Achieving Capital Efficiency on Projects

 In General

Introduction

In the oil and gas upstream, midstream and downstream sectors, operating companies need to replace depleting reserves to maintain shareholder value. The replacement facilities which extract and process the oil and gas must produce an acceptable return on investment before they can proceed. Over the last several decades capital projects have significantly increased in final total installed cost having a negative impact on the company’s financial results.

Operators are now evaluating their future programs based on their “capital efficiency”. As defined by the Construction Industry Institute (CII) DCC-07 Research team, Capital efficiency is the measure of an organization’s ability to define, develop, and manage a competitive project that optimizes the return on investment over its lifecycle. [1]

Operators are recognizing that step changes to the traditional execution methods currently employed are needed if capital efficiency can be an achievable goal. Several organizations in the industry have developed strategies to address more effective execution of projects. Examples include Integrated Project Delivery (IPD), Lean Six Sigma Execution, Independent Project Analysis (IPA), others. These strategies can be very useful if effectively applied but may not achieve the best results. As stated in the PWC article, “Successful capital project delivery, The art and science of effective governance” projects need to achieve good governance and transparency right from the start. [2]

This blog will present not just another strategy to improve capital efficiency, but a methodology which has worked in reducing the overall capital spend and addresses some of the issues improving shareholder value.

Program/Project Initiation

Operators identify a business opportunity associated with their organization’s business objectives. This is articulated into a project charter. For the heavy industrial sector this is a requirement for the first phase of a project, often called FEL1 or opportunity and framing phase. A project team is organized to further define and execute the project from FEL1 through to implementation and start-up. Most organizations employ their operations and technical groups to help further define the project requirements.

Experience has demonstrated that the project, operations and technical team are not fully aligned with the operator’s management business objectives. This disconnect leads to the project definition growing in scope resulting in increased capital cost and schedule. This increase produces an initial project cost estimate which is too high to be commercial viability. Value engineering is then performed. The updated “value” estimate still does not meet the commercial hurdle and the project is either delayed or cancelled. For those projects which are released for funding, the capital cost and schedule continues to grow which results in a project which does not meet business  objectives for the life cycle.

Various organizations, such as Independent Project Analysis (IPA), Integrated Project Delivery (IPD) and Construction Industry Institute (CII) have attempted to provide guidance on how to avoid these negative results. Several consultancy companies can assist with aligning on the projects business case but often do not provide sufficient technical know-how to achieve the best results.

Opportunity

A program/project can meet expectations if certain strategies are effectively implemented. These key strategies are highlighted as:

  1. Evaluate business objectives
  2. Align on the strategies to meet the business objectives
  3. Develop key solutions to achieve the business objectives
  4. Execute the key solutions
  5. Provide Governance to ensure the solutions are executed

The following describes each strategy in more detail.

1.    Evaluate Business Objectives

Over the last decade, most facilities have been challenged to meet commercial barriers with sensitivity around the capital cost. Owner’s and operator’s management need and are expecting improvements on capital efficiency and cost schedule certainty before they are willing to sanction new or sustaining capital facilities. A key to success is to clearly establish the project requirements based on the business objectives.

Operators need to employ resources which can facilitate the definition of the design and execution basis which supports the business drivers. Having the ability to understand the capital and operations cost impact when developing the basis of design is critical for achieving capital efficiency. Key business drivers such as rate of return, life cycle cost, performance guarantees and critical impact design philosophy’s such as loss prevention, availability, operability must be well understood and documented. Expectations for operations cost such as the operating expense ratio (OER) must be identified. Once the objectives are evaluated, the program/project charter can be developed, and then stakeholder alignment can occur.

Key commercial drivers that should be established include but are not limited to:

  • Technology
  • Design functionality
  • Design capacity
  • Design availability
  • Design flexibility
  • Future expandability
  • Extent of plant controls
  • Operations and maintenance impact

2. Strategic alignment on the business objectives

Experience on the initiation of several program/projects has indicated the program/project charter is not clearly understood and communicated to all stakeholders and execution team members including the business side of the organization. Understanding what is a ‘want’ vs what is a ‘must’ is critical. Often ‘wants’ which may not support the business case become ‘musts’. ‘Musts’ are defined as is it be safe, legal and operable and are the environmental and government regulations satisfied. Any other inclusion would be described as a ‘want’ and needs to prove to bring value to the business case (otherwise improve the projects IRR and NPV).

Alignment on the following items need to be achieved before the team can develop any solutions to meet the business case.

  • Business drivers and objectives
  • Class of facilities
  • Capital cost constraints
  • Lifecycle costs constraints
  • Schedule constraints
  • Boundaries for adding specific scope based on a Cost Analysis tool (NPV/IRR)
    • Does it bring Value to the business case?

