Surviving the Downturn
With oil prices slowly recovering from the downturn, exploration and production (E&P) companies are being forced to look at smaller capital investments to help maintain financial stability. Instead of taking chances on high-risk, long-cycle megaprojects, they’re devoting a larger percentage of their capital expenditure (capex) on smaller, short-cycle projects. While these projects may not carry the potential for massive returns that megaprojects carry, short-cycle projects allow owners and operators to stay financially stable in the low-price environment while preserving the production infrastructure and capacities needed to expand quickly when oil prices improve.
Associate project analyst Ifunanya Onwumere at Independent Project Analysis (IPA) wrote in a recent article that, even though short-cycle projects are not a new concept in E&P, owner companies are investing larger portions of their portfolios in them as oil prices remain around USD 50–55/bbl. However, because the industry has spent much of the last decade focused on megaprojects, Owunmere claimed that a pivot to a portfolio heavy in short-cycle projects may be difficult for owners and operators without a holistic approach. IPA determined that E&P short-cycle projects are overrunning their cost targets by as much as 120%, and schedule performance is worse (Fig. 1).
In a recent study of more than 300 projects delivered by 18 companies, IPA found that cost and schedule outcomes were worse than the business expectation. IPA stated that E&P short-cycle projects are overrunning their cost targets by as much as 120%. Source: IPA.
Katherine Marusin, manager of IPA’s site and sustaining capital business sector, said that short-cycle projects are critical for owner-operators in the low oil price environment.
“I think what people sometimes fail to recognize in the E&P sector is that sometimes their future is populated with projects that are measured in the millions and not the billions,” Marusin said. “The fact that they’ve really ignored a lot of the smaller efforts that would make up anywhere from 40% to 80% of their project portfolios means that they don’t really have the competency to do these things well and they simply don’t know how to do them well. Because it’s the bulk of what you do and what you will be doing, I would argue that they are of increasing importance and were pretty important to begin with.”
Marusin said the industry needs to pay more attention to the impact short-cycle projects can have on a portfolio, but also that she was encouraged by the questions operators are asking IPA about how they can improve on this. She said the larger operators are leading the charge, in part because they can afford more sophisticated forecasting, giving them a better sense of how smaller projects can fit into their financial future.
“On some of the larger companies’ mega-projects, they’ve seen that this is a pretty foolproof formula that’s being employed. So, if we can translate that down to the shorter-cycle projects, we’re likely to save some money and be a little healthier,” she said.
In working with operators, IPA found that three overarching business decisions can drive the success, or the volatility, of the smaller short-cycle return projects:
• The criteria companies use to differentiate and separate short-cycle, sustaining capital projects from major projects
• The ways in which companies modify their work processes to specifically cater to short-cycle projects
• The ways in which companies evolve their organizational structures and approaches to support a portfolio tilted toward short-cycle projects