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 The sheer scale and complexity of such projects is threatening to
outgrow the ability of even the largest oil companies to manage
them.
They have emerged as the central topic for debate as oil executives
gather on the sidelines of the World Economic Forum this week in the
Swiss alpine resort of Davos.
Almost all the top companies have seen huge delays and broken
budgets at projects ranging from record-breaking Australian
liquefied natural gas (LNG) schemes to the enormous and a
technically challenging Kazakhstan oilfield in the freezing Caspian
Sea.
The subject has elbowed out last year's hot topic, security, which
was forced to the top of the agenda by the attack at a BP <BP.L> and
Statoil <STL.OL> gas plant in Algeria in January 2013.
"What we see are significant delays in the oil and gas industry as a
result of a lack of available skills, bureaucratic barriers and
geopolitical challenges," says Fatih Birol, chief economist at the
International Energy Agency.
"We see almost all big projects delayed."
Most discussions are set to be moderated by Paolo Scaroni, the chief
of Italy's Eni <ENI.MI>, a company that for many years was lead
operator at the Kashagan field in Kazakhstan, the world's largest
discovery in 30 years.
Superlatives come naturally to the Kashagan project, including the
most notorious cost overrun in the last decade. Its initial budget
of $10 billion has ballooned to estimates of five times that amount
and more.
Not too far behind, the Chevron-led <CVX.N> Gorgon LNG facility in
Australia is now set to cost $54 billion, up almost $20 billion from
initial estimates. Chevron is the world's second biggest
investor-controlled oil company, and yet its own $25.5 billion share
of that cost will eat up eight months' worth of its total $40
billion a year spending budget.
NEW STRATEGIES
The latest setback to the Kashagan project was late last year, when
pipeline leaks halted output just weeks after start-up.
"Kashagan! I don't want to hear this word any more," one frustrated
oil executive said, shaking his head in disbelief.
The project's participants, which include Exxon Mobil <XOM.N>, Royal
Dutch Shell <RDSa.L> and Total <TOTF.PA> — three of the global top
five — could yet face new penalties from the Kazakh government,
which was hoping to ramp up output this year and increase budget
revenues to meet rising social costs.
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"Four years ago we heard threats of project nationalization because
of delays. And it cost us hugely," an oil executive said referring
to an earlier settlement at Kashagan, when Kazakhstan took a large
portion of the project under state control.
It remains to be seen how the government might penalize the
consortium for new delays. In the meantime, political risk is not
the only headache.
"The increasing scale, costs and risks of oil and gas projects have
taken complexity to a new level," the materials prepared for the
CEOs' meeting say.
"As companies across the spectrum frequently face cost overruns and
delays in delivery, successful execution of mega projects calls for
new strategies to manage capital and operational costs," it says.
It also adds that "mega complexity" will likely call for new forms
of collaboration, although in the case of Kashagan, having almost
all the biggest majors on board early didn't help. Indeed it has
turned the project into a bureaucratic nightmare.
There are financing constraints, too.
All of the top five are promising investors that capital spending
has peaked or is peaking, and are moving to sell assets and abandon
some of the most expensive, high-risk projects to take the heat of
the rampant cost inflation that occurred in Australia in recent
years.
Shell's GTL project in the United States is one of the latest
casualties. BP last year scaled back an ambitious and innovative
extension plan for its Mad Dog structure in the Gulf of Mexico.
But company bosses know that while investors look little more than a
year or two ahead, the industry's survival depends on their ability
to invest for production that will not come on line for another 10
or 15 years.
"The industry needs to find a solution to get the right supply
balance," says Birol.
(Reporting by Dmitry Zhdannikov; editing
by Andrew Callus and Will Waterman)
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