The energy industry in the Middle East and North Africa (MENA) will see a wave of major capital projects—more than $1.1 trillion in projected spending, approximately one-fourth of the industry’s total global investment through 2020, a report by Booz & Company said on Wednesday.
The consulting company has also indicated that a significant capital outlay needs to be carefully managed. However, the region’s track record is mixed when it comes to executing large capital projects. Management consulting experts from Booz & Company have identified the root causes of inefficient development, management and execution of capital projects that may impede taking full advantage of the anticipated capital outlay, and examined ways in which they can be overcome.
With about 70% of the world’s proven oil reserves and 50% of proven gas reserves, MENA oil-exporters is expected to play an acute role in the world’s energy market by executing a number of new mega projects across the Middle East. According to the International Energy Agency, the MENA region, led by Saudi Arabia, UAE, Iran and Iraq are expected to represent about 25% of global energy investments and lead the way in spending.
“However, the next wave of capital projects will be larger and more complex, and will represent a significant capital outlay that needs to be carefully managed. History suggests that the region’s companies have a mixed record of executing large capital projects. Cost overruns, schedule slippages, and inconsistent quality have become recurring concerns for senior management. Some of these problems come from market-related issues, such as a surge in commodity prices in the middle of the last decade,” said Raed Kombargi, partner with Booz & Company.
“Many of these problems, however, arise from within the industry itself. In our experience, the root causes include inadequate engineering and project management (E&PM) strategies, a lack of clear governance, inadequate checks and balances, insufficient standardization, and a shortage of local capabilities,” he added.
Meanwhile, Saudi Arabia, the largest exporter company in the region, will increase its oil production capacity to 12.5 million barrel per day (bpd) after Saudi national company, Aramco built infrastructure facilities in 2009, including Khurais field, at a cost of $10 billion. Moreover, it took the lead on developing a number of industries, such as petrochemicals, natural gas, liquid field natural gas, steel and aluminum.
Saudi Arabia have also become a global giant in petrochemicals market, with SABIC, been among the top five producers worldwide. This has been achieved by establishing massive industrial sites with world scale petrochemical complexes in Jubail and Yanbu.
Similarly, the UAE has also been vigorous in developing a liquid field natural gas through building a highly complex sour gas fields, along with its objectives to increase its oil production capacity.
On the other side, Qatar has become the largest liquid gas exporter by building 14 LNG mega trains through Qatargas and Ras-Gas. Furthermore, Qatar has built the largest gas-to-liquids project in the world in association with Shell.
Still, MENA energy companies are in acute position to master seven key habits in order to have an opportunity to pave the way for capital projects and build a world class project delivery capabilities.
One factor is to develop a clear E&PM strategy. Establishing such approach will ensure that companies are well equipped to manage and execute their capital projects. “This strategy will define which projects and activities will be performed by the company itself and which will be outsourced,” said Alain Masuy, principal with Booz & Company.
“To develop this strategy, companies should create a rigorous and trans-parent project classification frame-work. Projects are typically classified by risk, size, complexity, and nature.”
Another way is to develop strategic alliances to address local capabilities gaps. “Structured correctly, such an alliance can bring mutual profits to both partners, and speed up the development of the energy company’s own capabilities,” said Asheesh Sastry, principal with Booz & Company. “A good initial step is to develop a pilot project, which offers a training ground to assess how well the two companies work together and whether they are willing to share common benefits. The terms of the contract become relevant in this approach,” he added.
A key factor for successful project is also by increasing standardization level across all areas. “As a new wave of mega investments kicks in, now is the right time for MENA companies to fundamentally review the way they develop, manage, and execute their capital projects. They should master the seven key habits identified by Booz & Company to build world-class project delivery capabilities. In addition, through these major capital project programs, MENA companies have a unique opportunity to build and incubate the local private sector and play an essential national role in contributing to GDP and the economy as a whole. Perhaps most important, they can help build homegrown capabilities and reduce their dependence on outsiders,” Kombargi concluded.