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Pro-cyclical petroleum investments and cost overruns in Norway

Author

Listed:
  • Dahl, Roy Endré
  • Lorentzen, Sindre
  • Oglend, Atle
  • Osmundsen, Petter

Abstract

Development projects in the oil industry often have cost overruns. Through analysis of data from Norwegian development projects in the petroleum industry, this paper investigates the common effect of business cycle developments on cost overruns. Lack of capacity and expertise in a tight supplier market yield cost inflation and difficulties in managing projects. Unlike previous analyses of cost overruns, we analyze projects over a long time period to capture the cyclical effects. We document a statistically significant positive relationship between oil price developments and cost overruns, and a positive relationship between changes in number of employees in the sector and cost overruns. We also show that surprises to the oil price during the project implementation having a larger impact on cost overruns than the oil price level itself. Cost overrun ultimately leads to reduced competitiveness for the industry, and we discuss consequences and policy implications for business and society of these cost overruns.

Suggested Citation

  • Dahl, Roy Endré & Lorentzen, Sindre & Oglend, Atle & Osmundsen, Petter, 2017. "Pro-cyclical petroleum investments and cost overruns in Norway," Energy Policy, Elsevier, vol. 100(C), pages 68-78.
    • Handle: RePEc:eee:enepol:v:100:y:2017:i:c:p:68-78
    DOI: 10.1016/j.enpol.2016.10.004
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    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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