Good Project Definition Key To Reducing Risk Of Cost Overruns

October 15, 2015

By Elsie Ross – Daily Oil Bulleting – Oct. 15, 2015 – View Issue

If oil and gas companies want to ensure successful capital projects in a low price environment, they need to get back to the basics of properly defining the scope of a project before construction begins, the Calgary Energy Roundtable was told Wednesday.

Independent Project Analysis, a firm which advises institutional investors, has researched 400 projects in Western Canada out of l7,000 worldwide over the past 15 years and it found they trailed other Organization forEconomic Co-operation and Development (OECD) countries in terms of capital performance, said Elizabeth Sanborn, chief operating officer.

Labour productivity is very poor and there are cost overruns,” Sanborn said during a panel discussion on capital project cost savings. Most of the Western Canadian projects were oilsands, facilities or pipeline projects, she said later.

However, low labour productivity is not due to a lack of skilled workers nor weather windows but because of the byproduct of the trickle down effect of poor business practices at the beginning, Sanborn suggested.

For some reason, schedule-driven projects are more common in Western Canada than anywhere else in the world outside of Australia,” she said.

Nearly 70 per cent of projects have a business objective of being schedule-driven. And these are commodity projects which should be cost-driven — always,” she said. “What that schedule-driven strategy does is drive behaviour in such a way that it is creating rework and design changes later on, which is very costly.”

The project team is being handed projects but they don’t really know what direction to take, said Sanborn. “They are told it is schedule driven but then get beaten up for having high costs.”

In successful projects in Western Canada, the actual construction makes up about one-third of the timeline; the previous two-thirds set out the business case planning for the successful execution of the project.

Another element of a successful project is completion of a FEED (front-end engineering and design) study before construction begins. “I think every project manager agrees that good project definition is a good idea but only 10 per cent of projects in Western Canada complete a FEED study,” she said.

Late engineering is increasingly common and globally about 40 per cent of engineering is not on time, according to Sanborn. That will have a trickle down effect so that procurement is late.

Wall Street wants to know when you are going to start up so you are driving to that date but construction isn’t on time because they don’t have the materials.” The late engineering, though, derives from the fact that the scope wasn’t complete, according to Sanborn.

Other cost saving measures discussed at the Roundtable included early integration of engineering and construction companies, replication of facilities (design once and build many), modular tie-ins for wells and offshore procurement of modulars that are assembled in Canada.

The early involvement of construction companies in projects is critical,” said Jeff Gordon, vice-president of the Kiewit Energy Group based in Houston, Tex. Industry is beginning to get integrated engineering and construction teams for both pre-FEED and FEED studies, he said.

An engineering company needs to be integrated to make the correct business decisions going forward,” said Gordon. It involves “working hand-in-hand with engineers, going through estimates, going through schedules so that the engineering lines up with procurement and the procurement lines up with the construction, especially if you are trying to get cost certainty.”

Even though it’s mainly an engineering effort, there’s still value in having the contractor come in to work with them with regard to cost schedules and “if you get in early, you get ownership,” he said.

Gordon said he is seeing reduced engineering hours when an oilsands company builds one plant and then replicates it in successive phases. “And it trickles down to costs with savings of five to 15 per cent on those types of jobs and it is all scheduled so there is a lot of value there.”

Pat Carlson, president and chief executive officer of Seven Generations EnergyLtd., which is active in the Kakwa River Montney play in Alberta, agreed that bringing an engineering and construction firm together to plan and build a gas plant would be useful because in the early stages of a tight gas project, the operator can’t always be sure what rates and gas composition will flow from the wells.

The company also is working with a local contractor in Grande Prairie to build modular tie-ins for what could be 1,000 wells, he said. “It might be cheaper to do 10 stickbuilt [tie-ins] on site but if you start doing modular construction and learn how to be more efficient, given that you have thousands, it would be cheaper for modular construction.”

In an earlier panel on how companies are adapting to low prices, Jim Brittain, president of Energy andChemicals Americas for Fluor Corporation,also talked about working with energy companies struggling through the downturn to create an alignment of interests. “Make a prediction for costs and schedule and hold yourself to it,” he advised.

Contractors also can help companies by generating savings through better solutions in design or in better procurement strategies and sharing those savings with clients.

There are substantial savings if buildings can be fabricated in Asia and then shipped to Alberta, said Brittain. Some schools shipped over from India to Edmonton, for example, were 30 cents on the dollar landed “so there will be substantial savings if you can figure out that Asian supply chain where you can get engineering done right there and bring that solution to Alberta.”

Fluor also is making a significant investment in fabrication facilities in China, “obviously targeting West Coast LNG facilities,” he said.

Responding to a question, Brittain said that such overseas fabrication solutions are scaleable and could also be employed by smaller service providers.

When it comes to service providers, oil and gas companies have been under pressure to cut costs as prices have dropped. However, while some have simply told their service companies they expect a specific percentage reduction if they want to keep their business, Seven Generations has taken a slightly different approach, said Carlson.

We say we want the best price but that we want to work together as partners,” he said. “They have the technology experience and skills that we need. The business has repeatability and if we build up the skills in our business partners, they will be able to use those to go forward,” said Carlson.

There’s so much to gain from innovation that it makes sense to engage the companies and preserve your staff and preserve your capability. Don’t let your people go, but use this opportunity to build partnerships that will enable us to reduce costs and survive over the long-term.”