EY: 92% of oil & gas capital project JVs exceed budget

15 December 2015 Consultancy.uk

More than nine out of ten (92%) of oil & gas projects run by JVs are exceeding their budget, compared to 83% of non-JV projects, research by EY shows. Although JVs are more prone to overrun their budget, the analysis highlights that they tend to exceed targets by less than non-JVs, resulting in a lower average excess of budget than experienced by non-JVs projects. Following the dropped oil prices, EY expects increased pressure on JVs and warns companies to prepare for a possible exit.

As a result of the challenging market conditions, companies are increasingly struggling to deliver their projects on time and within the agreed-upon budget. One way to cope with these challenges is by partnering up for major capital projects in the form of joint ventures (JVs) in order to share risks. JVs can be beneficial, when managed well, and enhance the value of company portfolios, access to reserves and capabilities. However, when partnerships fail, JVs can be disruptive to agreed-upon targets. “JVs add both value and complexity to a project. Companies tend to invest the most time and resources into pre-signature due diligence but often fail to properly maintain investment and oversight once the JV commences. This is where most problems begin,” explains Axel Preiss, Global Oil & Gas Advisory Leader at EY.

Proportion of JV projects

In the recently released fourth instalment of its oil and gas capital projects series, titled ‘Joint ventures for oil and gas megaprojects’, professional services firm EYassesses the performance of joint venture capital projects. The analysis focuses on 333 projects of which 205 are JV projects and 128 single-operator projects, totalling approximately $1.58 trillion and $750 billion, respectively. The biggest proportion of JV projects are upstream (137), followed by LNG facilities (27). 23 of the projects are related to refining and 18 are pipeline projects.

EY’s research shows that of the JV projects, as many as 92% are experiencing cost and schedule overruns. Of the non-JV projects, this number is somewhat lower at 83%. For both types of management, upstream projects are more prone to schedule delays, while LNG projects more often experience cost overruns.

Proportion of projects facing cost overruns and schedule delays

Although JV projects more often exceed agreed-upon targets, the analysis also shows that these projects tend to fare better on the extent of failure compared to non-JV projects. JV projects that overrun their budget, on average exceed their budget by 84%, while non-JV projects that do not stay within their budget exceed as much as 107%. When looking at both projects that do exceed their budget and those that do not, the researchers point out that on average JV projects exceed budgets by 57%. However, non-JV projects exceed their budget on average by 63%.

Average project budget cost overruns

Downfalls for JVs
The research also highlights downfalls for JV projects, of which inappropriate structures, selecting unsuitable partners or engaging in an inadequate commercial structure are the most common. Another issue that could add considerable strain to many JVs is the continued oil price volatility. Research by Wood Mackenzie shows that as much as $1.5 trillion in oil projects is at risk as a result of the low oil price, which dropped from more than $110 a barrel over the summer 2014 to less than $50 in the recent period. The drop in prices is also creating geopolitical tensions, as shown by Aon’s ‘Political Risk Map’, which in its turn can influence the number of projects.

“It is not unusual for individual company objectives to change over the long life cycle of these major projects, and we can expect that some JV performances to suffer further as geopolitical issues and oil price uncertainty persists in today’s market,” Preiss comments. As a result of this financial stress, companies must, according to EY, invest in alignment between partners while preparing for the risk of exit to reduce market shock.

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