Why major oil and gas projects go wrong
The underlying causes of disruptions and disputes could be moderated by improving contracts, audits and controls
Oil and gas projects are complex, usually large-scale and involve integrating complicated supply chains and diverse technologies. But this complexity does not explain the delays, disruption, defects, lost productivity and higher costs that afflict so many of these construction and engineering projects.
Within the world’s largest database of real-life claims and disputes, HKA analysed 114 oil and gas projects with a capex value of US$603.7 billion from the last two years to identify and rank the underlying causes (see table).
The findings from HKA’s CRUX Insight 2019 Global Market Sector Analysis found change in scope to be the dominant causation factor in this and the other five sectors surveyed. However, high volatility and the shift in negotiating power since the oil price slump adds a different dynamic. Historically, oil and gas majors completed design and procurement in-house and tendered packages for installation.
Now, under heavily-amended engineering, procurement and construction (EPC) contracts, scope-related risks are passed on to contractors and along the supply chain, in some cases regardless of ability to manage them.
The inappropriate allocation of risk— especially when combined with the poor drafting of contracts, the second most prevalent cause of disputes in the oil and gas sector—often has deleterious consequences for a project.
Contractors bid low, then attempt to maximise recovery through variation orders. We see claims wildly overstated— by a factor of five in some cases. Such opportunism is compounded by poor commercial management as contractors cannot pinpoint the source of losses.
Design-related issues also loom large in this sector. An off-the-shelf rig template may be tried and tested, but bespoke modifications to this, without the appropriate detailed engineering checks and balances can have disastrous and expensive effects and a design that is not robust. Too often, designs progress to tender too early.
The industry’s long-running skills shortages may well be understated in our causation ranking. The rise of renewables can only exacerbate recruitment and retention problems for what is seen as a ‘dirty industry’. Our sector experts believe this competency gap lies behind at least half of the top 10 causation factors—not least poor contract management and administration.
Problems with workmanship are more prevalent than in other sectors. Many contractors are wedded to traditional approaches, and their own standards, rather than international norms. From steel quality to welding, claims over substandard materials and defects feature in many disputes.
Tight regulations on safety and environmental standards also constrain operations. As well as dovetailing scheduling with complex supply chains, project managers must navigate their way through a variety of authorities, usually at national, state and local level, and comply with multiple regulations, from environmental to established technical standards, to secure the necessary permits.
Delayed access to worksites triggers many disputes. Congestion occurs when works are not programmed properly, or plans need to change. Productivity suffers when multiple trades and works overlap. The knock-on impacts on linear works can be highly disruptive, as crews and equipment must be remobilised for other sections, causing congestion or conflicts with adjacent works.
Similar domino effects impact entire projects when custom-fabricated plant components are delivered late to site, playing havoc with the sequencing of installations with extremely tight tolerances.
The changing energy environment is spurring technological change as producers seek to extract the maximum output from existing facilities rather than invest in new infrastructure. Traditionally, new solutions were proven off-project before application. Smaller companies and joint ventures are increasingly willing to utilise emerging technologies before they are proven, fuelling complexity and risk.
The way forward
Without radical change, this pattern of disputes will continue. Contracts could be negotiated to share and manage risks more effectively. Stage-gate audits would limit scope changes and ensure designs are mature. Effective project controls, more professional administration of contracts and smarter commercial management would avoid over-inflated claims. Given the growing skills deficits, project teams can also benefit from war-gaming exercises that flag likely contractual disputes.
Oil and gas projects face enough challenges without compounding them.