design signal the end of the oil and gas megaproject era? For the most part, yes, industry insiders told Rigzone.

Megaprojects, particularly for deepwater, might crop up occasionally over the next five to 10 years. However, Wood Mackenzie expects to see far fewer of these projects compared to the first half this decade, Shaw said.

Offshore field development costs were already out of control prior to the 2014 oil price collapse. To keep costs under control going forward, oil and gas operators will forgo standalone production facilities altogether for some projects, opting instead to use existing production facilities or subsea tiebacks, Shaw said. Companies may also opt to stretch out project development. Rather than execute a major project in a year, they might develop a field over a four to six year period, Shaw said.

A good example of a discovery that went from facility to subsea tieback is the Constellation discovery. Formerly known as Hopkins, Anadarko Petroleum Corp. now owns the discovery, Imran Khan, senior research manager at Wood Mackenzie, said.

The oil price downturn will not prompt operators to revisit production facility design, but project strategies, relationships with engineering, procurement and construction (EPC) contractors, and project bidding, Shaw said. Oil and gas companies are also not likely to look to emerging technologies for field development projects. Testing and implementing new technologies onshore is easier as onshore represents fewer risks that oil and gas companies have to mitigate, Shaw explained.

One major technology priority for the deepwater Gulf of Mexico is the development of 20K technology. A lot of companies have made progress in this area, but the oil price downturn has dried up research and development budgets. What will drive the implementation of technology is the demand, Khan said.

Even at $45/barrel oil, oil and gas companies should make money as long as costs are aligned, Gautum Chaudhury, deepwater technology advisor for BHP Billiton Petroleum, told Rigzone. When oil was trading at $18 to $20/barrel in 2001, companies were making more money in terms of percentage of profit compared with 2012, when oil prices were trading at more than $100/barrel.

“The problem is that construction and supply costs escalated to unsustainable levels,” Chaudhury told Rigzone. “Most of the money in a project goes to construction and supply, not engineering. While oil prices have declined, construction equipment and vendor costs haven’t.”

Chaudhury said he has heard discussions about companies trying to align costs, but when oil prices recover, it’s likely going to be business again as usual.

It’s also likely that there will not be enough major offshore projects occurring in the next two years or so. The standalone projects that do move forward will likely be larger fields, say of 1 billion barrels, versus fields with $500 million barrels. Companies also might have trouble moving forward with major offshore projects if the industry is unable to hire back the engineers and technicians who make products. A shortage of desktop engineers – the people who design projects – won’t likely be an issue.

Business Process Innovation Needed to Address Project Costs

The oil and gas industry should adopt innovative business processes for the capital planning and estimating of major projects, Ron Beck, E&C Industry Marketing Director with AspenTech, said.

Improving organizational performance in the areas of bidding and front end project execution will most certainly be a strategic topic in many oil and gas, chemical and engineering contractor boardrooms in 2017. Implementing better estimating software technology, combined with more collaborative business processes, will provide a huge opportunity for improvement in capital projects, such as driving drive down capital costs on projects by up to 25 percent, Beck said.

AspenTech’s survey of 161 organizations last year found that 50 percent of the capital planning and estimating groups are dissatisfied with current practices.

“Most of these organizations still use Excel, even for very large and complex projects, and a startlingly high percent use manual data handover from department to department,” Beck stated.

The rapid capital projects business evolution, due to macro-economic pressure, will force much more agile reaction times, and those companies that change quickly will be the winners.

“Most executives in the EPC industry and their clients know that the current downturn in capital projects workload is a critical time to drive innovative business processes, but they are frustrated at resistance in estimating leadership. This has some urgency, because the window to invest in change is already beginning to show signs of narrowing,” Beck said.

“The back end of the detailed engineering process has been updated through automated technologies, but the front-end engineering design (FEED) process has not gotten as much attention in terms of improvements,” Beck said.

“The question is whether executives will have the courage and leadership to force bid leaders, estimating leaders, and FEED engineering leaders to think laterally and apply new approaches. With fully proven solutions available today, organizations have the opportunity to reduce or eliminate dependency on spreadsheets, increase the electronic transfer of engineering data between engineering disciplines and estimating, standardize estimating methods between estimating groups in a company and between individual estimators and more,” Beck said.

Knowledge capture in software is going to be increasingly crucial in 2017 as is transparency between client and contractor, Beck noted, adding that model-based estimating offers a competitive advantage. Model-based estimating will become critical as waves of experienced senior estimators retire and EPC firms face tremendous pressure produce accurate and precise capital equipment estimates.

Organizations need to implement an advanced model-based estimating system to achieve the efficiency, agility, speed and accuracy required to successfully capture a company’s unique proprietary costing basis and project cost history to ensure a competitive advantage, Beck said.

AspenTech also expects to see fast conceptual design in oil and gas during 2017. The upstream companies that AspenTech is working with have become extremely serious about capturing prior designs and templates, and mixing and matching best available project examples in an effort to speedup time to first oil and to reduce overall capital budgets and risk.

