Lessons to be learned from cost overruns

While Australia’s LNG projects have faced various delays and cost overruns, compared with other megaprojects these have been relatively minor for Queensland’s three LNG projects. University of Queensland Associate Professor John Steen takes a look what lessons we can learn from these developments.

With Queensland’s three CSG-to-LNG projects now exporting LNG it’s easy to lose sight of how impressive these developments are.

The gloomy backdrop of low oil prices overshadows the fact that this is a ‘new to the world’ industry that has been created in Queensland and what has been learnt here will be extremely important for future unconventional gas to LNG projects around the world.

These three projects – the Australia Pacific LNG (APLNG) Project, Santos GLNG Project and Queensland Curtis LNG (QCLNG) Project – with a combined cost of over AU$70 billion dollars, are large and technically complex by comparison to any project, and yet they have been fairly close to being on time and on budget.

While some analysts have criticised the projects for not meeting their target costs and schedule, these delays and overruns are relatively minor compared with other megaprojects.

For example, the typical cost overrun for rail projects is nearly 50 per cent and around 30 per cent for bridges and tunnels.

However, in time, we will see the three Queensland LNG projects as landmark developments in an industry that is renowned for managing complex projects.

Reducing cost risk

There is always a close relationship between business challenges and innovation, and Australia’s CSG-to-LNG projects are no exception.

Over the past five years University of Queensland (UQ) has written case studies on a number of innovations such as the pipeline installation system, the Spiderplough, and drilling processes that have dramatically increased the productivity of well crews.

UQ is currently researching new techniques in drilling that could significantly decrease the cost of well production.

While the owners of these projects will conduct their own ‘lessons learned’ processes at the conclusion of construction, UQ’s research points to some success factors that are relevant for the industry and the delivery of large projects in general.

In collaboration with Ernst and Young and the Australian Petroleum Production and Exploration Association (APPEA), the university conducted surveys of the industry in 2012 and 2014.

These surveys included project owners, producers and contractors through the supply chain, resulting in one of the most detailed surveys of a region of the oil and gas sector in the world.

In this 30-minute survey, questions focused on around 200 different variables and how they related to performance. What the data showed was that there were three very clear drivers of performance and that these were consistent across the supply chain.

The first of these was being able to manage innovation and change in the project. Innovation may be a frightening concept to many projects, but the capacity to respond to challenges as they emerge in a project is critical for success.

UQ has seen instances of the introduction of new technology in welding to overcome labour shortages that threatened to delay construction, and also dramatic rethinking of well production and commissioning schedules to ensure the availability of gas. These findings are interesting because they echo similar studies of other megaprojects such as the Cross Rail tunnel in London.

The second major driver of performance was collaboration. This includes horizontal collaboration such as sharing infrastructure or having common prequalification processes for contractors.

When this result was first presented with Ernst and Young to an executive briefing in 2013, collaboration was very rare, but as cost pressures have increased there have been more examples of positive collaboration in the industry.

Linked to collaboration was evidence about the importance of appropriate contracting strategy. A common approach to managing the supply chain in large projects is to endeavour to transfer as much risk as possible onto the supply chain for the lowest price.

While that might work for simple projects, there is overwhelming evidence that contracting strategy needs to be a lot more sophisticated with careful consideration of the behaviours that arise from contracts.

Something that is especially important is the sharing of risks and outcomes so that solutions to unforeseen problems can be developed collaboratively rather than through costly and time-consuming legal channels.

The final factor uncovered from the survey was deepening competitive capabilities. Businesses that focused on core capabilities and deepening expertise to drive performance were also productivity winners.

Core lesson is agility

When we step back and look at these three success factors there is an underlying theme: agility.

These are large projects that are delivered over several years. Planning matters, but no plan is complete enough to foresee all of the challenges and changes that will occur in a venture of this scale.

The next phase of the research is to look at how significant shifts occur in the delivery of oil and gas megaprojects.

In other words, what are the conditions that enable a large project to pivot to capture a cost-saving opportunity or avoid an emerging schedule delay? The results of this work will be reported in 2017.

Over the next few years, there will be a lot of lessons learned from the delivery of these projects and the creation of a new export industry.

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