The exploration and production (E&P) industry is faced with a challenging capital investment landscape in which to develop, plan, and execute oil and gas projects successfully. E&P operators are focusing on the wrong value drivers, setting projects up for failure from the beginning. In a keynote presentation delivered at the Offshore Technology Conference (OTC) 2014, IPA's Neeraj Nandurdikar addresses why and provides practices that operators need to implement in order to lift their performance.
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Why Only the Most Efficient E&P Projects Will Survive the Cost Price Squeeze
1. Declining Terms of Trade
Why Only The Most Efficient Will Survive
The Cost Price Squeeze
Neeraj Nandurdikar
OTC 2014
2. CONFIDENTIAL 2 INDEPENDENT PROJECT ANALYSIS
It’s a Mess Out There; Projects are Being Canceled,
Shelved and Recycled…Despite Sustained High Prices
“BP cancels costly GOM oil project…”
Reuters, 19 Sep ‘13
“Statoil delays FID on Johan Castberg…”
Statoil Website
“Fort Hills Oil sands project must make economic sense…”
Financial Post, 12 Jun‘13
“[COMPANY] puts brakes on expanding two Canadian
oil sands projects
Upstream, 19 Sep ‘13
“RDS plans to sell its stake in Eagle Ford…didn’t meet
the company’s targets for profitability…”
WSJ, 29 Sep ‘13
“In the end costs have not come down substantially for the
project to be viable…”
The West Australian, Apr ‘13
“LNG projects are facing big problems…more cost overruns
expected at Gorgon which is already over budget”
The Fool.com, 14 Oct ‘13
“E&P asset costs have increased more than 275 percent over
the 2008 lows…”
Proprietary Research Note, Nov ‘13
“While the costs are increasing, reserves are not - leading
to projects costing $45/bbl just for development capex…”
Proprietary Database, Aug‘13
…as a result of declining terms of trade?
$107
3. CONFIDENTIAL 3 INDEPENDENT PROJECT ANALYSIS
“Houston, we have a problem!”
Why do we have this problem
and what can be done about
the situation?
What are some of the
organizational changes
needed?
Framework of the Talk
1
2
3
4. CONFIDENTIAL 4 INDEPENDENT PROJECT ANALYSIS
0%
5%
10%
15%
20%
25%
30%
(200%) (150%) (100%) (50%) 0% 50%
PercentageofProjects
Actual NPV gained or (lost) relative to plan @ sanction; actual after minimum 2 years of production; price normalized
We Managed to Destroy Value on 70 Percent of all
the Projects we Completed in the Last Decade…
On average we lost 41 percent
of the planned value!!
1
5. CONFIDENTIAL 5 INDEPENDENT PROJECT ANALYSIS
1.00
10%
COST INDEX
PRODUCTION
FAILURES
SCHEDULE INDEX SCHEDULE SLIP
Non-E&P Megaprojects
E&P Megaprojects
COST GROWTH
1.30
0.90
1.20
1.00
0%
30%
10%
20%
-10%
1.10
40%
30%
20%
50%
20%
10%
0%
-10%
30%
1.20
1.10
0.90
1.30
…and our Performance on Large Projects is Much
Worse Than any Other Industrial Sector…
Except Here
6. CONFIDENTIAL 6 INDEPENDENT PROJECT ANALYSIS
0
5
10
15
20
25
2001 02 03 04 05 06 07 08 09 10 11 2012
CapitalIntensity($/BOE)2012US$
Year of Sanction
Red Herrings and Scapegoats…
Source: IPA Proprietary Database. Development Costs Only
…has lots of reasons
• Projects continue to be more
challenging…
• …and large developments are
confined to difficult places
with difficult governments
• Project input markets are
“imperfect”; vendors keep
increasing prices
• Contractors are struggling to
perform…subpar work
• …leading to declining
productivity
Rising Costs Per Barrel…
2
7. CONFIDENTIAL 7 INDEPENDENT PROJECT ANALYSIS
We Chase the Least Important Value Drivers, and in the
Process, Destroy the Most Critical…
(40%) (30%) (20%) (10%) 0% 10% 20% 30%
Reserves
Volatility
Asset Cost
Growth
Production
Attainment
Execution
Schedule Slip
Worse
Outcome P90
0.40
0.60
0.80
1.00
1.20
Year 1 Year 2 Year 3 Year 4
<80 percent of plan
production after 4
years online
40% of projects miss their P10 - P90 range
of reserves!!! (Poor Seismic, no long term
flow test…)
60% of projects overrun by more than 20%
60 percent of all projects chase schedule as
the primary objective over production or cost
Average project plans to achieve first oil/gas
20 percent faster than then industry
Value Driver
Best
Outcome P10
8. CONFIDENTIAL 8 INDEPENDENT PROJECT ANALYSIS
• We continue to make same mistakes over and over and
over….
