introduction
In 2011 78% of upstream oil and gas megaprojects faced either cost or schedule overruns according to an industry study by the Independent Project Analysis (IPA); in 2014, research by Ernst and Young found 64% of projects faced cost overruns and 73% of projects faced schedule overruns[1] and in 2017 the UK Oil and Gas Authority (OGA) published a study of lessons learned from UKCS oil and gas projects between 2011-2016, which reported “since 2011 fewer than 25% of oil and gas projects have been delivered on time with projects averaging 10 months’ delay and coming in around 35% over budget.”[2] This performance was not sustainable in the high oil price economic environment and is inconceivable in the lower for longer environment in which we now operate.
Both the Ernst and Young and the OGA reports identify factors for these overruns and lessons that can be learned. These include organisational learnings, project management failings, inadequate planning and cognitive biases within the team. However, they can be consolidated into three broad categories: poorly informed decisions; a failure to make decisions at the optimum point in the lifecycle and unmitigated risks. It is in these decisions and risks that value is lost through the resultant cost and schedule overruns.
As well as undertaking Business Planning, FEL 1 and FEL 2 activities, io performs the client advisor role protecting value throughout the project lifecycle, from business planning through FEL 1, FEL 2, FEL 3 and beyond. Bringing a holistic systems approach and requirements management, we identify where changes, whether intrinsic or extrinsic, have an impact on the project value drivers and require a decision to be made. The ‘io way’ uses Decision Quality (DQ) techniques along with
Multi Criteria Decision Analysis (MCDA), to bring greater certainty to the decisions. The options from these decisions are presented with an appropriate risk analysis (deterministic, semi-stochastic, or stochastic). This approach ensures the client is taking the decision best suited to their value drivers and risk appetite.
decisions
A project plan is only valid at the time it is created. As a project progresses the conditions influencing the original plan change, assumptions become clearer, new information becomes available and schedules evolve. This dynamic nature of a project requires decisions are taken at the optimum point within this cycle to ensure the project does not become derailed by the changes. Traditionally, critical decisions are taken at defined points in the lifecycle, in the stage gate process or project reviews. This is why companies need a proper framing document, which is regularly reviewed and revised as required.
the problem with stage gates
Tradition is that stage gates take place at fixed points in time rather than when it is appropriate to decide if the project is robust enough to progress to the next phase. This fails to recognise the complex and dynamic nature of projects and can result in decisions being taken at the wrong time. For example, OGA Lessons Learned report even references a project that progressed into detail design before FEED was completed. This static nature of the stage gates is compounded by the reviews often focussing on progress reviews and information updates, rather than taking the form of challenging assessments designed to decide with certainty whether the project is robust enough to pass to the next stage. This is partly due to stage gates regularly being chaired by project sponsors intimately involved in the project and subject to cognitive biases such as confirmation bias, which describes the act of people ignoring information that is contrary to their pre-existing ideas, in-group bias, which speaks to the tendency to overestimate the ability of a group of which we are part, while we underestimate the ability of other groups and status-quo bias, which drives us to view change as a negative and makes us more likely to resist a new approach (http://iooilandgas.com/how-good-is-your-decision-making-and-are-you-certain-about-that/).
unplanned decisions
Considering a project as a system, it can be subject to many intrinsic variables affecting the outcome. for example, a well test yields an unexpected result affecting estimated production profiles. The project system is also vulnerable to extrinsic events affecting the environment within which it is being executed, such as a change in government bringing new emission regulations challenging the process design. These unplanned changes bring about new decisions as to how the project should proceed. Unplanned decisions can also manifest during FEED when cost benefit analysis identifies changes, which when taken in isolation, appear to be beneficial but a holistic assessment of the full system reveals the potential for cost overrun or schedule slippage. All too often these changes are missed by management of change processes and the critical decisions are taken on an ad hoc basis. Without a defined approach to unplanned decisions they are often taken without the requisite information, in isolation from the full project team and in ignorance of the impact on the holistic project.
client advisor
Understanding value drivers
Understanding the value drivers for a project is critical for ensuring success. The project team must maintain cognisance of them for every decision that is taken on a project to ensure it continues towards the overall objective. As client advisor, io collaborates with the client early in the lifecycle to clearly establish the value drivers for the project. Where there is a trade-off between value drivers, as is often the case, io use an MCDA process to facilitate a quantitative approach to prioritisation. The clear understanding and prioritisation of value drivers ensures every decision is taken with the end in mind.
Planned decisions – bringing greater certainty through Decision Quality
In the role of client advisor, io brings independence and rigour to the stage gate process. io, in collaboration with the client’s established governance and assurance processes, establishes robust criteria for each stage gate; the criteria will be operational, realistic and discriminating to ensure the effectiveness of each stage gate. The decisions whether to pass the stage gate, recycle with actions required to pass the gate, place the project on hold, or to kill the project, will be taken within a DQ framework to ensure cognitive biases are mitigated.
Similarly, other critical planned decisions such as concept selection, contracting strategy and project financing are made within a DQ framework. This ensures higher decision quality with the project value drivers at the core.
Unplanned decisions – a systems approach
Working with a systems approach and utilising requirements management techniques, io can establish the relationships between requirements and intrinsic and extrinsic variables in terms of the value drivers. By establishing these relationships, the effect of any change can be understood throughout the system. This ensures the relevant stakeholders are engaged and, through the use of time as a variable within the project system, the critical timeline for making the decision is established bringing a holistic approach and greater certainty.
This can be taken a step further and io can create a dynamic systems model representing the project, this greatly accelerates the decision-making approach by allowing project teams to alter variables representing a change in conditions and observe the impact in real time, while retaining the holistic approach and greater certainty.
Risk and Uncertainty - Bespoke risk evaluation tools: sensitivity analysis, Monte Carlo simulation and Real Option Analysis
Every client has a different risk appetite. The io way has been developed to allow a flexible approach to uncertainty, risk and decision analysis. This includes deterministic, semi-stochastic and stochastic approaches. For each critical decision, io can offer a semi-stochastic uncertainty analysis, presenting a discrete set of outcomes, each with an assigned probability. Alternatively, should the client so desire, io can undertake a stochastic analysis utilising a Monte Carlo simulation of the uncertainty distribution of all inputs to derive a continuous distribution of possible outcomes and support real option analysis.
conclusion
As client advisor, io brings a team of highly experienced experts drawing on best practices from across industry to ensure value is protected throughout a project’s lifecycle. By bringing independent, holistic systems thinking, requirements management, decision quality and bespoke risk evaluation tools, io will prevent value erosion as a project progresses and ensures greater certainty to cost and schedule.
[1] http://www.ey.com/Publication/vwLUAssets/EY-spotlight-on-oil-and-gas-megaprojects/$FILE/EY-spotlight-on-oil-and-gas-megaprojects.pdf Accessed April 2017 [2] https://www.ogauthority.co.uk/news-publications/publications/2017/lessons-learned-from-ukcs-oil-and-gas-projects-2011-2016/ Accessed April 2017