The climate change discussion will not abate. Recent events have strikingly highlighted the need for traditional energy producers to reconstruct their business models to support a clearly defined climate strategy that also returns value to shareholders. It is no longer possible for oil and gas companies to operate under the vision of ever-expanding hydrocarbon resources to power the world’s energy systems over the long term. Some of the world’s largest energy sector companies have recently been reminded by legal and investor demands to take decisive and aggressive action to reduce carbon emissions.
It is in this environment of rapid transition that owner companies across the energy marketplace are reshaping the industry. Investments in the construction of renewable energy assets, proven and yet to be commercialized low-carbon power sources, and various emissions abatement technologies are setting the scene for the build out of new energy systems over the coming decades. However, as businesses and project teams rush the planning and execution of the clean energy projects of the future, they will encounter unanticipated pitfalls and complexities not uncommon to new technology and fast-tracked projects.
Indeed, uncertainty is high in today’s clean energy and emissions mitigation projects. Project sponsors are finding that even proven renewable energy concepts, for instance, are not as uncomplicated and easy to deliver as envisioned. Unbiased recognition of the uncertainties to the business case and willingness to reduce such risks should put the planned investments on a better footing for success. This needs to be done early on in the project investment cycle, before much of the design and execution plans for development have been formulated. This is when the sponsoring business is required to shape the opportunity, considering contextual elements such as comparative advantage, government regulations, partner issues, financing mechanisms, technology challenges, supply chain availability and constraints, and social and environmental requirements, among other business (not project) controlled issues.
When opportunity shaping is not fully completed, a business case is certainly not robust enough to support successful project development. For example, IPA has seen too many examples of poorly considered terms and conditions established among Joint Venture partners in the earliest stages of a project – sometimes many years before execution begins. These oversights, which are often caused by the rush to secure a deal, fully derail a project in execution due to unintended consequences. So, shaping is the first significant challenge that we see in energy organizations across the globe, and insight into the project cost and schedule consequences of deal terms is the value IPA provides to early investment planning.
Shaping plays a major role in offshore wind projects, for instance, with the development and siting phase of a wind project being challenging work. Owners need to find the right combination of wind conditions, favorable topography, and access to power transmission lines and land. Failure to close shaping issues can make or break a project. Even onshore, where the physical environment may be more benign, the supply chain and commercial challenges remain and give rise to levels of uncertainty that threaten many business cases. The trend of increased risk transfer from EPC firms to owner companies makes the scenario more worrisome.
The next set of challenges arises at project development. Many energy owner operators and investors do not have organizations and teams with the minimum core competencies to develop successful assets. Owners’ and contractors’ abilities to develop quality engineering, execution plans, and estimates with high levels of confidence are limited, and have been for many years in the construction industry. These gaps—compounded by the projected sheer amount of investment in new energy areas, project fast-tracking, and a stressed supply chain—constitute a recipe for disappointing outcomes. As IPA studies have shown repeatedly in the last 30+ years in the boom-and-bust cycle of industrial capital investment, when markets for a particular sector heat up, businesses lack clarity to assess the competitiveness of the projects in their portfolios and to plan effectively to meet the intended targets. Our studies of past hot markets show how and where the supply chain becomes overwhelmed, which aids decision making for our clients.
Hydrogen, another one of the much recently touted sources of clean energy, faces technology and technical unknowns that, for now, make it of limited use. Yet there is significant investment lined up for hydrogen projects in different regions of the world, with Europe and Asia leading in this respect. Undisciplined project systems and underprepared project organizations and teams will struggle to manage their growing hydrogen portfolios effectively given the risks associated with applying or scaling up new technology. IPA has recently worked with a major energy company on an options analysis for its hydrogen development program, looking at how the value chain for hydrogen should be developed.
While the energy landscape transitions to cleaner sources and carbon-containment approaches, traditional oil and gas projects still need to be developed and executed effectively to meet the world’s energy demands for years to come. Oil and gas operators are expected to focus on faster cycle times, lower cost opportunities, hub projects, subsea tie-backs, enhanced oil recovery, site and sustaining capital projects and revamps, and natural gas plays in the interim. Moreover, for owners in the fuels manufacturing and transportation sectors, managing their sustaining and maintenance portfolios cost effectively in a constantly changing energy market will save millions in capital that can be applied to future investments.
Like its energy sector clients, IPA has been preparing for the global energy transition for some time. IPA has been actively collaborating with energy industry clients and groups to promote the capital competitiveness of clean energy and GHG emissions abatement projects. The IPA Carbon Working Group, for instance, is a voluntary group whose membership includes some of the E&P industry’s most recognized companies. The group has already produced useful GHG management tools and is actively working to create new tools and research. Separately, a new study is about to get underway to develop industry average capital cost benchmarks for the development and construction of offshore wind farms. IPA will publish updates on the project evaluation and risk assessment services, new research, and cost and schedule estimating tools available to client on for a wide spectrum of energy-related projects.
For over three decades, IPA has been the “go-to” company in helping companies improve the competitiveness of capital project systems across the oil and gas, chemicals, mining, and other capital-intensive sectors. Energy industry leaders have long recognized IPA’s role in providing the industry benchmarks and ground-breaking research necessary for assessing the competitiveness of their capital projects. As we navigate the energy transition landscape, IPA will remain diligent in advancing its benchmarking and research capabilities to continue supporting our clients in the traditional energy industry. We welcome inquiry from firms involved in the planning and construction of new energy and low carbon projects to learn how IPA partners hand in hand with operators to improve the effectiveness of their capital project delivery in constantly evolving and increasingly competitive project markets.
—IPA Staff Writer Geoff Emeigh contributed to this article
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