5. The Norwegian Petroleum Directorate's assessments

Evaluation-of-projects-forside

5.1 Comparative causes of the development 

 

Based on the project review, the NPD has identified deficiencies in the following areas of project implementation. These are regarded as being main causes of the time and cost overruns. The following aspects are key as regards success in implementing major projects:

  • Early phase work
  • Prequalification of contractors
  • Contract strategy
  • Project follow-up

A high level of activity in this period has resulted in a tight market for all of the projects. This has led to a scarcity of resources and expertise, and has driven up prices for all input factors. This has contributed to amplifying the negative effects as regards progress and costs in the project. However, the review also includes examples of projects that have been completed on time and in accordance with cost estimates, in spite of implementation in a much tighter market than was presumed in the PDOs. What these projects have in common is that the aforementioned factors have largely been properly dealt with.

A high activity level means tighter conditions for project implementation and, in the opinion of the NPD, constitutes a contributing cause of the schedule and cost overruns incurred in some of these projects.

Below is the NPD's assessment of this, related to the review of the discussed projects.

 

The operator's work in the early phase

A conclusion for all of the projects with major time and cost overruns reviewed in this report is that there have been significant deficiencies in the early engineering work. In this context, this means all engineering that takes place prior to the PDO and before procurement and construction start. In this context, it is also a fundamental precondition that the licensees and the operator, in particular, have a good internal decision program for maturing the projects in an early phase. Through such a system, demands will be placed as regards a sufficient level of engineering and cost estimation as the project is gradually matured towards final approval. This will ensure a minimum quality standard for a decision basis for project approval.

Deficiencies and flaws in the early engineering will be transmitted on through the project work. Thorough front end engineering design work is thus essential in succeeding with completing the project on time, according to the cost estimate, and in compliance with quality requirements. Several projects have been driven by a far too ambitious implementation plan from the very start, and have therefore also shortened the time spent on early phase work. For example, this has meant that FEED has not been 100% complete when the PDO was submitted, or that equipment has been ordered and construction work commenced before necessary engineering was completed. In other cases, new information that could have impacted the preconditions for the project has not been taken into account as the project was already well underway. Experience indicates that projects with deficient early phase work have experienced a substantial need for changes along the way in the construction phase. Significant parts of the work have had to be done over, which has resulted in major overruns and delays.

 

Prequalification of suppliers

For several of the projects with major overruns, the causes can be traced to deficiencies in prequalifying suppliers. In major offshore projects, the operator has no chance of following up all deliveries, and must therefore prioritise which areas should be subjected to operator follow-up. Thorough prequalification of the companies that are to deliver to the project in terms of previous experience (quality, delivery security), financial strength, etc. could reduce the risk of problems along the way, and thus also the need for follow-up. This review shows that the operator, in several cases and to a far too extensive degree, and without necessary verification, has relied on the contractor's ability to deliver according to the requirement specifications, and furthermore, that these contractors also deal with subcontractors that can live up to this. The consequences if this fails is that much of the work must be done over, with detrimental effects on both schedules and costs. 

 

Contract strategy

It is important that the project has a contract strategy that ensures cost-effective progress and quality, including the operator's opportunity for follow-up, verification and corrective measures along the way. The contract strategy should reflect the key risk elements in the project, and should also be viewed in context with the operator's direct follow-up and prequalification of suppliers. The review has shown that the operator should consider taking on a greater direct contract responsibility as regards deliveries of major key equipment packages in the projects.

For many projects, design and build contracts have resulted in both time and cost savings compared with previous sequential contract forms. This contract form will also be important in the future. Use of this contract strategy will be crucial, particularly for many of the smaller operators on the Norwegian shelf. Therefore, in the NPD's opinion, vigilant follow-up of the challenges associated with design and build contracts will be particularly important. This applies particularly to factors associated with the process of selecting contractor/ subcontractors, and requirements related to the operator's follow-up of construction according to quality requirements and Norwegian regulations.

