Advanced Contractual Risk Management

Reducing cost of capital needed to fund large capex projects.

Posted: October 24, 2017

Oil and Gas

Advanced Contractual Risk Management

Is there anything that can be done to renew confidence in complex capital projects?

We think there is, and it could be as simple as the way you interact with your contractors and the Advanced Contractual Risk Management solution(s) you select for your business.

Despite the current low confidence in large project investments, McKinsey estimates that more than US$60 trillion of complex projects will be sanctioned over the next 14 years to 2030—and even with the latest oil price forecasts factored in, more than half of these projects will be energy-related. In addition, almost 80% of these projects will be large complex projects, and if the past is our guide, almost two thirds of these will overrun, many hugely so.

The oil and gas industry’s relatively poor track record of completing complex capex projects on time and on budget has been testing the banking sector’s appetite for lending to it for some time. And when large projects are increasingly being hit with unforeseen claims, this just compounds the problem.

12% share price drop after project delay announcement

PwC’s analysis of 36 companies across multiple sectors has revealed that after a public announcement of a capital project delay or shutdown, a majority of companies experience a steady decline in share price. By the three-month mark following such an announcement, the decline in share price averages 12%. As a result, the organisations competing for these investment dollars, to finance their complex capital projects, often sensibly look for proven risk mitigation mechanisms such as advanced contractual risk management software to help them to generate the confidence required to secure these funds.

Compared with large infrastructure projects that provide more predictable future cash flows, upstream oil and gas projects are considered as sitting at the riskier end of the spectrum, due to challenges of project size, complexity, and the volatility of oil and gas revenue streams.  Technical, economic, commercial, organizational, and political risks are typically evaluated to determine the cost of capital for any of these large projects. 

Keeping public political stakeholders aligned

Recent research (*) from McKinsey identified that during project execution, the key risks for the sponsor or developer are related to contractual default, claims, keeping public political stakeholders aligned, and monitoring for any mismanagement by the contractor.  McKinsey research concluded that “the interface with the contractor is therefore the critical element.”

So, clearly there is a strong case for owner operators of capital projects to embed and enforce proven contractual risk-management discipline to mitigate these risks and better manage this essential interface with the contractor. And if implemented properly, then surely such ventures should command lower risk premiums and therefore lower cost of capital to fund their projects.

Sensible owner operators proactively manage the contractor and the contract risk using best-of-breed Contract Risk Management solutions with Early Warning Indicators (EWIs) that flag potential risks in time to take corrective action. As such, they truly merit a lower cost of capital than those that are negligent in this regard.

*Sources: McKinsey – Working Papers on Risk, Number 52

author
Written By
Clare Colhoun

VP Global Product Sales. Clare Colhoun has over 20 years of diverse experience in capital project intensive markets. Prior joining AVEVA, Clare held executive positions in strategic planning and finance in global blue chip businesses.

Sign up for our newsletter and get all the latest information straight from the source.

Digital Transformation in Oil and Gas  Download the Whitepaper to learn how Digital Transformation holds the key for  the oil and gas industry Download Now

Related Blog Posts

Stay in the know: Keep up to date on the latest happenings around the industry.

Oil and Gas
Optimizing my Refinery Blend is Much Harder than Baking Cookies

Refinery products are blended to get final products with desired quantity, quality and schedule specifications. However, rigorous planning, scheduling and ...

Oil and Gas
3 Steps to Maximising Pipeline Integrity

Ageing infrastructure is posing huge challenges for pipeline operators in keeping their pipelines running optimally and profitably in the face of increasing ...

Oil and Gas
How Can Predictive Analytics Reduce Unplanned Downtime in Oil and Gas Production?

Production can increase either by developing new fields or improving asset uptime in existing fields, but asset downtime due to facility maintenance – planned ...

Oil and Gas
My car has predictive analytics, why shouldn’t my refinery?

Rebroadcast of Air Liquide's experience with predictive analytics and AVEVA

Oil and Gas
How Digital Transformation in Engineering and Design boosts Project Profitability

Low oil prices had sanctioned almost every large Exploration and Production (E&P) projects in the oil and gas industry. Today, with the recent recovery of oil ...

