Capital Projects: Keeping your eye on the ball

With over US$100 billion of planned investments over the next decade, Malaysia’s oil and gas industry is embarking on the largest capital expenditure program ever seen in the country.

PwC Malaysia partner Nurul A’in Abdul Latif
Spurred by increased competition within the region, Malaysia has identified the oil, gas and energy sector as a National Key Economic Area (NKEA) under its Economic Transformation Programme (ETP).

In a nutshell, the ETP is fundamentally an economic road map designed by both the government and private sector to achieve developed nation status by the year 2020.

Since its implementation in 2010, a total of 12 entry point projects had been earmarked in the oil, gas and energy sector which is projected to deliver a staggering US$43.7 billion in gross national income and in the process create 52,300 additional jobs. Faced with declining oil reserves and maturing oil fields, the magnitude and complexities of the challenge facing the Malaysia oil and gas industry is colossal.

With a target of 5% growth per year from 2010 to 2020 set against a backdrop of economic uncertainty and depleting resources, a number of large scale capital projects are currently underway.

Failure is not an option

For Malaysia, the stakes are especially high considering the oil, gas and energy sector currently contributes more than 20% of the gross national income while Petronas tax revenue accounts for 40% of total government income.

It is critical that the capital projects undertaken are on schedule and within budget. The immense capital outlay and uncertainties due to the credit crunch, weak global economic sentiment and domestic contention of other deserving recipients of Petronas’ coffers only makes this all the more urgent. Bringing effective rigour and challenge to decisions at all stages of the capital project lifecycle is crucial in determining any project’s success.

From project appraisal right through to start-up and commissioning, a sturdy project management strategy will optimise capital project delivery, to ensure survival in a downturn, mitigate risks and position the organisation to better deal with competition. From the stakeholder standpoint, a well managed capital project not only prevents cost overruns but will possibly avert any catastrophic disasters.  

The common pitfalls

Capital projects are notoriously difficult to deliver: they are inherently complex, carry considerable risk and each faces its own unique complexities. Some known experiences based on our firsthand account of these troubled projects are, amongst others:

  • Construction delays and cost overruns – This can be due to weak incentive structures in contracts, an unstable political environment, limited local workforce capability and difficult site terrains. Other reasons include low resource levels and installation quality issues, arising from subcontractor performance or lack of supervision.
  • Governance issues – This happens when there are insufficient systems in place to provide a robust challenge to the claims being issued by the contractor. Sometimes this is also compounded by a heavy dependency on the individuals’ skill rather than formal procedures.
  • Loss of contract value – This results when procurement proposals by suppliers are not robustly challenged. Value is further eroded arising from inequitable risk allocation when larger commercial risk is borne by the company even when contractors do not meet performance expectations.

Providing added scrutiny

Informed project owners and stakeholders are increasingly turning to independent risk advisers to ensure that their projects – and their organisations – are ready to proceed and have controls in place to monitor progress.

We have seen how important adequate and thorough attention needs to be given at each stage of a capital project lifecycle – which in turn can be broken down into four major phases - namely appraisal, development, execution and recovery. Getting decisions right from the start (Appraisal) the organisation needs a robust project appraisal process in place in which all market, technical and execution uncertainties are taken into consideration when making major decisions.

Securing funding and getting the right partners/ contractors (Development) capital projects undertaken need to be selectively assessed to ensure the optimum return on investments is obtained. Due consideration should be given to bringing on board the right partners and contractors to share the risks.

Making sure the project is on track (Execution) by having in place strong project management governance and oversight, risk is mitigated while costs are managed prudently.  

Getting projects back on track (Recovery) for projects in distress, management’s focus must shift from normal operations to recovery. The initial decisions that managers make will set the course for the recovery programme and have a substantial influence over its success.

Keeping on track

Although Malaysia is currently the world’s third largest oil and gas exporter, the International Energy Agency recently predicted that Malaysia would become a net importer of oil and gas in 2017 as a result of rising domestic demand.

The good news is that we’re on the right track to address this predicament, with the many oil and gas initiatives underway and projects in the pipelines.

With proper management of its capital projects, Malaysia should be able to meet its four oil, gas and energy key thrusts – sustaining oil and gas production, enhancing downstream growth, building a sustainable energy platform for growth and making Malaysia the number one Asian hub for oilfield services.   
 

- ENDS -
 

This article first appeared in Oil & Gas Asia; Issue 4, 2012; Energy Publications