Exploring strategic motives behind cost and time overruns in oil and gas infrastructure projects

Siddique, Saad
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Problems most frequently discussed in the regard of cost and time overruns in project management literature are planning failures, such as understated budgets, underrepresented technical complexity, and issues with public approval. Less frequent are discussions of changes in project scope and technical complexity related changes in market, industry, and policy environments. Most examples of impacts of market conditions on decision making prior to final investment decision (FID) are found, while little focus is found on how projects underway are impacted and dealt with. This thesis study will contribute to that latter strand of literature and explore how changes in project timeline and technical specifications can be interrelated to changes in market and policy parameters and therewith, may be justified from a project economics standpoint. To be specific, the study will focus the situation of significant drop in oil prices and natural gas prices and fast changing environmental regulations since 2014. On one hand, decreasing capital spending by oil and gas upstream companies led to decrease in supply. On the other hand, the prices of equipment are falling. Midstream companies may decide to increase the construction time of their projects to enjoy lower equipment costs, and to have the start of their project be associated with the return of higher oil and gas prices and therewith increased demand for newly-installed capacities which would warrant higher profits. This thesis performed decision tree analysis and net present value (NPV) calculation for a post-FID mid-construction pipeline infrastructure project to understand whether cost and time overruns may have potentially positive value from a theoretical and practical perspective. In particular, the study proposes how making decision changes to project timelines and specifications at that stage can alter the economic viability of the projects and give them a better chance at avoiding economic failure despite the overruns. This thesis will provide a decision-making method for project managers and contractors for situations where unexpected drastic changes in market conditions might affect the success for a mid-construction project. It will seek to provide information to potential investors and FID makers about the fate of similar projects.