Historically most of the capital projects in the oil & gas industry ( and many others) have been delivered on a Lump Sum basis (or its derivatives EPC / LSTK/EPCM etc), which implies one basic thing - transfer all risks to other party. Over the last several decades, plenty of books have been written and studies conducted, only to find out that performance of large projects have been deteriorating at an alarming speed. What all of them show is that mega projects in oil & gas industry ( and other) are on the decline curve when it comes to performance, both under budget and on time completion. The number ranges from as low as 10% to as high as 350% overspent. Some interesting facts:
IHS Upstream data shows that the cost to build and operate an upstream facility nearly doubled.
One can argue that regulatory compliance, more stringent HSE regulations, escalating commodity prices and hard-to-find-oil may have resulted in such an increase, yet no other industry witnessed a similar escalation in costs, nor such an increase could be attributed to increased HSE regulations. The question is, as an industry, did we really want to solve the problem of escalating costs and poor project performance? Looks like not, really. Even if a project is late and overbudget, it will still be profitable - high oil price smoothened all of it.
There is a number of common themes and reasons as to why oil & gas project performance suffers. Yet looking a bit deeper, we sometimes miss a number of fundamentals - human and mother-nature issues that underpin project performance through behaviours, that affect project execution. Here we go with the list:
- Desire to achieve long-term goals, with short terms decision making. Almost all projects in the oil industry are long-term, sometimes reaching 50 years. This implies long-term planning and thinking, and designing projects to accommodate future uncertainty, changes, expansion and the most efficient run life. Yet, when it comes to decision-making - most of the time decisions are based on short-termism. For example, equipment might be priced low at the purchasing stage, but come with a high maintenance cost. So, when compared, equipment that has a higher initial purchasing cost, will not be selected. Instead, lower-priced equipment is purchased, despite higher maintenance and life costs. Although many times we say we use lifecycle cost approach, it most of the cases we still stick to short-term decision-making. This is magnified in large projects, whereby lowest turnkey/lump sum bid is selected, with bidders offering a solution that suits them, not the oil company. There is no incentive for an EPC company to serve clients best interest, hence they choose what best suits them.
- Task and Schedule management - when it comes to managing time and schedule, in the field of project management it is all about activities, tasks and milestones. There are mother-nature laws that explain a lot here and it is so basic and simple: 1) Parkinson Law says that work expands so as to fill the time available for its completion. Sounds familiar? How many times you've delivered your task in the time prescribed for it? Almost always. Did you try to deliver it faster? Why bother. 2) Student Syndrome is a tendency to leave the work until the last moment and build up execution efforts closer to the deadline. Recall when you started a task last minute and worked hard on it to complete on time? What stopped you to start it earlier? 3) No Early Work Transfer. If you finish your task earlier, you cannot pass it on to the next step, because the person next in the line is not ready to accept it. Happens a lot, isn't? 4) Multitasking. Although multitasking might sound a productive tool, it actually works the opposite. When project people have to multitask, they lose focus and struggle to complete those tasks effectively and on time.
- Psychology. Projects often fail to perform as a result of putting practices (policies and procedures) before people. Companies focus more on rational areas, such as the process of managing projects and paying less attention to emotional aspects, that could lead to better project performance.
- Uncertainty is another major issue in projects. Almost all projects contain a large degree of uncertainty. Instead of trying to manage this uncertainty and learn to be comfortable with it, we transfer the risk to an EPC company, which, in many instances, is not the best party to manage associated risks. Although risk registry and risk management plans are there to help, the unknown unknowns / Black Swans can have a devastating impact on project performance. In addition, when there is uncertainty, we naturally have a fear, as uncertainty avoidance or being uncomfortable with it, is hardwired in the human brain. When we have fear, we tend to act differently - we take more risk, we are more aggressive in scheduling projects and willing to pay more.
- Stage Gate process. Development of management gate process also could be a source of poor project performance. While the idea of stage gates might be a good option in certain projects, this shall not be a cooky-cutter approach. Stage-gate process may work counter-intuitive and actually increase uncertainty - scope might be adjusted on every stage as the information becomes available.
- Illusion of removing risk via good planning. Although the concept of influence curve suggests that projects outcome is best influenced at the beginning/planning stage, there is a danger of falling into the trap of spending most of the time to ensure that the front-end loading is good and losing the focus on the actual execution of the project, which might have risks with similar of higher probability and impact.
- Traditional Project Management. There is a plethora of evidence to suggest that current project management methods are not doing what they are supposed to do and result in cost overruns and delays. Going into the overall field of project management, there seems to be a universal and common-to-all problem with project management. According to Lawrence Leach, a project management author and consultant, in the last 20-30 years, the situation remained the same - most projects fail to perform as planned, with budget overruns and schedule delays. The question is - if the existing system of project management is robust enough would there be issues in project performance across many industries? And by the way, having a certified project manager is hardly a predictor of project success.
Is there a solution? Yes, there is.
It is changing Contracting Approach and Project Management Philosophy project owners choose for large capital projects. And those are Relationship Contracting (also known as Collaborative Contracting or Project Alliancing) and Critical Chain Project Management (CCPM).