Download - The future of oil and gas amidst persistent cost overrun-presented at ICCE Ottawa, Canada
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“The future of oil and gas supply amidst persistent cost overrun: A review”
By
Evans Akwasi GyasiPhD Researcher
(Warwick University, UK)
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Outline
Introduction
Cost overrun
Method
Findings and Results
Conclusion
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Introduction About 81% of world energy demand
is on fossil fuel (IEA 2012, WEO 2012)
Current Oil demand is 92m/pbl (IEA 2013).
Average daily global oil production is approximately 88m/pbl (OGJ 2013, and EIA 2013).
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Critical Issues
Peak Oil Threat-(oil running out?)
Strict laws, rules and regulations (e.g.
BP-US)
Environmental concerns (“going
green”)
High risks and complexities (deep
waters)
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Demand and Supply Gap (Forecast)
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Trend and future outlook
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Action point
The need for different methods of oil and
gas production
Need for more innovation and technology
Efficiency in production to maximise supply
Manage and control Cost Overrun-(focus)
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Cost overrun
Definition: The amount by which the
actual cost of a project exceeds
its budget (Sheldom and Peng 1972).
Types include OPEX, CAPEX etc.
CAPEX overrun (Research
Focus)
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Operator
Oil Field
Start Year &Estimate($)
End Year Final cost($)
%Overrun
Shell Sakhalin
2003 10b 2007
22b 120%
Agip Kashagan
2005 7b 2009
14.9b 112%
Shell Bonga 2001 2.7b 2005
4b 48%
**Petrobras
Upstream
2010 125.8b 2012
141.8b
12%
Suncor
Calgary (OS)
2011 36.7b 2011
39.6b 7.9%
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The Threat
8 out of every 10 upstream oil and gas project
overrun its cost (CAPEX)
Global Cost overrun(CAPEX) is 40%.
Oil producing regions, recorded overruns are
as high as 50-100% (Canada, Brazil, Nigeria
etc.)
Threat to Future projects and profit
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Why bother?
Impact on oil production
Impact on oil prices and demand
Impact on global economic growth
Impact on shareholders and operators profit
Impact on host country royalties tax
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So what?
A call to manage energy projects efficiently
There is the need for pragmatic approach to
control CAPEX overrun.
Current level of overrun (40%) requires a
quick response
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Method
Qualitative Systematic Review method-
preliminary tool(gap)
Survey Analysis was used for the work
Survey focus (5 oil regions)
Respondents(Project Managers, Cost
Engineers, Contractors and Service
providers.
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Findings and ResultsCost Overrun Causes Impact/severity (%)
Frequent design and scope changes 23.9%
Incorrect planning and scheduling by contractors 17.8%
Delay in material procurement 11.8%
Fluctuation in prices of materials 9%
Underestimation of project duration 7.5%
Contract mismanagement 7.5%
Unforeseen conditions (risk) 7.5%
Practice of assigning contract to lowest bidder 6%
Shortage of site workers 4.5%
Lack of communication 4.5%
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Discussion 1/31. Frequent design and scope changes and Incorrect planning and scheduling by contractors representing 23.9 and 17.8%.Reasons
Incomplete requirement capture
Environmental changes (bad weather)
Geographical location
Business change
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Discussion 2/32. Delays in materials procurement (11.8%) and price fluctuations (9%) are dominant factors in especially Africa and other parts of the world eg. Nigeria, Angola, Canada (Suncor Calgary oil sand overrun) etc.
Reasonsorganizational weaknesses suppliers' defaults governmental regulations transportation delays
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Lack of clarity with respect to supplier
offer & materials specifications
Level of Approving authority
Exchange rates
Global economic instability
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Discussion 3/3
Underestimation of project duration
Contract mismanagement
Unforeseen conditions (risk)
Practice of assigning contract to lowest bidder
Shortage of site workers
Lack of communication
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ConclusionThere is a link between oil and gas
project performance and cost overrun factors
Finding efficient ways to control cost overrun would increase profit margins and increase investment for alternative energy source by operators in the industry.
Current energy environment demands efficiency cost management for business survival, therefore cost control is a necessity.
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Future WorksIs starting point towards developing a validated
model that would help predict project cost accurately
Findings can be helpful in other industries such as
military, construction, ship building, highways, and
multi-complex project companies.
Lessons will be learnt from other industries to help in
the modelling process.
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