Blog insights that make a difference
The price of failure
Many people have debated and written extensively about the reasons for project failure over the years. We ourselves have written and commented previously at length – the result of which can be found in papers on this site. Click here
Regardless of why a project fails, what is often overlooked is the price of failure and the knock-on effects failure can have for the companies involved in the project – from the rig owner and manager to the field operator hiring the rig or investors associated with them. What they have in common is a financial reliance on the rig drilling and producing revenue, so when things go wrong, the financial results for all these companies are affected.
Drilling contractors rely on being drill ready to generate day rate income and cover Opex as well as paying back Capex. The operators need the field development to be on time to realise revenues from production, or to validate assets from exploration and appraisal. Investors and lenders – whether on the project, drilling contractor, the operator, or the rig itself – rely heavily on the revenues and profits to service their debt and investment.
That’s why companies bail out projects to the tune of tens of millions of dollars – to ensure that the schedule is protected and the rig hits its contract start date. In some cases, that is money well spent – money that with better planning wouldn’t have been needed but under the circumstances is probably the lesser of two evils.
Failing projects also devastate financial performance and industry reputations. Our research looked at the quarterly results of 15 drilling contractors in 2013 and the relationship between project delays and financial results. The results announcement for nearly a third of the companies cited ‘project delays’ and ‘start up delays’ as a reason for lower than forecast revenues.
Results announcements follow a consistent and familiar pattern these days, with the main topics being uptime and utilization (with a glance to fleet status), order backlogs, new build and construction activity, and more often than not contract updates. The news of a new 8-year contract with a major oil company or an NOC will very often conceal underlying issues on projects. From a market point of view and as a shareholder that is natural as a healthy order book and long stable contracts guarantee income and some stability.
In the round of end of year results presentations, the drilling contractors cited the following factors as risks and issues to performance:
- Lack of project planning rigor and accuracy
- Operational downtime, in particular those related to Subsea and BOP
- Rig startup delays, especially with deep and ultra deep water MODUs
- Increasing operational costs, in particular pressure on wages