AVOIDING CAPITAL COST BLOWOUTS ON OIL AND GAS PROJECTS

Abstract

Modern corporate practices have been slow to come to grips with the risks of large capital expenditure projects, particularly the processes of due diligence on investment submissions and high level monitoring of project implementation.

Unlike the mining sector where major project cost blowouts have received intense public scrutiny, collection of data on this issue is difficult in the oil and gas sector and there remains a reluctance of companies to share horror stories. The increasing trend towards company acquisitions rather than exploration, the rates of return on capital investments reported by oil and gas companies and the data available on this issue within the mining industry point towards a potential problem for the oil and gas industry and one that, with appropriate corporate practice could be more readily identified.

This paper puts forward the case for more effective corporate practices in relation to large capital projects in optimising return on capital and discusses the role of project owner senior management and the key factors impacting on capital expenditure blowouts.

Effective project due diligence, monitoring of project implementation and integration management are put forward as the three key focuses for Boards and management in ensuring that cost blowouts are avoided.