Oil Industry Megaprojects: Our Recent Track Record
Authors: Merrow Edward Wolverton 
Published: May 2011

Upstream Megaprojects Revisited: What Is the Problem?

In a recent major study of industrial megaprojects, the author finds that E&P megaprojects fared very poorly. By contrast, earlier studies showed that the results of E&P megaprojects were about the same as megaprojects from other industrial sectors. With this much larger and more recent set of megaprojects, we find that upstream megaprojects are more fragile than their non-E&P cousins. The author attributes this finding to the poor functional integration that characterizes upstream project organizations, which makes these complex projects much more sensitive to poor preparation, schedule aggressiveness, and loss of continuity in the project leadership.

Introduction

Projects throughout the process industries—petroleum, chemicals, minerals—have been getting significantly larger and more complex over the past decade or so. The underlying reasons for increasing project size and difficulty are understood: We are developing natural resources in progressively more difficult circumstances simply because we have to. Moreover, the choice of E&P developments is influenced by the decisions of some large resource-holding countries to restrict or delay the development of some more easily accessible reservoirs.

Eight years ago at OTC, I reported on a distressing pattern we were seeing in offshore projects: Success, measured by how well we meet promises made at the time of the financial investment decision (FID), declines rapidly with project size (OTC03). While projects in the $300 million to $600 million range were largely successful (OTC03), the success rate for the megaprojects—defined as over $1 billion measured in constant start of 2003 term—was about 50 percent. Interestingly, megaprojects in other industrial sectors, such as downstream, minerals, and chemicals, had about the same rates of success and failure.

This year, with a much larger sample of both upstream and other process industry megaprojects, our conclusion is quite different. While non-petroleum development projects increased in size and difficulty, they maintained a success rate of about 50 percent. The rate of success is certainly not good, but at least it had not declined despite the much more difficult projects market. Meanwhile, performance in petroleum development megaprojects collapsed; only 22 percent of upstream megaprojects could reasonably be called successful. The successful projects were spectacularly successful. The other 78 percent are a sorry lot indeed: 33 percent real cost overruns, cost indices that averaged 1.37, execution schedule slip of 30 percent, and a disappointing 64 percent of projects that experienced serious and enduring production attainment problems in the first 2 years after first oil or gas.

What explains this nose-dive in relative performance? Why did the success rate tumble for E&P while holding steady in the same market environment for other industrial megaprojects? What is it about upstream projects—or the approach used to execute them—that made them more fragile than other megaprojects during this period?