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Keeping oil and gas mega projects moving – grappling with Non Technical Risk

19 January 2010

Project delays cost money. This is evident in all areas of business, no more so than in the oil and gas industry where the global cost of major project delays amounts to billions of dollars every year.

Why should this be so? Firstly, the stakes are getting higher all the time. According to research by Goldman Sachs, the average value of the world’s top oil and gas 230 projects is now $11.3billion. Oil and gas companies must operate in ever more sensitive and challenging parts of the world to meet energy needs. Project delivery is becoming more complex and more expensive; teams who are frequently working within joint venture alliances are under growing pressure to deliver, with an expectation of decreasing time to market.

In ERM’s experience non technical, or “above ground” issues, which includes everything from partner and stakeholder relationships to environmental sensitivity, can account for up to 75% of cost and schedule failures on major oil and gas projects. One client alone reported losing over US$3billion a year due to project overruns and delays attributed to environmental and social issues.

So why are sophisticated, well resourced oil and gas companies still struggling in this arena? Two factors, we find, increasingly demand attention.

Starting Early

The first critical area is the way in which teams operate to address social and environmental risks prior to the formal permitting process. In ERM’s experience, it’s essential that there is engagement with these issues at an early stage of the project, to identify and prioritize environmental and social risks. This allows relevant risks to be actively managed as the project moves through its conceptual stage, reducing the likelihood of costly delays later on.

The challenge of team-work takes on a new significance in the case of joint ventures, for example between international oil companies (IOCs) and national oil companies. In such cases we find there is often an early need to bring together different team members from the business, environment and social/community areas to align expectations on non technical risks (NTR). In a mega project this could cover everything from local employment priorities to the costs and processes involved in resettlement.

In keeping with the concept of “Front End Loading” or in other words ensuring robust planning and design is implemented from the early stages of a project lifecycle, timely environmental and social interventions are essential to avoid unforeseen delays down the line.

Approval from whom?

The second factor demanding attention for the social and environmental aspects of mega projects are approvals.   In order to get this right and follow the right path, the proponent needs to understand who needs to give “approval” for the project.  Whilst host governments have long been the focus, there are also the financial backers, JV partners, and corporate HQs to consider.

ERM’s oil and gas clients are increasingly required to undertake an international or bankable standard Environmental and Social Health Impact Assessment (ESHIA) to satisfy these various needs. A key challenge they face is to run the ESHIA in tandem with other key aspects of the project and with the involvement of all relevant parties. A period of two years from commencement of the ESHIA to getting the final permit in place is now the norm but many projects go significantly longer – often through failure to plan and integrate key stages of the ESHIA effectively.

ERM works with IOC clients, from country entry all the way to final approval. For example, we helped a client who was entering new territory with a fast track greenfield project encompassing onshore gas fields, pipelines, an LNG plant and major port expansion. Each task, including different elements of the ESHIA, had to be carefully mapped out to ensure social and environmental risks were understood and managed at the highest level – and factored into decision making, timeframes and budgets. Needless to say for a project of this scale, communication and timing were essential, from the mapping of approval requirements; to identifying appropriate ESHIA standards and ensuring they were consistently applied by JV partners and their consultants.

Focus on implementation

International standards such as those set out by the World Bank and the International Finance Corporation (IFC) now require practical management plans for environmental and social impacts – and evidence that these plans are actually being carried out. Consequently there is now a new focus on preparing management plans that are auditable and cost effective to implement.  This comes at a time when IOCs have also increased their internal focus on compliance assurance – to demonstrate responsibility but also to ensure that the right processes are in place and being followed to avoid those costly delays.

In summary, as oil and gas mega projects become more costly and complex there is a renewed focus on the management of non technical risks, notably relating to key environmental and social issues. In this respect, forward planning, well integrated project teams and timely interventions are all essential to avoid some of the hugely expensive project delays that are pervasive in the sector.