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Published: November 9, 2006

 
 

Unprecedented and Unseen: The Next Great Energy Challenge

While oil and gas industries ramp up “megaprojects” to meet demand, few companies really know how to manage them effectively.

In September 2006, Chevron Oil Company announced that it had tapped a 3 billion– to 15 billion–barrel pool of oil in the Gulf of Mexico, a new source of fuel that could potentially rival Alaska’s Prudhoe Bay. Jack 2, as the well is called, spurred hopes that the United States could become more energy self-sufficient, or at least replenish its own dwindling oil reserves. As Fortune columnist and now managing editor Andy Serwer noted in October 2006, the discovery might challenge the peak theory of oil — the idea that the world has used up more than half of the available inexpensive petroleum.

But, as Mr. Serwer writes, this is no cause for complacency. Because projects like Jack 2 are so much more complex than they used to be, no country should rely heavily on the fuel that they generate. Bringing Jack 2 to fruition takes unprecedented technological mastery: The drilling rig sits in a hurricane zone, and must delve 28,000 feet below the Gulf’s surface. Even more complex, however, are the managerial issues at play. At Jack 2, three oil companies — Chevron, Statoil, and their smaller partner, Devon Energy — share the risk and responsibilities, reinforced by an army of suppliers. A similarly sized project in Nigeria undertaken in 2005, the $3.5 billion Bonga oil field, has four investors: Shell Nigeria (55 percent), Esso Exploration and Production Nigeria (20 percent), Nigerian Agip, and Elf Petroleum Nigeria (12.5 percent each). And there are at least three megaprojects in Angola (Kizomba B, Dalia, and Xikomba B) with four or more partners splitting a cost of more than $3 billion for each. (The Web site Rigzone tracks these and other oil and gas exploration and production megaprojects.) Such bets are bold, long-term endeavors. Production on Jack 2 won’t start until 2010, with each well costing between $80 million and $120 million.

All of these factors stretch the capabilities of the companies involved. In short, what hinders the oil industry in providing energy independence to countries like the U.S. is the managerial complexity of the oil and gas projects of the future. And that helps explain why capital project execution has become a hot topic in executive suites — for big oil producers; smaller producers; and related engineering, procurement, and construction contractors (or EPC firms, as they’re known in the industry).

Megaproject Mega Tensions
Recently, Booz Allen Hamilton surveyed the leaders of 20 companies, including super-majors, independents, and EPC firms, as well as some heavy industrial companies from the United States, Europe, and Asia, with combined capital spending of over $100 billion. Eighty percent of the respondents say that they expect their companies to increase capital expenditures over the next five years, with many planning increases of 30 percent in 2006 alone. (Industry-wide spending for exploration and production is expected to exceed $275 billion in 2006, mostly in megaprojects.)

The push, of course, is a response to an unprecedented surge in oil demand. Although the United States currently consumes 25 percent of global production, developing nations — once barely a blip on consumption charts — are starting to close the gap: China and India have more than doubled their consumption since 1990, and the trend is expected to continue. World energy consumption is projected to increase by 71 percent from 2003 to 2030. Politicians have taken note, and in October 2005 the U.S. House of Representatives’ “Peak Oil Caucus” introduced a resolution calling for a multilateral energy project equivalent to the “Man on the Moon project.”

But walking on the moon may turn out to be a garden stroll by comparison, at least in terms of management. More than half of the executives who were surveyed are dissatisfied with their companies’ overall project performance. All of them say costly budget and schedule overruns plague 40 percent of their projects. Producers and contractors disagree frequently, but both groups identify the same points of pain: risk management, performance risk, and human resources. Contractors are also dissatisfied with the lack of collaborative project planning on the part of the owners.

 
 
 
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Resources

  1. Global Upstream Performance Review, John S. Herold Inc. and Harrison Lovegrove & Company, 2006: Source of statistics on and forecasts of exploration and production investment and performance. Click here.
  2. Sachi Hatakenaka et al., “From ‘Black Gold’ to ‘Human Gold’: A Comparative Case Study of the Transition from a Resource-Based to a Knowledge Economy in Stavanger and Aberdeen,” MIT Local Innovation Systems working paper 06-002, July 15, 2006: Benchmark study of two North Sea oil and gas sites, focusing on innovation. PDF download. Click here.
  3. Matthew G. McKenna, Herve Wilczynski, and David VanderSchee, “Capital Project Execution in the Oil and Gas Industry,” Booz Allen Hamilton white paper, 2006: The article on which this “leading idea” was based goes into more detail for industry leaders. PDF download. Click here.
  4. “Oil Sands Costs May Rise 35%,” Energy Bulletin, November 2, 2004: Cost overruns in megaprojects in northern Alberta, Canada. Click here.
  5. Peter Parry, Otto Waterlander, Varya Davidson, “Resourcing the Challenges of Maturity: An Oil Industry View,” Booz Allen Hamilton white paper, 2006: Lays out the challenge of an aging workforce (and declining expertise base) in the oil and gas industries. PDF download. Click here.
  6. “Peak Oil Resolution in U.S. House of Representatives,” Energy Bulletin, November 20, 2005: Resolved that the U.S. create an energy project with the magnitude, creativity, and urgency of the “Man on the Moon” project. Click here.
  7. Andy Serwer, “The Gusher Paradox,” Fortune, September 21, 2006: Columnist argues that even megaprojects won’t mitigate the need for oil independence. Click here.
  8. John Wormald, “Engines of Change,” s+b, Summer 2006: Overview of recent books and resources that seek to make sense of future trends in energy and transportation. “A forced transition away from fossil fuel dependence is almost certain,” but no one knows for sure how quickly it will take place. Click here.
  9. Chevron Web site: Official announcement of the Jack 2 megaproject. Click here.
  10. Oil Career Web site: For professionals seeking careers and for those trying to understand the industry’s greatest points of activity. Click here.
  11. Rigzone Web site: Gazetteer of oil and gas projects worldwide, with pictures. Click here.
 
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