Mega-projects have been defined in the Project Management Institute (PMI) journal as “large-scale, complex ventures that typically cost $1 billion dollars or more, take many years to develop and build, involve multiple public and private stakeholders, are transformational, and impact millions of people.” The need for basic infrastructure for economic development made the megaproject a popular policy prescription. Mega-projects can be very important to the host country: the Nigeria Liquefied Natural Gas (NLNG) Project was estimated to have contributed about four percent of Nigeria’s Gross Domestic Product (GDP).
Mega-projects have been executed for thousands of years: The Great Wall of China and the Pyramids of Egypt are two famous ancient examples. A more modern famous example of a mega-project is the U.S. National Aeronautics and Space Administration (NASA) project that, in 1969, successfully put a man on the moon.
The decade 2000-2010 produced more large and complex projects than any other comparable period in history. Low oil prices in the 1970s and 1980s seemed to have discouraged the execution of mega-projects in some parts of the world. Most mega-projects in the 1980s that reached the planning stage were terminated as commodity prices fell in that decade. However, the industrialization of China and India, with the increased demand for commodities (within the context of global economic growth) created more demand for mega-projects. Also, to satisfy increasing demand for such commodities as crude oil, international oil and gas companies (IOCs) were given access to difficult terrain in Brazil, Venezuela, the Capsian and Russia, for exploration and production mega-projects. In such difficult terrain, IOCs differentiated themselves from national oil companies (NOCs), with their technical expertise, as a larger portion of easily accessible exploitable natural resources were held by NOCs.
As projects increase in size, and become more complex, managing these projects becomes more challenging. Schedule slippage and cost overruns are familiar occurrences in mega-projects. One study discovered that the most important correlate of cost growth and schedule slippage for industrial mega-projects was the interface challenges between the projects and the host governments. Challenges imposed by host governments include: health, safety and environmental (HSE) regulations, labour laws and opposition, procurement and local content restrictions. From a project economics point of view, mega-projects frequently end up with a negative net present value (NPV). Due to the large capital expenditure involved in these projects, investment decisions usually take longer, and require more thorough analysis.
Mega-projects have been found to end up overbudget 90 percent of the time. Bent Flyvbjerg, professor of management at University of Oxford, studied 70 years of mega-projects data and concluded: “Cost overrun for the Channel Tunnel (the longest underwater rail tunnel in Europe, connecting the UK and France) was 80 percent in real terms. For Denver International Airport, 200 percent. Boston’s BigDig, 220 percent. The UK National Health Service IT system, 400-700 percent. The Sydney Opera House, 1,400 percent. Overrun is a problem in private as well as public sector projects, and things are not improving; overruns have stayed high and constant for the70-year period for which comparable data exist. Geography also does not seem to matter; all countries and continents for which data are available suffer from overrun. Similarly, benefit shortfalls of up to50 percent are also common, and above 50 percent not uncommon, again with no signs of improvements over time and geography.”
Flyvbjerg then concludes that there is an Iron Law for megaprojects: they are always likely to be overbudget and not delivered in time (schedule slippage) over and over again! Flyvbjerg estimated total annual global megaproject spend to be about $ 7.5 trillion: approximately eight percent of total global GDP, which denotes the biggest investment boom in human history. Oil and gas megaprojects have been found to have poor project execution record, in recent years. Upstream oil and gas megaprojects, particularly, perform poorly compared to midstream and downstream megaprojects. The yardstick for success defined by how well these projects perform, compared with expectations when final investment decisions (FID) were taken. It was found that project failure was positively correlated with project size. Oil and gas megaprojects usually created schedule targets that were too optimistic, and often missed.
One reason for the poor performance of these megaprojects could be their complex nature. The management of complex systems, like megaprojects, requires a shift in perspective away from ‘linear thinking’ to ‘systems thinking’.
Uyiosa Omoregie
Uyiosa Omoregie is a petroleum economist and management analyst. He can be contacted at [email protected]