Several of the projects reviewed here contain elements of new technology. However, this has not been identified as a cause of cost overruns or project delays. In the projects reviewed here, central technology qualification elements have been identified early in the process as high-risk elements for the project, and have thus received operator focus. This has led to direct operator follow-up of contracts and technology qualification.

 

Operator’s follow-up of the projects

In the projects reviewed, the NPD does not consider there to be a basis for concluding that there is a direct correlation between the overruns and the geographical location of the fabrication sites. Understanding of NORSOK standards and Norwegian regulatory requirements is a greater challenge in international shipyards compared with those located in Norway. The operator therefore has a special responsibility to follow this up. Conducting courses in Norwegian standards and safety requirements is important, but not sufficient. It must be followed up throughout the entire construction period. In those cases where faults and deficiencies in fabrication are caused by inadequate understanding of NORSOK, this is, in the NPD’s assessment, about the operator’s deficient follow-up of the construction work in relation to what is specified in the contracts. Correspondingly, it applies to those cases where the cause of overruns is often due to a deficient work quality. A recurring cause of project overruns is deficient deliveries in relation to the contract. This is about inadequate fulfilment of Norwegian standards, as well as inadequacies in relation to other quality requirements in the projects. In the NPD’s assessment, this is largely caused by the operating companies lack of personnel with sufficient experience and expertise to follow up the requirements and project progress.

It will be important to find the correct balance between the contractual responsibility assigned to the contractor and the operator’s actual opportunities for follow-up. In this case, Yme differs from the others with a "turn-key EPCI contract"» for construction of an installation that would in turn be leased by the operator. In reality, the contractor built its own facility in this case, and it became challenging for the operator to provide sufficient input in the contractor’s work during the construction phase. These types of solutions entail very special follow-up challenges, that, in the opinion of the NPD, should be considered carefully before such contracts are signed.

The projects in this review are primarily developments of new fields. However, the Valhall VRD project stands out being a redevelopment project for an operating field. Newbuilds in combination with major modification work at facilities in operation entail special requirements for planning and coordination. Estimation of costs and the time spent on modification work on existing facilities is associated with major uncertainties and is therefore particularly challenging. In the NPD’s assessment, it will be particularly important in these types of projects to conduct thorough early phase work which includes detailed planning of the activities. With regard to the fact that redevelopment of operating fields could become relevant on several fields, it will be important to learn from the projects that have been carried out.

 

5.2 Comparison with factors noted by the Investment Committee

The NPD’s summary of the causes of the project development in the five projects reviewed here, is very similar with the causes determined by the Investment Committee in 1998 (see Ch. 4). Then, as now, it was noted that the basis for the cost increases arose at an early stage of the projects. Exaggerated optimism, unrealistic ambitions and inadequate understanding of uncertainty, as well as insufficient time set aside for the planning phase before project start-up, were noted as reasons for this. This largely corresponds with the conclusions in the NPD’s review.

Deficient qualification and follow-up of suppliers and sub-suppliers was also noted by the Investment Committee as another important reason for the development. This is also noted in the NPD’s review. In 1998, the transition to design and build contracts represented new and inadequate knowledge in the supplier industry, with regard to this being identified as an important cause. Today, 15 years later, it should be expected that the knowledge regarding these issues has improved. However, it appears that several of the projects have experienced troubles with some of the same challenges. Correspondingly, the issues regarding use of traditional shipyards for offshore construction projects have long been known. Our review therefore attributes these issues to the operator’s deficient prequalification and follow-up of suppliers.

The industry underwent a technology shift during the period which the Investment Committee examined, particularly within transition to floating solutions and subsea wells. A corresponding shift has not been identified in the projects reviewed here. New technology elements appear to be safeguarded well in the projects. New technology has therefore not been identified as a cause for the overruns with regard to time and costs in the projects reviewed here.

The activity level was also considered to be high during the period which the Investment Committee examined. It was concluded that there were indications that the activity level was significant for the cost increase, but that the main reasons for the increases were other fundamental factors in the project implementation. This corresponds with what the NPD has identified in this review based on the current high activity level.


04.11.2013