By John Kemp
LONDON, Sept 6 The market for giant engineering
projects has begun to cool after running red hot for a decade.
Mining companies have been among the most aggressive in
postponing or cancelling projects, but major capital
expenditures are also being deferred by oil and gas companies
Like most other developments in the oil and gas sector, the
changing environment for large-scale projects stems from the
shale revolution. Shale has transformed the outlook for oil
prices and sources of supply that underpinned so many of the
megaprojects launched earlier in the century.
Rather than the technically complex megaprojects that were
expected to provide almost all the extra oil and gas supplies at
the start of the century, the oil and gas industry now expects
much of its future output to come from shale formations.
Shale has burst into the middle of the cost curve, with a
profoundly disruptive influence on the rest of the industry,
especially for high-cost, high-risk and capital-intensive
Costing just $50-80 per barrel, shale is more expensive than
some conventional production in well-established plays like the
Middle East, but far cheaper than complex offshore engineering
projects like Kashagan in the Caspian.
Developing shale formations is much more like a
manufacturing process, with an emphasis on standardisation and
cost control to deliver value, rather than megaprojects, where
the emphasis has more often been on bespoke technology and
integrating complex processes.
Even an expensive shale well is likely to cost only $10
million - compared with $100 million for a single
ultra-deepwater well. Shale development rewards exploration and
production firms and contractors who can hundreds of wells as
cheaply and quickly as possible by employing techniques learned
from mass production manufacturing.
The nature of capital expenditure is changing, from a focus
on complex megaprojects focused on a handful of giant oilfields
and super-abundant wells to developing thousands, even tens of
thousands, of wells across a wide area as efficiently as
Fluor, the largest publicly listed engineering and
construction company by market capitalisation and the value of
projects in its pipeline, with a diversified portfolio across
sectors and regions, is a good marker for the state of the wider
capital construction market. Only privately-owned Bechtel is
Between July 2012 and June 2013, Fluor completed more work
on existing engineering and construction than it won in new
business, signalling that the capital expenditure cycle for
large projects in oil, gas, refining and petrochemicals is
Fluor performed work costing $28 billion but was only
awarded new work estimated at only $25 billion, according to
company data. The company's backlog of outstanding project work
dipped from a peak of $43 billion at the end of June 2013 to
just $37 billion.
Except for a brief drop following the financial crisis, it
is the first significant decline in Fluor's backlog since
2003/2004. It marks a turning point in the global project boom
which has resulted in a vast expansion in the engineering sector
an enormous escalation in the cost of capital projects.
Between 2003 and 2011, the estimated cost of projects in
Fluor's backlog, similar to the company's order book, quadrupled
from $10 billion to $40 billion. Fluor's worldwide workforce of
skilled engineers, project managers and other staff, doubled
from 17,000 to 33,000 (Charts 1-6).
The boom extended to the other major engineering and
construction firms such as Foster Wheeler and Chicago
Bridge & Iron. Foster Wheeler's backlog of oil and
gas-related projects grew from $1.3 billion at the start of 2004
to $6.7 billion in the summer of 2008, just as oil prices hit
their peak and the financial crisis erupted (Chart 7).
Prices spiralled and the industry suffered widespread
overruns in both project timetables and costs, as pressure on
the supply chain became intense, affecting the delivery of
everything from new oil and gas fields to refineries, gas to
liquids plants and petrochemical facilities.
Now the market is starting to cool. Fluor has reacted to a
shrinking pipeline of new work by cutting staff and trimming its
costs. From a peak of 33,600 at the end of March 2012, Fluor has
cut the number of salaried employees 8 percent to under 31,000
by June 2013. Similar cost control programmes are evident at
other engineering companies.
The best hope for many engineering firms going forward is
probably the construction of a string of LNG export facilities
in the United States.
Large-scale projects experience frighteningly high rates of
failure. Two-thirds of industrial megaprojects, those with a
capital cost of more than $1 billion, failed to meet their
business objectives according to an assessment written by Edward
Merrow, chief executive of Independent Project Analysis, a
leading project-appraisal firm.
Failed projects overran original cost estimates or project
timetables by more than 25 percent; were 25 percent more
expensive than comparable facilities, or were still falling far
short of their intended output two years after commissioning.
Most failed in more than one dimension. It was common for
projects to bust the budget, over-run the timetable, and still
fail to meet expected production targets.
The failure rate has been worst in oil and gas. Oil and gas
projects failed to meet their original objectives in 78 percent
of cases, compared with a 70 percent failure rate in mining and
below 50 percent in LNG.
Among the failed oil and gas projects, the average cost
overrun was 33 percent and the failed projects cost 40 percent
more than the industry average. "Nearly two-thirds of the
petroleum development failures suffered severe operability
problems," two years after they entered production, Merrow
Large-scale projects became much more prone to failure in an
overheated market. Pressures associated with the global
construction boom did not cause the failure, but they made
projects much more sensitive to errors.
"When the global megaprojects market is hot, there is very
little resiliency," Merrow wrote. "Contractors will not have the
personnel on the bench that can be brought in to help rescue a
project experiencing difficulties."
"Similarly, project sponsors usually find themselves
understaffed in a hot market environment as they attempt to do
too many large projects," increasing the risk of failure
("Industrial megaprojects: concepts, strategies and practices
for success" 2011).
The turn in the contracting market in 2003-2004 from a
generation of being a buyers' market to a decidedly sellers'
market was the most important change in the context for
megaprojects and exacerbated the failure rate, according to
Now the market is turning again, as attention shifts to
shale and demand for huge-scale engineering projects begins to