Project Management is about to get harder

Every project I’ve worked on that has found itself adrift of where it should be in terms of costs and schedule with the end nowhere in sight (i.e. all of them) there has always been a mentality among the project team that “it will get done eventually”.  Meaning, no matter how bad it looks now eventually the project will be completed and production will start and the whole thing will be deemed a success.  In other words, the concept that a project might fail, and not reach completion, simply doesn’t exist in the oil business (at least in the majors).

I once worked on an enormous project, one of the world’s largest, that had gone completely off the rails and was bogged down in disputes with the government, the partners, and multiple contractors before the thing was even half built.  We had a mountain to climb to get it finished and there was no end in sight, but nobody was in any doubt that eventually, after another few years and several billion (and then some) it would be finished and we could all go home.  Of course, the fact that a lot of the project team were day-rate contractors contributed to the upbeat mood when facing lengthy delays but that aside, nobody believed the project would fail.  And sure enough, it got done.

Such inevitability is taken for granted in the oil industry and sometimes I wonder if perhaps we are entering a new era where a major project can actually fail, i.e. not reach the production phase.  I have discussed the Kashagan and Angola LNG projects previously, noting that in each case a facility has been built costing tens of billions which failed to start up, requiring further billions of dollars and years of delays in reworks.  My personal knowledge of the world’s oil and gas projects is limited and so I don’t know if these are breaking new ground globally, but in my experience I have never come across a project that has fallen so catastrophically short after mechanical completion as Kashagan and Angola LNG.  Of course, we have all seen teething problems during commissioning and it is not unheard of for a facility to require a major overhaul after a few years of production to correct the problems in the design and construction, but I can’t think of an example of facilities of this size being completed, start-up attempted and failed, and then remaining offline for years afterwards.

The assumption in each case is that, having poured so much money into the ventures thus far, the owning consortia – made up in part by western supermajors with deep pockets – will turn on a firehose of cash to get the facilities in production come hell or high water.  This assumption is almost certainly correct, but I do think we are breaking new ground here.  The government of Kazakhstan was forced to intervene in Kashagan because it felt the Eni-led consortium had disregarded any sort of financial discipline and was happy to continue spending tens of billions with gay abandon while the project went practically nowhere.  Under the terms of the PSA, the cost of the facility is paid back to the consortium out of the initial production after which the government takes ownership: the government, perhaps with some justification, felt that under such an arrangement the consortium had little incentive to control costs, and any overruns would ultimately be felt by the government and people of the country (Russia raised similar objections over the spiralling costs of the Sakhalin II project).

Given most major projects today have on board a state-owned partner company, we are likely to see more such interventions.  It ought to be obvious to the western oil companies that, having gotten the projects sanctioned largely on the back of their professed competence in project delivery, there will be a limit to the degree of cost overrun a host government will tolerate.  This might seem a bit unfair, given that a large percentage of cost overruns on major projects is due to intransigence on the part of host governments, ludicrous local content legislation, and blatant corruption on the part of local authorities and contractors.  It would only seem right that the government-owned partner shouldered its share of the costs for these obstacles.

But as we’ve seen since the dawn of the oil age, the industry isn’t fair, and governments don’t play fair.  The possibility of retroactive legislation dumping cost overruns beyond a certain point squarely on the shoulders of the western operating partner (by making such costs non-recoverable from production) is hardly far-fetched, and in previous years the majors would likely have just swallowed the costs (as they did with other non-recoverable costs).  But with the recent decline in the oil price the cash flow of oil companies, even the traditionally cash-rich supermajors, is precarious with several being forced to sell assets in order to maintain debt levels and pay dividends.  With a shift of focus towards profitability instead of production figures, the willingness – or even ability, in some instances – of oil companies to simply open their wallets and meet multi-billion dollar cost overruns for which nobody is taking proper responsibility might not be guaranteed.

Hence I believe it is a only a matter of time before we see in our industry a first instance of a major, multi-billion dollar asset get cancelled without ever reaching production due to soaring cost overruns which nobody is willing to pay for.  On inspection of current ongoing projects, and assuming Kashagan and Angola LNG eventually get into production, the most likely candidate for failure is Total’s Egina project being carried out in Nigeria. A leaked letter to a Nigerian newspaper provides the details:

The Nigerian National Petroleum Corporation (NNPC), Samsung Heavy Industries Nigeria Limited and Total Upstream Nigeria (TUPNI) Limited are heading for a collision over the demand by Samsung to raise the cost of the $3.3 billion Egina project, THISDAY has learnt.

After a 19-month delay, Samsung recently performed the ground-breaking for the construction of a mega fabrication yard for the integration of Total’s Egina Floating Production Storage Offloading (FPSO) vessel.

