EY: Oil & Gas megaprojects exceed budgets. Cost overruns reach $500B

A new report by EY reveals that almost two thirds (64%) of multibillion-dollar, technically and operationally demanding megaprojects continue to exceed budgets, with three quarters (73%) missing project schedule deadlines.

The report – ‘Spotlight on megaprojects’ examines the performance of 365 megaprojects and the impact on the oil and gas industry of these overruns.

On average, current project estimated completion costs were 59% above the initial estimate. In absolute terms, the cumulative cost of the projects reviewed for the report has increased to US$1.7t from an original estimate of US$1.2t, representing an incremental increase of US$500b.

Axel Preiss, EY’s Global Oil & Gas Advisory Leader, says: “While the report looks at current industry performance, longer-term industry outlooks suggest that project delivery success is actually decreasing, especially in certain segments of the industry, such as deepwater, where complexity and risk are considerably higher. Poor execution can potentially result in the project being economically uncompetitive and negatively impacting an organization’s overall financial results.”

Geographic influence on megaprojects

Geographically, the proportion of projects facing cost overruns is highest in the Middle East (89%), followed by Asia-Pacific (68%), Africa (67%), North America (58%), Latin America (57%) and Europe (53%).

These figures tie in with the proportion of projects reporting schedule delays with the Middle East being the highest (87%) followed by Africa (82%), Asia-Pacific (80%), Europe (74%), Latin America (71%) and North America (55%).

Project costs are significantly underestimated
Critically, from a capital investment perspective, the research shows that in the post-Final Investment Decision (FID) stage, 65% of the projects analyzed were facing cost overruns, with an average escalation of 23% from the approved FID budget. The reasons for this are varied and may be impacted by the geographic location of the project.

Barriers to successful project delivery
There are several internal and external factors that influence the success of a megaproject. Internal factors include inadequate planning; access to funding; poor procurement of contractors and contractor management; aggressive estimates; optimism bias and changing risk appetite. Many of these areas can be addressed through thorough upfront planning and strong project management and to help improve overall project performance.

External factors such as regulatory issues and geopolitical challenges can also hamper performance. In addition, given the scale of the investment, the impact of exchange rate fluctuations and commodity constraints can be severe and lead to megaprojects being delayed or even cancelled. However, with good project management, the impact of external factors can be mitigated.

“In order to secure economically attractive funding for megaprojects, resource access rights and corporate approvals, companies need to guarantee high levels of transparency, value-adding assurance and proven delivery capabilities, says Preiss.

“Clearly the external environment and regulatory- and policy-related changes are not as easily controlled as the internal project management-related issues, but the oil and gas industry can do significantly more to prepare for these issues so that their effects can be adequately managed within the project environment”.

Preiss concludes: “Companies can no longer rely on oil and gas price increases which in the past have masked many of the consequences of megaproject overruns. Unconventional discoveries have already had an impact on the economic viability of many megaprojects and securing capital is only going to become more difficult unless companies are able to consistently deliver on deadline and within budget.”

 See the full report here.