Majority of oil and gas capital project joint ventures exceed budget

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The FINANCIAL — Analysis of 333 current oil and gas capital projects revealed that 92% of joint venture (JV) arrangements experienced cost and schedule overruns compared to 83% of non-JVs, according to EY’s new report Joint ventures for oil and gas megaprojects.

Inappropriate structures, selecting unsuitable partners or engaging in an inadequate commercial structure ─ which fail to align or flex to changing participant strategic priorities ─ are the most common downfalls of these JVs. Continued oil price volatility and escalation of geopolitical tensions are also adding considerable strain to many JVs.

The report also finds that while the probability of cost and schedule overruns is higher in projects that are JV led, they tend to fare better on the extent of failure compared to non-JV projects. For overrunning projects, completion costs were, on average, 107% above target for non-JVs and 84% above target for JVs.

Axel Preiss, Global Oil & Gas Advisory Leader at EY, says:

“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.”

JVs set up prior to the drop in oil price may now include partners under severe financial stress and whose priorities and willingness to invest may have changed significantly. This can, in the worst instances, lead to JV exits. In today’s environment, companies must invest in alignment between partners while preparing for the risk of exit to reduce market shock.

Preiss says: “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.

“Too often there is a failure within the JV to maintain trust and alignment of strategic objectives between partners. This creates even greater performance challenges. Project developers must effectively set up and manage JVs on an ongoing basis to preserve support and investment in these large capital projects.”

 

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