However, concerns have mounted that the multi-billion dollar project located in Oil Mining Lease (OML) 130 may not be delivered on schedule.

THISDAY gathered that Samsung, the contractor building the Egina FPSO vessel for Total, has submitted a Change Order Request (COR) on engineering and schedule/cost impact, inflating the project cost by about $400 million, a demand which Total has rejected.

In a 98-page letter addressed to Total … Samsung has requested the additional payment of about $400 million, citing articles of the contract.

The company also requested Total to pay $41 million for changing the engineering design of the project and other modifications.

On claims Samsung called cost expenses due to schedule impact, the Korean firm told Total that it “brings this claim for cost of schedule impact of $67 million pursuant to Article 15.5(a)(b)(i) as a result of Total’s default in complying with Article 6.4 and Article 14.4.2-3, which is the default in timely clarification by Total impacting on the cost and work schedule on the contract, in addition to other factors affecting the project delay as previously outlined”.

THISDAY gathered that Samsung’s justification and clarification was based on Total’s position that Samsung had not been able to justify its claims for additional cost.

However, a source at Total told THISDAY at the weekend that aside from lack of justification of contractual entitlements, the claim cost impact, schedule impact and promise of recovery of these alleged events had not been demonstrated.

He insisted that the position of Total is that the basis for any request for change has to be grounded and premised on the contract signed between the parties.

According to him, Total has been inundated with claims lacking in contractual basis, adding that claims without proper details cannot be entertained by the French oil giant.

There are two things damning about this story.  Firstly, the final investment decision on Egina was made in May 2013 – 18 months ago – yet the article refers to a 19-month delay in a key activity.  It is a worrying sign when project progress is showing a negative value after a year and half of work.  Secondly, in terms of the difficulties the Egina project represents, this was supposed to be the easy bit.  The terms of the project call for 3 topsides modules to be constructed in Nigeria and their integration with the FPSO (being built in Korea) also taking place in the same Nigerian yard.  These activities haven’t even started, and construction thus far has been limited to Samsung making a start on the hull, something they can do in their sleep.  Detailed engineering – 70% of which will take place in Nigeria – is still ongoing yet already Total is facing claims of $400m, serious rifts between them and their main contractor Samsung, Nigerian government authorities which are looking mightily unimpressed, and an enormous delay.  This situation might be tolerable deep into construction with production – and revenues – in sight.  But now, with engineering still ongoing and not so much as a welding rod expended?  Something is not right.

It will be interesting to see how this plays out.  Total has been shaken by the untimely death of its charismatic CEO Christophe de Margerie, an event this organ believes will hit the French major far harder than people realise.  Like all major oil companies their cash position is not healthy, and their stomach for coughing up an extra $400m at such an early stage might be open to question.  I hope for the sake of the Egina project management team that they can demonstrate to the satisfaction of all interested parties that they have applied robust and documented project management, contractual, and technical principles across the project thus far allowing them to sidestep the claims from Samsung, and that they have not engaged in slapdash practices, woolly decision making, finger-pointing, and managerial incompetence which will leave them with the bill placed squarely at their doorstep.

In the new era of complex projects, lower oil prices, and national partnerships western oil companies are going to have to demonstrate far better project management capabilities than they have managed to date.  Whether they are up to the task remains to be seen.

2 Responses to Project Management is about to get harder

  1. Crankshaft says:

    Hi Jake,
    We seem to be experiencing a similar problem on a large “megaproject” here in Darwin, Australia although you won’t find too much about the issues in the media or on the net. The EPC contractor claims the project is 70% complete, however talking to one of the guys working on the site for a contractor, there company has used 60% of the budget but only completed 3% of the work! Usual stories of the spaghetti type contract / sub contract arrangements and workers standing around with their thumbs up their arse 90% of the time.
    There are tidbits in media that something is greatly amiss though. Apparently most of the majors involved in construction are recruiting lawyers all of a sudden, which is ominous. This project was apparently the largest corporate finance deal in history ($20 billion from 41 creditors), with repayments coming from the first 16 years of production. As the financing was arranged with expectation of barrel prices north of $120, not sure how the fundamentals of this project can stack up. They are offering huge salaries for ops and maintenance techs, however most are on two year contracts (bait & switch?). Will be interesting to see how this one pans out.
    Love the blog, piss myself laughing reading it, experienced many of the same things!
    Cheers.

  2. Crankshaft says:

    Update 27/01/17 – The sub contractor for the 500 MW power plant on this project has just pulled the pin, without the turbines having started up or commissioned. Facility is due for first production September 2017, however the main contract consortium claim that “the power station isn’t on the critical path” for project completion. I suspect they are preparing to train millions of mice in little cage treadwheels to spin up the refrigerant compressors.

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