Leaked Study Says Exxon, Partners Overspent by $138 Billion on Oil,
Gas Projects
An internal analysis performed by Exxon in
2020 suggested mismanagement by operators and poor planning were
behind cost overruns
Photographer: Luke
MacGregor/Bloomberg
By
Kevin Crowley
- September 23, 2022 Oil and natural gas projects
that Exxon Mobil Corp. invested in between 1998 and 2017 ended up
costing $138 billion more than early-stage estimates, potentially due
to mismanagement by operators and poor planning, according to an
internal analysis seen by Bloomberg.
The 2020 study, reviewing 110 projects in
which Exxon took a stake over two decades, suggested two theories for
the overspend: the sheer complexity of large-scale developments and
“human biases” that resulted in “overoptimistic” plans designed to win
approval from senior executives for funding. Twenty-one of the
projects accounted for 93% of the overspend, according to the
analysis. The worst ended up costing more than six times an
early estimate.
The $138 billion
overspend is a gross figure that includes partners’ stakes in the
projects, meaning Exxon didn’t shoulder the excessive costs alone.
Exxon spokesperson Matt Furman said that the so-called Gate 2
early-stage estimates used as a comparison in the study were “rough
sketches” and that the company’s share of the costs above the more
important “Gate 3” final investment decision amounted to $20 billion
during the period. Of that total, only $6 billion was attributable to
projects that Exxon actually operated, representing a margin of error
of just 1.5% compared with the total capital invested, he said.
The entire energy industry suffered large cost overruns
during the 2010s, made worse by the 2014 oil price crash, one of the
worst in the history of the crude market. The Kashagan project in
Kazakhstan, funded by a group of major oil companies including
Exxon, went considerably over budget. Gorgon, a massive Australian gas
operation run by Chevron Corp. and in which Exxon has a minority
stake, also saw costs spiral. Other examples abound.
But the study’s findings
are notable because of Exxon’s historic reputation for keeping a tight
leash on spending and the sheer number of major projects in which the
US company holds stakes. It was in large part this widely perceived
erosion in financial discipline that led to last year’s successful
activist campaign by investor Engine No. 1 to replace three directors
on Exxon’s board. And while the company has seen record profits this
year amid surging commodity prices, it faces decisions in coming years
on whether to proceed with new, multibillion-dollar projects,
including a gas development in Mozambique and low-carbon investments.
“The point of the
study was to look at how it’s possible to tighten up the rough
sketches to get them closer to the numbers used for final investment
decisions,” Furman said. “We did so that we don’t risk wasting time on
projects that may never be funded.”
The study gives several examples of how
costs soared, without naming specific projects. In one instance, it
was decided to shorten a length of a pipeline to cut costs, but that
ended up rerouting the pipeline through a “more challenging
and sensitive location.” Costs were ultimately higher than they would
have been otherwise, the report said. Elsewhere, it said, “shortcuts
were taken in engineering to save costs and resulted in poor quality
and excessive cost in fabrication and construction.” The study didn’t
say whether it was Exxon or other operators who took these short cuts.
“There are a number of projects in this study in which we did not have
a controlling interest,” Furman said. “This means we do not have
decision-making authority on the project or how money is spent. This
includes any decision making that takes place before the project is
funded or built and at any time during the project.”
The analysis identified
so-called “runaway projects” — defined as those that exceeded early
cost estimates by more than 70% — and suggested that planners
have “intentionally underestimated” the price tags of projects in
critical early stages to get them green-lit. “This theory suggests
human biases and behavior contribute to overoptimistic outlooks,” the
study said, without attributing the actions specifically to Exxon
employees. “Shortcuts can create false expectations and set a project
up for failure.”
Exxon’s demanding culture
can largely be traced back to legendary former CEO Lee Raymond, who
aggressively drove down costs and relentlessly pursued new reserves,
especially in downturns, during his tenure from 1993 to 2005. The
result was a peer-leading return on capital employed (ROCE) that led
Exxon to the top of the S&P 500 Index. Despite the cost overruns,
Exxon’s ROCE “led the industry for nearly the entire period,” Furman
said.
The 2020 study was part
of regular internal reviews ordered up by Exxon management to improve
on how the company develops oil, gas and chemical projects. It wasn’t
the first time an internal report highlighted room for improvement in
Exxon’s planning of major projects.
A 2015 study known
internally as the “Black and Blue” report identified misaligned
employee performance incentives, a lack of communication between
teams and undue pressure to meet deadlines as "hypotheses" for
"inefficiencies" in its internal processes. The company’s “go fast”
culture meant “key processes’’ were skipped to stay on schedule,
according to a presentation of the 2015 study seen by Bloomberg. “We
routinely evaluate capital investments and how we can improve,” Furman
said.
Darren Woods, who took
over as CEO in 2017 after then President-elect Donald Trump tapped Rex
Tillerson as U.S. Secretary of State, consolidated Exxon’s front-line
business units and shifted the company’s focus to operating its own
assets rather than taking stakes in outside projects. He recently made
a series of rare external hires, such as Chief Financial Officer Kathy
Mikells from Diageo Plc and Low-Carbon Vice President Dan Ammann, who
once led General Motors Co.’s self-driving division.
By next year, Woods
is targeting a reduction in annual costs by $9 billion. The company
has trimmed its workforce — mainly through layoffs and post-pandemic
attrition — to the lowest in at least two decades.
The 2020 analysis found
that “multiple runaway projects” were the result of insufficient
design and planning work. “Some projects locked in to specific
concepts too early, without fully considering other, better, options,”
the analysis said.
Exxon has “reduced
complexity and internal interfaces, allowing faster decision-making
and significant efficiencies,” Woods told investors in March. The
improvements, he said, preserve “the functional excellence we’ve built
over decades.”
