Big energy projects moving fast, face $150 billion a year in cost overruns, Bain & Co. says
Energize Weekly, June 19, 2024
The scale and speed of the energy transition risks project delays and setbacks leading to cost overruns of 15 percent to 20 percent, equal to $150 billion a year, according to research paper by consultants Bain & Company.
“A successful energy transition will require the largest, most rapid transformation of the global energy system in history,” Bain said, requiring companies “to deploy unprecedented amounts of capital with unparalleled speed and efficiency.”
Capital spending on the energy transition from fossil fuels to clean energy is projected to grow to between $3 trillion and $5 trillion annually by 2030 – two to four times current outlays, according to the International Energy Agency.
Projects cover conventional technologies and infrastructure, including solar power, battery storage, liquefied natural gas and copper mining.
The problem is that large capital projects in energy and natural resources (ENR) “typically run over budget and fall behind schedule, sharply eroding returns,” the report said.
From 2015 to 2019, for example, upstream and midstream oil and gas capital projects experienced average delays of 2.5 years with average cost overruns of 17 percent.
A Bain survey of project owners and contractors found that both agree cost estimate forecasts are often flawed.
“At the same time, roadblocks are stacking up,” the report said. “High interest rates and inflation are driving up project costs. Lead times and costs are being stretched by limited supplies of equipment, materials, and talent.”
Public attitudes and the regulatory environment for these large-scale projects are becoming more complex, with “a patchwork of policies around the world.”
“This leaves ENR companies exposed,” the report said, with large projects often running 15 percent to 20 percent over budget.
There are steps that companies can take to improve project development, the Bain & Company paper said.
The first is to reconsider using the traditional stage-gate process, which breaks up a project into phases with achievement points or gates.
“Stage gates create a rigid decision-making cadence that can delay critical decisions until a gate review, which may be too late,” Bain said. “Or worse, some decisions never get made, simply due to scheduling conflicts among key stakeholders.”
The approach can also focus decision-making on a project-by-project assessment rather than looking across the entire portfolio of projects.
The consultants recommend thinking systematically across the entire portfolio “to capture synergies and build resistance.”
Eliminating waste and friction by employing digital technologies is another recommendation. “Digital solutions, automation capabilities, and artificial intelligence tools have matured enough that they can deliver real and immediate efficiency gains for capital projects,” the report said.
Revising operating models so that there is cross-pollination among decision-makers, project managers, and finance managers can also improve performance. The three tend to be siloed, the report said.
One U.S. electric utility was able to reduce construction costs of a multi-year solar program by 15 percent after revising its operating model, according to the report.
A majority of contractors in a recent Bain survey said they saw an opportunity to reduce project costs by 5 percent to 10 percent.
