• 21 Dec 2016

Slow project activity requires new attention to cost performance

Independent Project Analysis Inc. (IPA) has presented its latest findings on slow project activity in the Europe, Middle East, Russia & North Africa Region.  

There are two main changes in the region that affect the projects landscape. The first obvious one is the price of oil. The drop in oil prices has reduced the number of projects in places such as the North Sea and Russia. It has also meant a reduction in refining projects in the Middle East as revenues from exploration and production are reduced. For projects in much of the region, a lower oil price makes return on projects more challenging. In other words, companies are struggling to make investment decisions.

The other issue in the region is the political uncertainty leading to economic uncertainty in the Eurozone. The Eurozone is still struggling economically, slowing the need for new chemicals production and thus new projects. This summer’s Brexit vote has increased the uncertainty and, with it, the caution for moving forward on investments.

In response, companies have reduced their capital expenditures over the last couple of years and, in some cases, are continuing to rein in capital project investment spending. Making matters worse for engineering directors is that companies are having a difficult time deciding on investments with the limited capital expenditure funds. Engineering directors are under increased pressure to make sure their businesses are sanctioning the right projects that will achieve the best business returns.

Companies in the region also still seem to be depending on contractors to supply knowledge/talent gaps. They still want to understand how to leverage fewer owner resources and how best to organize. Some are working towards centralizing or in some cases re-centralizing their resources. An issue far more difficult to address for state-owned companies that have to manage in siloed organization structures. In these organizations, sharing resources from a central source has been found to be difficult. In some cases, companies have increased staff assuming an increase in projects. When the projects did not materialize, these organizations had teams with too many people without clear accountability. These organizations are now looking to optimize their staffing and keep needed skills.

On the positive side, uncertainty is bringing new attention to cost performance, causing more organizations to look carefully at their capital effectiveness. Project performance analysis is no panacea, but in hand with technology, collaboration and a willingness to break with convention, industry will be better equipped to navigate today’s tough challenges.