The head of National Petroleum Construction Company says reform is needed on bidding for big oil and gas projects to curb rampant cost inflation in the industry.
The steady rise in costs is a particular worry at a time when oil prices are showing further signs of weakness.
In Dubai on Tuesday, Oman crude futures on the Dubai Mercantile Exchange traded below US$80 a barrel for the first time in more than four years, with the contract for January delivery closing down $1.85 at $79.93 a barrel. Prices have fallen by about 30 per cent since the summer highs, when North Sea Brent was near $115 a barrel, putting pressure on oil-producing countries and companies.
In this environment of squeezed margins, “we urgently need to develop a more flexible approach to share both the risks and the benefits of large projects,” said Aqeel Madhi, the chief executive of NPCC.
While prices are still well above the budget break-even levels for the lower-cost producing countries such as the UAE, many of the higher-cost producers are feeling the pinch, especially countries such as Venezuela.
Among the major oil companies, those with a bias toward exploration and production suffered with their third-quarter earnings as lower oil prices outweighed gains in refining margins. While most of those with big projects say they are unlikely to adjust their capital spending budgets in the near future, they do expect pressure on spending if prices stay at, or below, $80 a barrel for a prolonged period.
“If prices were to stay at $80 a barrel for a long time it would challenge future projects, but ones that are already on the way I see no immediate pressure,” said Arnaud Breuillac, head of exploration and production at the French oil company Total. But he added: “It does put pressure on cost management, and we need to address this issue even at $80.”
It is something that both the big contractors, such as NPCC and the leading oil services company Schlumberger, as well as the large international oil majors agree upon: rampant cost inflation on ever bigger and more complex projects is a threat to the industry. They also agree that both contractors and oil companies are to blame.
“We in the industry have been slow to adapt while the projects have become much more complex and larger,” said Andy Brown, the head of upstream at Royal Dutch Shell.
One of the underlying causes is that the industry has been slow to adapt to new technologies, especially information technology.
“Over the past 10 years, total [exploration and production] spending has grown by $650 billion a year, but the only part that has grown is liquid production in the US,” said Paal Kibsgaard, the chief executive of Schlumberger. This, he said, was because of a prolonged period of underinvestment by the industry in research and development during the 1980s and ‘90s. Meanwhile the explosion of unconventional sources of hydrocarbons, such as deep offshore and shale oil and gas, has meant more complex and expensive projects.
“We have to move from being a hardware-focused industry to be more of a software-focused one,” Mr Kibsgaard said.
While projects have grown more unwieldy and costly in all regions, none has done worse than the Middle East, where about 89 per cent of current projects are overdue and over budget, according to Choong Heum Park, the chief executive of Samsung Engineering.
“We have mega-projects now with the kind of complexity that is unprecedented, and with much shorter delivery times – from 29 months to 24 months just in the last three years,” Mr Park said.
“ While the demands of the oil companies have become dramatically more challenging, the engineering firms have not changed their methods sufficiently.
“We need to develop better tools.”
The contractors are also pushing for a different approach to bidding so that competition for business does not lead to cost overruns and delays.
For Abu Dhabi, Mr Madhi suggested a move toward a model similar to Saudi Aramco’s long-term agreements, with contractors and oil companies sharing risks in a project partnership.
The fall in oil prices could hit some projects based on $100 crude, said the Minister of Energy Suhail Al Mazrouei.
“What worries us is that some investors will not continue to invest,” he said. “Not us, others, are not going to continue to invest. And in a few years, we’re going to face difficulties finding enough investments in the market.”
amcauley@thenational.ae