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It’s an odd situation these days, the costs of
international major construction projects in the oil and gas area
are increasing dramatically and it is quite difficult to find the
real reason for this. Admittedly commodity prices have been roller
coaster’ing (steel products have increased in price by a factor of
2.6 since 2000 and the dollar has been wobbling around, Euro to
$1.37 to 1.6 and now to 1.45 in the last few months) and there are
major order backlogs—its difficult to get the full attention of
major international contractors and suppliers, regardless of how
much money you plan to spend, they just don’t seem to have the
capacity.
Dramatic cost growth of mega
projects is just a fact of life nowadays. In the past nuclear power
projects and tar sands projects were well known as the type of
undertakings that led to massive cost increases. At the time
(excluding space projects) these were the largest types of projects
undertaken, or rather often just contemplated due to cost growth
leading to their cancellation on economics grounds. For a mega oil
and gas project to increase in cost by a factor of 2x or 3x between
initial opportunity identification and final commitment is not
unusual, many examples are around and the numbers are in billions of
dollars; to add to this likely further increases, again by factors
of 2x or 3x post final investment commitment is also common.
Large complex projects have been
under development for many years there is an established history of
development of these things, one of the biggest early undertakings
were the programs of the North American Space Agency (NASA). NASA
developed methods for project management and control (due to
experienced massive cost overruns) that have become industry
standards, but still they projected an increase of $32 billion to
their initial budget for the period 2004 to 2020 of $70 billion. As
there is an established history of development of large complex
projects so there is also a good catalogue of lessons learned. Why
then do things continue to get out of hand? Are the reasons for the
misfortunes of the past not properly taken on board or understood,
or is it some other reason?
Big complex projects are by their
nature prone to go wrong, not necessarily technically but certainly
on the cost and time side, there are simply too many interfaces to
look after and people tend to be optimistic and go in for things
without adequate preparation. External influences—non controllable
costs and time factors in the current hyper inflationary
environment, account for about 50 percent of changes, while
“controllable” items account for the other 50 percent. I can
bring to mind now unexpected cost increases of over $200 billion on
just a handful of recent mega projects—that’s a lot of money,
and guess who pays for it, its not the shareholders, it is the
consumers (and in NASA’s case tax payers) of whatever it is that
the mega projects are delivering—no doubt sending manned space
craft to Mars has an eventual deliverable for the American tax
payer!
My point here is that there is a
lot of money wasted often due to a lack of real accountability for
massive expenditures. “Oh dear the cost has increased we will have
to increase the cost of the product in order to preserve our
margin” and this sentiment knocks on and on and on . . . and we
just continue to pay for these inefficiencies!
mawootton@gmail.com
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