Bloomberg Gadfly – Big Projects, Big Problems

We’ve covered big oil’s structural problems with big projects in a number of posts this year – see Megafragility for example.

I have also contrasted this with the alternate world of manufacturing improvements and their increasingly sustainable impact on shale oil efficiencies – see the latest continuous improvement story in this week’s FT

This analysis has been picked up by Bloomberg’s influential energy columnist  Liam Denning, who penned an article on Big Oil’s faltering love affair with big projects on Bloomberg’s Gadfly column here,  quoting some of my comments.

We used the following to summarise the issue:

Mega-projects are highly complex one-offs, and demand very experienced teams to manage their unique difficulties. These intrinsic characteristics prevent conventional manufacturing mechanisms of cost improvements such as standardization at a distance and trial-and-error advances that lead to rapid sustainable technical learning and cost reductions.

The numbers also tell the story:

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As noted in the piece, Big Oil spent over $1.5 trillion in the last decade for a decline of over 1 million bpd. US shale oil producers spent a fraction of that – about $0.3 trillion – for a production increase of over 4.5 million bpd.

Its a natural experiment contrasting the performance of  singular vast-scale, one-offs, versus a vast range of small, flexible and scalable alternatives.

In the end, megaprojects are probably best studied in the social science section of the reference library – they are so immense in size that they are more determined  by diverse JV partner strategies, transitory governmental priorities and current local content requirements,  than by any fundamental engineering and technology. And this means most “learnings” are likely to remain confined to few if any other large projects.

Meanwhile, you can research shale oil improvements at the other end of the library,  under standard texts on learning curve and manufacturing practice.

Denning concludes reliance on these huge projects may be more a curse than blessing.

He may well be right – its time the large oil companies took a long hard look at the numbers of the last decade, painful as it may be.

And ask themselves if the sustained addition of complex infrastructure is the right strategy to compete in the future world of energy competition.