3.    Develop key solutions to achieve the business objectives

 The stakeholder and execution team members alignment on the project requirements that support the business objectives with allow for the development of solutions to achieve the most capital efficient design and execution plan. Traditional methods will not provide the step change required to produce the most effective results. Strategies which push the traditional thinkers out of their comfort zone will be required. Four solution driven strategies that support the aligned business objectives are:

  • Develop Minimum Kit utilizing Lean Design Methods
    • Developing a design basis which produces the minimum requirements which supports the business case is important to achieve the most efficient use of capital. Most operators struggle with this element.
  • Utilize Optimal Modularization and Standardization
    • Modularization – Over the last decade, maximizing the application of modularization has been proven globally to reduce cost and provide cost and schedule certainty. Removing less productive labor offsite to a more controlled environment improves safety and quality. Well-designed modular plot plans can reduce overall quantities and optimize removal of labor offsite.
    • Standardization – Most engineers and operators customize their process equipment to satisfy exacting conditions. Reputable manufacturers and fabricators comply with industry recognized standards and specifications such as ASME, API, ANSI and IEC.  Standardization is a key solution to remove non-value add activities during the design and procurement phases. The amount of standardization applied to a project should be established as early as possible on the project or program.
  • Optimize Supply Chain
    • The highest recognized risk associated with the execution of projects is with supply chain management. It is critical to align and develop supply chain strategies to the business case in the earlier phases of the projects. This will allow for optimized supply chain solutions to align with engineering, fabrication and construction
  • Lean Based Execution Efficiency
    • A strategy which is not being effectively applied by owners, engineers and constructors is lean based execution efficiency. Execution Efficiency is executing the work in the most effective method with the least amount of time and effort.  If performed effectively, it will result in the most cost-effective execution for the project. Below are key strategies that will assist with gaining execution efficiency through Integrated engineering, procurement, fabrication and construction approach.
      • Advanced workface planning in engineering, fabrication and construction at the project initiation
      • Integrated project delivery (IPD) contracting strategy
      • End to end digital project delivery with Integrated data management
      • Collaborative project execution
      • Scaffolding reduction solutions

4. Execute the key solutions

After the key solutions that support the business case and a capital efficient outcome have be agreed upon they will be included into the project/program execution plans. A common reason why projects fail is a lack of vision or goals. It is very important when executing projects/programs that the vision, business drivers and objectives is communicated frequently, and alignment is obtained through the lifecycle of the project/program.

The influence the design and engineering phase has on the outcome of a project/program to meet the business case is immense. It is extremely important to develop a capital efficient integrated EPFC execution plan during the early phases of a project that incorporates:

  • All key capital efficient execution strategies developed and implemented
  • Incorporation of an end-to-end digital project delivery model
  • A cost efficient with high probability integrated EPFC estimate and schedule that de-risks the project
  • Identify and implement developed capital efficient procedures and processes

The developed integrated execution will need to be communicated and alignment gained with all stakeholders including the executive management and project/program teams for the project/program to be successful. Key decision making with ensuring that any decisions align with the business case is another element that will ensure a successful outcome.

5. Provide Governance to ensure the solutions are executed

Experience has indicated when programs/projects deploy non-traditional strategies, designs and executions, governance is required to assure effective implementation occurs. Also, a common cause for project/program failure is lack of leadership and governance. History from completed projects has indicated opportunities which were identified at the outset were lost during the implementation phase. Questions arise on why the objectives were not achieved which were incorporated into the execution plans.

 Applying different strategies which require a step change in a team/individual mindset to achieve the desired results is challenging. When things get challenging, it is easy for execution teams to revert to more traditional methods. The most effective method of averting disappointing results is to apply an effective governance program during all phases of the project.

The best governance comes from outside the project team. Scheduled gate reviews performed by external teams is the most effective strategy for assuring the strategies are being applied. Gate review checks should be performed and results with executive management and project/program execution team.

Conclusion

Step changes to the traditional execution methods currently employed are needed for a project /program be successful and achieve the best capital efficient result. The key strategies discussed in this blog need be developed, aligned, implemented and governed to ensure success and can reduce the overall TIC by 15% to 50%. If implemented appropriately throughout the life cycle of the project/program, the results will support the business objective which is critical to the stakeholders and owners of facilities. If you would like more information about how you can ensure your project is capital efficient, please contact DyCat Solutions at info@dycatsolutions.com or visit our website www.dycatsolutions.com.

Sources:

1 – RT-DCC-07 – Capital Efficiency Scorecard for Downstream and Chemicals Projects, Construction Industry Institute (CII), Aug 2021

2 –  Successful capital project delivery, the art and science of effective governance, PWC