“We are seeing more and more organizations move from talking about modular and template-based design to putting these concepts into action,” Beck commented. “Companies that get ahead of this curve will have a cost and profit advantage in this challenging environment. Integrated and model based software systems will play a key role in enabling organizations to take leadership positions in this area.”

One strategy oil and gas companies should pursue is to actually own the engineering data for a project, and to have real-time, 24/7 access to that data, rather than project updates at milestones, Amish Sabharwal, EVP Americas at AVEVA, told Rigzone.

“It’s all about visibility for the project in terms of cost and schedule,” Sabharwal said. “Today, the process is very manual-based on contractual agreements between the EPC and the owner. This prevents visibility, making it difficult to foresee scheduled delays or cost overruns until it’s too late. As a result, oil and gas projects tend to get over-budget and over-schedule.”

This type of contract has been used by oil and gas owner/operators and the EPC community because, for such a long time, owners/operators were just held over the barrels by the EPC community. But project owners are getting smarter now, and EPCs are scrambling for the little work that is available. With this new philosophy, oil and gas companies can easily be fired if operators own their engineering content, Sabharwal said.

Houston EPC offices and owner/operators are starting to get busy, Sabharwal said. Not a lot of projects will be sanctioned right away and it won’t be like the heyday.

WHAT DO YOU THINK?

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Generated by readers, the comments included herein do not reflect the views and opinions of Rigzone. All comments are subject to editorial review. Off-topic, inappropriate or insulting comments will be removed.
Mohd Fairuz Bin Idris | Feb. 26, 2017
This is rich people's money game.... make it low...buy all... then sell when high... get richer...

William Wagner | Feb. 8, 2017
Will most of the heaving lifting associated with off-shore equipment be leveraged in off-shore wind turbine installation and maintenance?

Contractor Witheld | Feb. 2, 2017
We engineers in design engineering companies have always understood the cost impact on equipment suppliers of specifying a clientís preferred accessories and idiosyncratic requirements on packaged equipment but the clients never have. There is no doubt that significant cost saving will be made using standard equipment not only in CAPEX but OPEX too. However, I have to take exception to belief that Ďvisibilityí during a detail design will be beneficial. In a career spanning 40 years I have seen oil companies strip themselves of their engineering departments that were full of pragmatic and sometimes enigmatic ex contracting engineers who had great foresight that only experience can give to be replaced with a new guard of the technically highly qualified. The clientís fit for purpose mentality has been replaced with a nit picking jobsworth application of every word of every specification piled onto the poor suppliers. We donít send paper to vendors anymore itís all pdfís as the paper is too big and bulky. There is so much to read often the vendors donít, they just donít have the time or resources. They rely on us to review the bid and condition it so that the omissions can be added to make a level playing field. Then there is the issue of design change. I know some contractors have in the past always under bid the original design contract to secure it as they know the weakness of their clients. Anyone who has had a builder in their house should understand the word Ďchangeí but itís on a whole different scale. Itís what contracting is about, itís the place where the money is made, costs escalate and schedules scuppered. The contractor will get the blame for any wound self-inflicted by the client but the contractor is only trying get out of that hole he got in to get the job, make a profit and ensure his survival. I think itís also true to say management at high level in clients have no appreciation of how to select an ideal candidate to be their project manager. Because the ideal source, the clientís in house engineering team, is limited and preferring to promote within the company the client is forced to look elsewhere. How many times have we had to suffer a client project manager that comes from an operations or unrelated background? You donít appoint a bus driver to be in charge of the bus design, you might ask him for his ideas but not be in charge of the engineering as he does not have the right experience. The next bus driver will have different ideas anyway! Nobody likes working on a bad project, on our CVs we try to be sure what we were doing canít be seen as contributory to the disaster. And there has been a few in the recent past like Yme and the more infamous Cash All Gone. The other sad thing is that whoever was at the top of the pyramid and can never be considered 100% innocent is likely to be promoted. How can a clientís project manager report that the job is a failure or that there has been mismanagement of any of the of contractors below him? It will never happen, no matter how bad a project is it will always be a success for the company and failures will be somebody elseís fault, unless of course the client project manager and his team want early redundancy. We know so many times the truth is perverted when it goes to the top, it costs us reputation all the time. The best job a client will ever get is if they specify their requirements well at the beginning i.e. spend time and money on a good FEED and good specs. Select a decent design contractor where you understand the ethos of the management, not the lowest bid or one that wants to maximise their profit by employing labour from a totally unknown pool. Then, let us get on with it, keep changes and client interference to a minimum. We may not produce exactly what the client expected but weíll be pretty close with a reasonable schedule and budget. It used to work in the past without all this micro management. When the industry was in a slump I was involved in a building project with other oil & gas engineers where the builder travelled from one side of the UK to the other. It was a slightly specialist building and was going to profitable for the builder. At the end of the job he said to me he had never worked on a job like it before and I asked why. He told me he hadnít lost money but hadnít made much either and he couldnít believe he had had only one change. There are engineers and designers out there who can and want to do this for an oil and gas client but we need everything above us to be in place, then we will deliver.


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