Spotlight on Oil and Gas Major Projects – Shall We Continue Investing?

Abstract

Today, increasing prosperity of developing economies is considered as the main reason for increasing world energy demand and renewable energy will be the fastest growing source of energy. It is forecast that despite increasing share of renewables in energy consumption, demand for oil and other gaseous fuels will not decline till 2040. To cater for increasing demand for hydrocarbon liquids and natural gas world is going to witness increased production through mega projects under US tight oil, OPEC and expansion of liquefied natural gas (LNG) production from US shale, North Sea, Asia and Africa. These mega projects are in various stages of conceptualization, planning, construction and operations. In this study four categories of oil and gas megaprojects have been discussed taking guidance from a report " Spotlight on Oil and Gas Megaprojects" prepared by Ernst and Young Global Limited in 2014. The Ernst & Young study identified 365 projects with individual CAPEX of multi-billion dollars in petroleum sector related to upstream, LNG, refining and pipelines. Cumulative projects’ CAPEX was approximately USD 2.6 trillion and included only those which were in planning or construction phase. According to the report, average cost of such projects varies in the range of USD 6 – 11 billion which is matching with CAPEX of projects identified for this study. All four projects studied have started commercial operations recently, as listed below: Upstream Wellhead Project – Clair Ridge production, Major UK North Sea development – CAPEX ~ USD 6 billionLNG Liquefaction Terminal – Prelude FLNG project, Browse Basin, Australia – CAPEX ~ USD 10 billionGas Pipeline Construction – Trans-Anatolian Natural Gas Pipeline, Turkey – CAPEX ~ USD 8 BillionPetroleum Refinery Installation – Pengerang Refinery Complex, Malaysia – CAPEX ~ USD 27 Billion It is well known today that era of " easy hydrocarbons" is approaching its end. Petroleum sector players are now planning to diversify their portfolios by tapping into emerging opportunities in unconventional oil and gas like shale gas, Oil sands, Light tight oil, Coal seam gas, LNG liquefaction, Ultra-deep water, the Arctic etc. All these unconventional hydrocarbon production technologies require mega-projects for their commercial implementation. Mega-projects are becoming a norm in petroleum sector despite high CAPEX and having long lead times for reaching commercial operations. FID for such project is driven by commercial deployment of technological advanced methods for unconventional hydrocarbon recovery with major focus on offshore development. Deployment of pooled resources by multinational Joint Ventures using their experience to implement innovative technological solutions is a recipe of successful project implementation. Oil and gas megaprojects have four distinct characteristics – high investment costs, long lead time, relatively higher technical risks and geopolitical influences. Four successfully completed projects have been found to have common traits which point towards dependency of project success on sincere commitment as well as capability of project owners to neutralize intrinsic as well as extrinsic factors that impede project implementation during project lifecycle.