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Cost Overruns, Labor Shortages Dogging Mega Projects
BP plc’s decision to rethink one of its long-planned mega-projects in the deepwater Gulf of Mexico (GOM) is one of a growing list of big industry projects that today are being reconfigured because of cost overruns and changing market conditions.
Two weeks ago, BP said it was delaying Mad Dog Phase 2, a truss spar project estimated to cost at least $10 billion, which would be capable of producing 120,000-140,000 boe/d (see Daily GPI, April 22).
The proposed project, being built with partners Chevron Corp. and BHP Billiton, is “world class,” and it will be built, BP Group CEO Bob Dudley said Tuesday (see related story). However, “when we looked at the current plan, we realized that we can’t always keep going down the road…We decided that the project was not as attractive as we had previously modeled it because of market conditions and inflation…”
Instead of pouring millions into Mad Dog, “we’ve stopped to improve the economics. It could be we do it in phases and bring some production on sooner, but we need to take another look at the engineering and try to optimize it.”
Mad Dog Phase 2 as it stands “is not a failure,” said the BP chief. “But it didn’t have the margins we were looking at. There’s no read across to other projects, and no impact on the reserves in the field. I’m most certain we will develop it over time.”
BP intends to become more “disciplined” in its capital spending approach, Dudley said. With up to $27 billion earmarked for ongoing projects this year alone, there’s time to make a financial commitment on the deepwater project.
BP’s decision “is based on a commitment to shareholders…to only develop projects that meet suitable benchmarks,” he said. “We are doing exactly what you would want us to do…
“It’s not unlike the big Browse project in Australia,” in which BP is an investor, said Dudley. Operator Woodside Petroleum Ltd. earlier in April agreed to “step back and look again” and the liquefied natural gas (LNG) onshore facility’s proposed economics (see Daily GPI, April 15). “Restructuring a project and looking at it differently is absolutely the right thing to do.”
The Browse project, which originally was to be built onshore in Australia at a cost of more than $45 billion, has suffered from cost overruns and labor shortages. Management has been working with its partners, which also include Royal Dutch Shell, BHP and Japan Australia LNG to find less expensive options.
Taking a pause appeared to do the trick. On Tuesday Woodside management said it is working with Shell on a plan to use its floating LNG (FLNG) technology. If partners Japan Australia LNG and BHP, agree, the FLNG plan could be a go, said Woodside CEO Peter Coleman.
Higher oil and gas prices, higher costs and labor shortages all work against some of the big projects, said Motley Fool’s Arjun Sreekumar. “The issues surrounding Mad Dog 2 are illustrative of one of the biggest challenges facing the oil and gas industry: cost overruns and delays. Projects running over budget and taking much longer than expected are starting to become an industry norm, especially those in deepwater locations and in Canada’s oilsands.”
The analyst pointed to ExxonMobil Corp. and affiliate Imperial Oil Ltd.’s start-up problems and cost increases at its Kearl oilsands project in northern Alberta (see Daily GPI, Feb. 4, 2012). Following several delays, and a budget that was 60% higher than Imperial’s initial forecast, Kearl over the past few days only now has begun operating.
The changing market mix in North America, upended by shale development, led Calgary’s Suncor Energy and partner Total E&P Canada Ltd. to launch a strategic and economic review last year of their six-year project, the Voyager Upgrader, for the oilsands. In late March, the duo abandoned the $20 billion expansion. Suncor in early February said it was writing off $1.5 billion of its Voyager investment.
“High labor costs, as well as an under-supply of workers and depressed prices for Canadian oilsands crude, are the main reasons Total decided to abandon the project,” said Sreekumar.
“With the era of ‘easy oil’ now a relic of the past, oil majors are venturing into deep, uncharted territories in search of oil. But as BP’s Mad Dog 2 illustrates, many of these unconventional projects are plagued by cost overruns and delays. Hence, BP and other oil majors are finding it more difficult to boost production, despite spending tons of money of new development projects.”
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