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 amidst persistent cost overrun-presented at ICCE Ottawa, Canada

  1. 1. “The future of oil and gas supply amidst persistent cost overrun: A review” By Evans Akwasi Gyasi PhD Researcher (Warwick University, UK)
  2. 2. Outline Introduction Cost overrun Method Findings and Results Conclusion
  3. 3. 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).
  4. 4. 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)
  5. 5. Demand and Supply Gap (Forecast)
  6. 6. Trend and future outlook
  7. 7. 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)
  8. 8. 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)
  9. 9. Oper ator Oil Field Start Year &Estimate($) End Year Final cost($) %Over run Shell Sakhali n 2003 10b 2007 22b 120% Agip Kashag an 2005 7b 2009 14.9b 112% Shell Bonga 2001 2.7b 2005 4b 48% **Petr obras Upstrea m 2010 125.8b 2012 141.8b 12% Sunco r Calgary (OS) 2011 36.7b 2011 39.6b 7.9%
  10. 10. 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
  11. 11. 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
  12. 12. 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
  13. 13. 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.
  14. 14. Findings and Results Cost 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%
  15. 15. Discussion 1/3 1. 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
  16. 16. Discussion 2/3 2. 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. Reasons organizational weaknesses  suppliers' defaults  governmental regulations  transportation delays
  17. 17. Lack of clarity with respect to supplier offer & materials specifications Level of Approving authority Exchange rates Global economic instability
  18. 18. 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
  19. 19. Conclusion There 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.
  20. 20. Future Works Is 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.