Offshore project management costs soar 20% in two years
The cost of project management on offshore exploration projects has risen 20% in the past two years and will rise further as operators drill more complex projects in deeper waters, Performance Forum, a study group made up of major oil companies, said in a report.
Globally, the cost of project management as a share of total capex has risen from 9% in 2013 to 11% in 2015, for a project with capex of $3 billion, the report said.
The cost of project management represents as much as 20% to 30% of total costs for almost a fifth of projects currently being developed.
The survey analyzed 150 projects undertaken by 20 operators, and found the rise in project management costs varied according to the type of project and location.
Projects involving floating platforms such as Floating Production, Storage and Offloading units (FPSOs) and tension leg platforms (TLPs) were more expensive than subsea operations.
The costs were generally highest for Gulf of Mexico projects, followed by African and Asian projects. North Sea projects represented the lowest-cost.
The size of the company was a major factor, with large integrated firms spending three percentage points more than their smaller rivals on project management.
Aileen Jamieson, vice president of Turner & Townsend and the Director of the Performance Forum, said: “I think people were expecting project management costs to increase, and they've seen it themselves, but I think they were surprised by how much it has increased. I think that most people were very shocked at the number of projects in that range from 20 to 30%.”
The need to exploit complex deep water reservoirs was one reason for the cost increase, Jamieson said.
The cost of project management has risen with the complexity of the work, so the increasing number of deep water projects with floating production platforms has been a principal driver, she said.
Another factor has been the growth of multiple project teams to manage complex projects.
“The majors spend more because they have many more people and multiple layers of managers managing other managers, and that’s when the costs really start to rise. The majors still do it the way it used to be done in the olden days. Companies like BP and Shell might have 10, 15 even 20 centers around the world where they have a team in place working on the same project,” Jamieson said.
Costs were lowest in the North Sea because much of the production was in shallow water from fixed structures and teams were often highly experienced, Jamieson said. “Typically the office is in Aberdeen and all the work’s done from the UK, so that's where North Sea really has an advantage. There are a lot more majors in the Gulf of Mexico, and you've got the Shells and the Chevrons doing complex deepwater projects,” she said.
The Performance Forum plans to repeat the survey in 2017 and include more West African projects.
“In West Africa, the local content rules means you have to have local people in Africa working on projects and they need a lot more supervision because they don't have the skills and experience that a team in Singapore or the UK would have,” Jamieson said.
Project skills shortage
A shortage of seasoned project managers may be partly responsible for the higher than expected cost of large projects, Phillip Bullock, project services manager for the $12.5bn Freeport LNG project in Texas and a former project manager with Amoco and BP, told Upsteam Intelligence.
Widespread job losses in the 1980s have been followed by further job cuts in the recent downturn.
“There’s an experience gap between people who are in the 54 to 65 age range versus the next generation of project professionals, who are at best in their early forties,” Bullock said.
“There was a lot of people laid off in the eighties who left oil and gas and did not return, so we lost a whole generation,” he said.
Career structures in the oil and gas industry dissuade many recruits from becoming project managers, and younger new-hires prefer roles that offer more job security than project-based roles, Bullock said.
Contractors in particular require competent project managers, in order to control project costs, he said.
“A lot of times you [work with] a contractor who's struggling and you end up having to bring in claims or commercial people and that adds cost. With megaprojects, a lot of that is driven by contractors getting into trouble early.”
A 2014 report by Ernst & Young said that 64% of megaprojects faced cost overruns.
Ernst & Young studied the 365 projects with a capex of over $1bn.