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Common Causes of Cost Overruns on Offshore Projects

Written by Kelly Maloney | November 12, 2013

The Norwegian Petroleum Directorate (NPD) reviewed five field developments taking place on the Norwegian shelf to uncover the causes of cost overruns in offshore projects over NOK 10 billion ($1.7 billion USD). Their goal was to identify why some developments finish within budget, while others suffer significant cost overruns and then provide recommendations future projects can follow to increase project success rates. Not surprisingly, the report showed that overruns are not specific to Norwegian megaprojects, but are becoming a global issue due to the increase in size and complexity of projects taking place around the world today. In the search for new resources, E&Ps are developing in increasingly remote, deepwater areas and projects are also now more modular-based, requiring multiple scope packages to be managed by multiple global contractors. In addition, the global talent crisis the industry is facing, with an estimated 40% of experienced staff departing in the next 5-10 years, is making it harder and more expensive to find (and keep) skilled workers. With all of these hurdles today, it is increasingly challenging to achieve cost effective developments in isolated and extremely deep locations. Although ballooning project sizes and costs are global phenomenons, the research shows that certain geographic areas, such as North Western Australia, incur much higher development costs over other major oil and gas hubs. A recent study by the Business Council of Australia compared the costs of projects in Australia to projects in the US Gulf Coast and found a 40% cost premium for resource projects overall, and a 200% increase in costs for offshore oil and gas developments. Research by Deutsche Bank also found that current proposed and sanctioned Australian LNG projects are estimated to cost $2.7 billion per MMtpa vs. $1.2 billion per MMtpa for recently commissioned projects globally.

Common Project Success Factors

Notwithstanding specific regional issues, like regulatory requirements, competition for restricted supply chains, local day rates, and labour costs, there are common elements leading costs to skyrocket on all mega capital projects worldwide. Looking at projects that both stayed on budget and those with cost overruns, NPD’s work uncovered the four following main project implementation factors that influence a project’s success:

  1. Meticulous work in the engineering phase. This will form the basis for decisions and ongoing work throughout the project lifecycle.
  2. A clear contract strategy which takes the project’s most important risk elements into account.
  3. Thorough prequalification of the suppliers who contribute to the project.
  4. Good operator follow-up of the project. Ensuring the operator is actively involved in decision making from prefeasibility to commissioning, regardless of where in the world the construction takes place.

One discipline seeing a great deal of attention because it helps support these success factors is interface management.  As illustrated above, large, complex, modular-based projects struggle to achieve on-budget, on-time performance, and mismanaged interfaces are a key factor in this.  In offshore projects, interface issues account for up to 20% of total installed cost. These multidiscipline projects can easily include up to 75,000 task-related interfaces and thousands of engineering deliverables. Without established work processes to manage these thousands of interface-related issues, the risk of cost overruns and schedule delays increases dramatically. More and more project owners are recognizing interface issues as a significant risk to their projects and are actively pursuing interface management solutions to address this risk. Thankfully, the treacherous waters of offshore project management do not need to be navigated alone (pun intended). Interface management systems are specifically developed to help manage interface issues prevalent within these projects and help to ensure your project comes in on-time and on-budget. An interface management system can help you influence a project’s success by:

  1. Identifying, documenting, and tracking key interface points early on during the front-end engineering and design phase. This will help to establish a clear understanding of contractor responsibilities and ensure proper action is taken when issues arise.
  2. Ensuring interface agreements are established early, outlining and documenting how contractor needs will be addressed.
  3. Providing good visibility into who was a successful contractor on past projects, making prequalification on future projects easier.
  4. Providing a globally accessible platform for collaboration – one where project participants can share and revise up-to-date engineering documents and reports.

The research shows (and any seasoned project manager can tell you) there is no single factor affecting cost or schedule overruns on projects, however, proactively managing interfaces has been proven to mitigate some of the known risks with megaprojects. A relatively small, up-front investment in a dedicated interface management solution can save hundreds of thousands of dollars in re-work down the road.

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