Financial Times: Shell's 'hands off' approach pushes up costs: “Shell's dependence on contractors may help explain why it has lost control over costs at some of its largest projects. This summer, the company said the price tag of Sakhalin-2, a giant natural gas project in eastern Russia, had doubled to $20bn.”: “Shell has conceded it has a problem.”: Monday 7 November 2005

Shell projects 'over-reliant' on contractors
By Carola Hoyos and Thomas Catan in London
Published: November 7 2005

* Concern that handing over critical exploration and production functions is linked to spiralling costs

Royal Dutch Shell is over-reliant on outside contractors to manage its large exploration and production projects, a confidential internal analysis has found.

Ed Merrow, an outside consultant commissioned by Shell to evaluate project management, found the company was almost wholly dependent on contractors for critical functions, including scheduling and cost control. Shell took a "distinctly hands-off approach", Mr Merrow found. A copy of the presentation, which evaluated 13 projects, was obtained by the Financial Times.

Shell's dependence on contractors may help explain why it has lost control over costs at some of its biggest projects around the world. This year the company said the price of Sakhalin-2, a giant natural gas project in far east Russia, had doubled to $20bn (£11bn). But the company has given few details about why or how costs have risen so dramatically compared with its peers.

Shell has conceded it has a problem in the area. Jeroen van der Veer, Shell's chief executive, set up a "project academy" to improve the company's ability to manage large projects. Last month, he also announced that the company had hired 1,000 technical staff to improve the management at its projects.

Shell said its recruitment drive, coupled with its project academy, would reduce its reliance on contractors. "We want a strong cadre of in-house project professionals which will give us the option of looking to take in-house some of the work currently done by contractors," the company said.

Shell once ran one of the industry's most tightly controlled project management operations but analysts said it lost that capability after laying off many of its technical staff in the 1980s and 1990s when oil prices were low.

Mr Merrow, head of the Independent Project Analysis consultancy, found Shell's ability to manage large projects had slipped to the industry average and the quality of the company's projects varied widely.

Shell is not alone in struggling to limit cost overruns and delays at its largest projects. Mr Merrow warned: "There is a set of trends operating that will result in an unprecedented crisis in capital stewardship for the petroleum industry over the next decade," including more complicated projects and fewer low-cost oil reserves.

BP, Europe's biggest energy group, has suffered delays at its Thunder Horse platform in the Gulf of Mexico, caused by a design fault. Statoil, the Norwegian company, has seen delays and cost increases at its Snohvit field. In a note published on Friday, Neil McMahon, analyst at Sanford Bernstein, said Chevron, the US's second largest energy group, was facing project slippage at some of its projects.

The industry is taking on ever-larger projects in challenging "frontier" areas, such as Sakhalin, which is frozen for almost half of the year. In the Caspian region, technical difficulties have already caused several years of delay at the Kashagan, the oil field project led by Italy's Eni.
 

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