NPD report reveals causes of cost overruns for field developments on the Norwegian shelf
14/10/2013 The Norwegian Petroleum Directorate (NPD), on assignment from the Ministry of Petroleum and Energy (MPE) has reviewed five field developments on the Norwegian shelf to uncover why some developments finish in line with their estimated cost target, while others are much more expensive than planned.
The report deals with field developments in excess of NOK 10 billion, with plans for development and operation approved during the period 2006 – 2008. The specific fields involved are Skarv, *Yme, Valhall redevelopment, Tyrihans and Gjøa.
Most projects on the Norwegian shelf end up with development costs within the range of uncertainty stated in the plan for development and operation (PDO) (+/- 20%), but there are some projects with very extensive overruns.
The NPD’s report reviews both projects with major overruns, and projects that have been carried out on schedule and with costs within the range of uncertainty.
The report also shows that overruns are not a Norwegian phenomenon. Several studies reveal the same trend internationally.
The NPD’s work uncovered four main factors in project implementation that are important for the project’s success:
- Meticulous work in the engineering phase, that is, in the early phase. This will form the basis for decisions and the ongoing work in the project
- A clear contract strategy which takes the project’s most important risk elements into account, such as use of new technology and major equipment components
- Thorough prequalification of the suppliers who contribute to the project
- Good operator follow-up of the project. This is crucial, regardless of where in the world the construction takes place
All of the projects reviewed by the NPD were built during a period when the market was tight. The high level of activity is a contributing factor to the cost overruns, however, the most important causes lie in the planning, contract strategy, supplier follow-up and project follow-up.
Yme, Valhall redevelopment and Skarv have the largest cost overruns. Gjøa and Tyrihans were completed on time and within the estimated cost range presented in the PDO.
The objective of this work has been to extract lessons learned from the findings, both for the industry and for the authorities.
“We believe that the experience gained from these projects can be transferred to other projects. It is therefore important that the industry studies the findings in our report,” says director Arne Holhjem in the NPD.
“It is important to clarify the responsibilities in a field development. The licensees are responsible for implementing the project within the framework outlined in the PDO. This is a basic principal for our follow-up of the projects.”
“Now we in the NPD have to work through these findings to see how this will impact our follow-up efforts in connection with field developments,” says Arne Holhjem.
*The Yme project was included even though the original investment estimate was less than NOK 10 billion, because the final investments ended up being higher than NOK 10 billion. Tyrihans is included because the development was approved by the Storting (Parliament) in late 2005.
Contact in the Norwegian Petroleum Directorate
Eldbjørg Vaage Melberg, tel.+ 47 51 87 61 00