‒ We do not rigorously follow our own work processes and always
make exceptions for ‘S’ projects
‒ We have substituted short-term gain for long-term value
‒ Companies that don’t know how to go fast keep trying to go fast and
end up with slow and expensive projects that don’t work
‒ We often do not display deep functional cooperation within our own
companies to get best asset development value
‒ We have largely failed to adequately renew people resources
‒ We fail to learn effectively even from our own mistakes, much less the
mistakes of others
The Current Mess is, Therefore, Our Own Doing
We have been quick to change on the technical side but slow
to change on the business, organization and people side
9. CONFIDENTIAL 9 INDEPENDENT PROJECT ANALYSIS
• Most E&P companies never saw a petroleum
accumulation they didn’t love
• They allow opportunities into the scope development
process with virtually no scrutiny and often without
much knowledge of basic data and/or of the project
context
• The effect: Too much work to do, in not enough time and
not enough people with the right skills to do it
• Operators, therefore, need to focus on shaping,
disciplined portfolio management, and realistic targets
Undisciplined Project Selection and
Poor Shaping are the Root Causes
10. CONFIDENTIAL 10 INDEPENDENT PROJECT ANALYSIS
…Otherwise it Becomes Increasingly More
Difficult to Exit FEL 2…
Sanction
Appraise
(FEL 1)
Select
(FEL 2)
Define
(FEL 3)
FEL 2 Is Clogged With Too
Many Opportunities
Assess
Opportunities Select
Project
Concept
Finalize
Scope
11. CONFIDENTIAL 11 INDEPENDENT PROJECT ANALYSIS
Sanction
Appraise
(FEL 1)
Select
(FEL 2)
Define
(FEL 3)
Recycle Back
Select Project
Concept
Finalize
Scope
...Frequent Recycling Further Chokes FEL 2 and
Leads to More Marginal Opportunities…
12. CONFIDENTIAL 12 INDEPENDENT PROJECT ANALYSIS
• Most E&P companies never saw a petroleum
accumulation they didn’t love
• They allow opportunities into the scope development
process with virtually no scrutiny and often without
much knowledge of basic data and/or of the project
context
• The effect: Too much work to do, in not enough time and
not enough people with the right skills to do it
• Operators, therefore, need to focus on shaping,
disciplined portfolio management, and realistic targets
• A Disciplined Opportunity Selection and (De-selection)
Method is Needed Most Pressingly…
Undisciplined Project Selection and
Poor Shaping are the Root Causes
13. CONFIDENTIAL 13 INDEPENDENT PROJECT ANALYSIS
0.00
0.25
0.50
0.75
1.00
1.25
1.50
1.75
The Need for Speed Does not Allow Enough
Time for Basic Data Analysis…
Not Schedule Driven Schedule Driven
Front-EndDurationIndex
+1 Std. Dev.
MEAN
-1 Std. Dev.
Pr < 0.01
Schedule driven projects, on average, plan to achieve execution durations 20 percent faster than industry
14. CONFIDENTIAL 14 INDEPENDENT PROJECT ANALYSIS
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
We Need to Learn How to go Fast:
“Go Slow to Go Fast”
+1 std. dev.
Mean
-1 std. dev.
Asset Cost Growth Schedule Slip
@ End of Gate 2A
Timing of Subsurface Deliverables
After Gate 2 @ End of Gate 2A After Gate 2
15. CONFIDENTIAL 15 INDEPENDENT PROJECT ANALYSIS
0.40
0.60
0.80
1.00
1.20
1.40
Successful Project 1 2 3
Excessive Speed Kills Humans and Capital Projects
+1 std. dev.
MEAN
-1 std. dev.
Number of Dimensions In Which A Project Failed
MoreLess
Dimensions of Failure
• High cost growth (25%+)
• Large overspend (25%+)
• Severe schedule slip (25%+)
• Highly uncompetitive schedule (50%+)
• Production Failure
16. CONFIDENTIAL 16 INDEPENDENT PROJECT ANALYSIS
Complete
Scope
FEL 2B
Select
Scope
FEL 2A
Define
Project
FEL 3
Start Up &
Operate
Execute
The Ideal Process Needs to Provide Proper
Alignment and Timely Flow of Information
Authorization
Basic Data Process
(Science) Reservoir-Driven
Project Process
Project-Driven
Business Shaping Process
Business-Driven
Project
Context
Potential
Value
Stakeholder
Alignment
Comparative
Advantage
Partner
Issues
Interaction at Decision
Points to Either Move
Forward or Kill the Project
Scope Closure
Core Team is
Formed
Basic Data Development
3
17. CONFIDENTIAL 17 INDEPENDENT PROJECT ANALYSIS
• We need to build our organizations to fit the needs of the
development, not vice versa
• Integration, interface management and timely flow of
information need to be at the core of the organization
‒ Remember, teams are simply creators, movers and consumers
of information and if this is not set-up right, projects fail
• Success will require an asset integrator who will be
accountable and responsible for business results and
who has understanding of all the broad aspects of asset
development
• If the people with skills do not now exist, they will have to
be created through training
The Missing Upstream Asset Integrator
18. Thank you for your attention!
Neeraj Nandurdikar
nnandurdikar@ipaglobal.com
+1 703 729 8300