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Total calls on energy industry to review projects with excessive costs

01.24.2014  | 

“Costs are becoming too high,” Christophe de Margerie, CEO of Paris-based Total, said Friday in an interview from Switzerland. “Projects of $50 billion leave one thinking ‘Isn’t it crazy?’”



Total, Europe’s third-largest oil company, called on peers to revise projects that require tens of billions of dollars of investment as costs escalate.

“Costs are becoming too high,” Christophe de Margerie, CEO of the Paris-based company, said Friday in a Bloomberg Television interview from Davos, Switzerland. “Projects of $50 billion leave one thinking ‘Isn’t it crazy?’”

Total has vowed to lower capital spending even as it starts projects from Norway to Angola to increase output. Royal Dutch Shell, Europe’s largest oil producer, also has pledged to rein in costs after this month issuing its first profit warning in a decade. The companies have seen expenses climb as they search for crude and gas in more remote and complex areas.

“We have to redefine how we can develop some fields without spending as much money,” De Margerie said. “It probably means reinventing, going back to the architecture of projects” to reduce cost inflation.

Expenses also have been driven up by rising construction bills and currency changes. In Australia, such costs have hurt companies including Chevron, whose A$52 billion ($45 billion) Gorgon project is among seven liquefied natural gas (LNG) ventures being built there at a cost of more than $180 billion.

The pressure on producers has a knock-on effect for oil-service companies that help them find and pump crude and gas. Ayman Asfari, CEO of London-based oil engineer Petrofac, said Thursday that the company and its peers will feel the impact of belt-tightening among their clients.

“Our industry is facing a huge amount of cost pressure,” he said. “More is being spent to produce less. Our clients are seeing the rate of return on capital dropping and they’re being challenged by investors who want them to be more disciplined.”

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Bob D

Hey J. Gumaz!

It is the onerous "Management of Change" procedures that have the Computer programmers having to answering superfluous questions about plumbing and having to get approvals from a battery of managers who don't understand the issues that kill productivity. I'm sure you're a great front-end planner for building your ancient widgets by the thousands. But for the rest of us in a real new world engineering is change. And Change must be done by competent people who can be fired if they are not competent... not micro-managed by legacy managers.

A Zealonga

Companies like SNC Lavalin should no more be allowed to bid on big projects. Not only is the company involved in corruption cases all over the world, they so far had not achieved in cleaning up their act. The managers from the olden days are still around carrying on as usual with their corrupt ways and the old corrupt group and system is still operating within the company. Unless a total re-structuring and clean up of old staff from 6 to 10 years back are not removed, this company will continue to operate as usual. They will bid low to get the project, assign favored but inexperienced staff into the project (to cement these staffs tenure) and deliver late and over budget. There are several more players in the field who can do what SNC does, for a better return and result. They don't need to be awarded contracts just because the government doesn't want them to fail.

Walt O'Brien, Piping Systems Cost Estimator

There needs to be introduced a productivity standard based on yield per workhour ROI for individual managers tied to the project closeout bottom line starting with the president of the individual firms doing the E & D work just as there is in automotive and US Federal aerospace manufacturing contracts.

IT systems costs also need a brutal ROI evaluation. In my field it is easy to spend megabucks on nifty timesaving cost estimating & scheduling programs only to find you need your original manual estimator crew to handle all the IT system input plus 10 more data entry clerks with the net result being an output slowdown. It is a metaphoric repeat of the old "paperless future" myth where in reality IT deployment has increased paper consumption and waste.

Labor productivity is not the issue. They are already pedaling as fast as they can. It is management productivity corrective action which can yield the fastest turnaround on cost reductions and increase in net yield per project. Managers need to simplify procedures and stop chaos meistering for the sake of promotion and personal gain.

J. Gumz

Along with proper front-end planning, management of change is key to successful capital project delivery.
I wrote a white paper on this topic, "Zero Change on Capital Projects: Is it possible" about oil & gas projects. http://www.projectauditors.com/Papers/Project_Management_Thought_Leadership_Managing_Change_Construction.html


In their report last year, Accenture predicted that the spending on capital projects will be in the range of 135 trillion through 2035.

With each megaproject, hundreds of millions of dollars are at stake. Accenture has identified four areas to help chemicals companies improve capital projects delivery:

1. Establish strong project governance, risk management and front-end planning tools.
2. Optimize scarce talent through portfolio management, organizational flexibility and training.
3. Integrate information systems among capital projects players.
4. Accelerate operational readiness.

Furthermore, it is high time that the capital projects adopts Agile Project Management and Lean applications for the rapid development and deployment of the projects.

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