Are Megaprojects Worth the Trouble? Lessons from the Oil & Gas Sector10/18/17
With a worldwide push toward the use of low-carbon power sources and efforts to minimize the output of greenhouse gas (GHG) emissions into the biosphere, LNG (liquefied natural gas) has become a prominent source for diversifying energy supplies. LNG is natural gas that has been cooled. To move this cleaner-burning fuel across oceans, the natural gas must be converted to liquefied natural gas, a process called liquefaction.
Between 2010 and 2014, buoyant LNG commodity prices supported a high level of investment in large-scale LNG liquefaction projects. But significant capacity build-out and low crude oil prices in 2015-2016 have thrown the market into a period of oversupply and falling LNG prices.
According to Thunderbird professors Andrew Inkpen, Michael Moffett, and Kannan Ramaswamy, this is a perfect opportunity to take a look at lessons offered by an Oil & Gas sector that grew relatively quickly on the backs of dozens of extremely costly megaprojects.
In a new book, The Global Oil & Gas Industry: Stories from the Field, Inkpen, Moffett, and Ramaswamy tell the tales of several global Oil & Gas megaprojects in an effort to explore similarities between them and lessons that can be applied to any industry. The role of megaprojects in remote and technically challenging regions is one of four key themes the professors say characterize the current state of the Oil & Gas industry and its future prospects. (The first key theme: The role of change, innovation, and disruption.)
All four themes will be addressed in depth in the upcoming Thunderbird executive education course, Advanced Management Program for Oil & Gas Industry Executives. Held December 4-15 in Glendale, Arizona and taught by Inkpen, Moffett, and Ramaswamy, the course is designed for upper-middle to senior-level leaders facing industry-related globalization challenges.
Megaprojects in remote and challenging regions
In their new book, the Thunderbird professors explore lessons from Shell’s exploration of the Arctic, a comparison of ExxonMobil and Royal Dutch Shell projects in Sakhalin, TNK-BP partnership in Russia, and challenges presented by the rapid and massive LNG sector growth in Australia. Common throughout: the extreme difficulty of success.
“Successfully executing megaprojects is extremely difficult.” – Click to tweet
“Megaprojects in remote and technically challenging regions have been a hallmark of the industry since its early years,” the professors say. “Hitting home runs through successfully executing megaprojects is extremely difficult, as consortia of companies, governments, interests, and technology – and markets – frequently change over their development.”
Australia, which saw the country’s first oil well drilled in the 1880s, is a good test case for what can go wrong.
Evaluating the performance of megaprojects down under
LNG has often been considered a cost-effective option for gas-hungry nations and a long-term growth industry for countries that invest in it. Yet strategic and logistical challenges faced by countries and companies as they establish a foothold in the LNG sector can quickly drive up the costs of already massive capital projects.
In Australia, where the last decade has seen an unprecedented pipeline of LNG megaprojects, a variety of challenges have meant significant cost overruns, missed deadlines, and near failure.
Among the most famous examples of LNG setbacks is Chevron’s Gorgon natural gas project, one of several in Western Australia. Gorgon’s original budget was $34 billion; by 2014, costs had risen to $54 billion. Chevron began shipping the first product out of Gorgon in March 2016. By mid-2017, the company reported that all three trains (or liquefaction and purification facilities) were producing natural gas.
Gorgon: A symbol of struggle and success
As the Gorgon project matures it is often quoted as a costly lesson, a study in how to overcome issues that arise in such a megaproject. Gorgon represents the largest single private sector investment in Australia ever. It also has a 99% Australian workforce. But industry experts are still asking, ‘Was it worth it?’
“Australia may be a country of considerable geographic size, but its population, 23 million in 2013, with a total workforce of 11.6 million, was not large by global standards,” the professors say.
“The high level of cost overruns and delays associated with megaprojects is not confined to the energy industry.” – Click to tweet
The list of challenges at the Gorgon site is long, including its remote location 50 km off the coast, labor supply, staffing and skill requirements, weather delays, logistical challenges, high wages, and low productivity. Though the last two are disputed – Australia’s powerful unions refute Chevron’s claims of low productivity despite high wages.
These kinds of challenges are common with LNG megaprojects, but it’s not only LNG. A recent EY Spotlight on Megaprojects identified similar issues – staffing, training, project delivery, regulatory challenges – in other sectors as well. But repeated failures of LNG projects make them good examples for a study of the root causes of project failure.
Employment structures & strategies
In their new book, Inkpen, Moffett, and Ramaswamy explore the causes of Gorgon’s overruns and delays and offer many suggestions that could be applied to megaprojects in other industries, including:
- Construct residential communities closer to project sites
- Optimize shift patterns to reduce travel time
- Improve site productivity, including supply chain and workplace logistics
- Develop the skills of indigenous populations
- Explore specific benefits for FIFO (flown-in, flown-out) workers
- Sponsor employment development, training, apprenticeships
There is benefit in creating relationships and cooperation between megaprojects within a region, the professors say. “With so many large-scale and remotely located projects, the industry is reconsidering the typical standalone development.” Shared use of capital-intensive segments and common facilities would be beneficial to all.
Bottom line: Are the megaproject challenges worth it?
Australia’s investment in LNG, although rocky, has been paying off. The country is on track to overtake Qatar as the world’s largest exporter of shipped gas sometime in 2019.
“However, it is debatable whether such projects that have formed the staple of the industry in recent years will continue to pay rich dividends in the future given the tectonic shifts in cost economics, energy supply, and climate change considerations,” the professors say. “In an era of low oil and gas prices globally, the future of the oil and gas megaproject is in doubt. Cost overruns and seemingly endless delays may prove too costly unless structural changes are made to the way megaprojects are carried out.”
It’s a topic of in-depth analysis and discussion in the upcoming Advanced Management Program for Oil & Gas Industry Executives.
Advanced Management Program for Oil & Gas Industry Executives
December 4-15, 2017 | Thunderbird Campus