Oil and Gas
The Price of Optimizing Your Process Is Asset Reliability

Predictive maintenance (PdM) strategies enable front-line personnel to act before costly failures occur and maximize value throughout the entire asset ...

Oil and Gas
How Closed-loop Operations Enable Digital Transformation of Oil and Gas Fields

Today, the advancement in technology – cloud platform, analytics and computing power – is revolutionising the way how companies can leverage big data and ...

Oil and Gas
How Pipeline Operators are Working to Improve their Asset Reliability

Asset reliability is a key component of an overall asset performance management strategy. And it plays a big part in helping midstream oil and gas operators ...

Oil and Gas
Maximizing Midstream Profits with OT IT Convergence

Historically midstream oil and gas organizations have kept two critical functions within their businesses almost entirely separate – IT and OT. One of the ...

Chemicals
Operational Excellence: Likely the Most Overused Term in the Process Industries

Operational Excellence isn’t achieved overnight. It is a methodology that takes a commitment to focusing on continually improving the process, and its ...

Oil and Gas
How Virtual Reality Compresses Operators Learning Curve in Oilfields

Unlike a traditional classroom environment, the VR immersive training system facilitates interaction between equipment and environment and scenario simulation ...

Oil and Gas
How Advanced Analytics improve Margins at Natural Gas Processing plants?

mproved fracking technology in oil and gas fields is creating an unprecedented boom in natural gas production, exerting tremendous pressure on natural gas ...

Oil and Gas
Implementing a tiered methodology for pipeline integrity significantly improves business’ chances of preventing leaks

With pipeline operators facing increased scrutiny as of late, the conversation must shift to pipeline integrity. Pipeline integrity encompasses three methods: ...

Oil and Gas
Digitizing the Mobile Workforce

The front-line opportunities to improve plant reliability, safety, and profitability are infinite. Value lies in digitizing the mobile workforce.

Oil and Gas
Why IIoT in Refineries Now?

IIoT in refineries is trending fast and promises great short and long-term results, allowing for smoother refinery optimization.

Oil and Gas
IIoT: Acting on All Big Data

The importance of IIoT, big data and closed-loop operations to bridge the gap between unused data and profitability in refineries.

Oil and Gas
Strategic Implementation of IIoT in Refineries

Delivering Closed Loop Business Operations for the Refinery Enterprise with Schneider Electric Software. Strategic Implementation of IIoT - Refineries.

Oil and Gas
How are you minimizing risk throughout the three phases of pipeline integrity?

Pipeline integrity includes three phases: prevention, detection, and mitigation, which together minimize the chances of a leak and the ensuing repercussions.

Oil and Gas
IIoT: Three Trends Impacting Upstream Producers

Many producers have started looking to IIoT to help them navigate through the digital evolution and create a competitive edge for their operations.

Oil and Gas
How the Internet of Things has Influenced Midstream Pipeline Operations

IoT Internet of Things has provided increased ability to connect, measure and analyze variety of behavioral statistics for midstream pipeline operations.

Oil and Gas
How Big Data and Analytics increase Production Asset Uptime in Oil Fields?

Oil companies must continue to make investments in improving operational efficiencies to sustain and improve their profitability.

Oil and Gas
How Digitalization of Process Design and Operations boosts Profitability in Ethylene production

Learn how to apply impacting digital technologies in ethylene production plant design and operations for higher profitability.

Chemicals
You Must Cross That Bridge Now; Not When You Get to It

A successful Unified Supply Chain and Operations Execution Management solution is a fully functional, bi-directional communicative interface between supply ...

Oil and Gas
Advanced Contractual Risk Management

Reducing cost of capital needed to fund large capex projects

Oil and Gas
China HQCEC uses AVEVA Solutions to Design World’s Largest Coal Liquefaction Construction Plant

Situated in the hi-tech heart of China’s Ningdong Energy Chemical Industry Park, the world’s largest indirect liquefaction processing facility covers 2.8 ...

Oil and Gas
How Digital Operations Management Improves Profitability in this Challenging Oil and Gas Environment

Learn how digital operations management framework enables refineries and petrochemical plants to optimize profitability.

previous next

Sign up for our newsletter and get all the latest information straight from the source.