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Transforming major capital project effectiveness ..................1 The pitfalls between concept and commissioning ................................2 The consequences of risk .......................4 How to bypass the pitfalls and manage the risk ..............................5 Focus areas for effective capital project life cycle management................6 How Ernst & Young can help...................9 About Ernst & Young............................12
Project \]falagf
Engineering design
Project procurement
Construction
Asset management
Decommissioning
Commissioning
Procurement
Sustainment
Dismantling 1
Front-end engineering
Detailed engineering
Conceptual
Operations support
Approve capital
Hook-up
By considering the long-term effect of the entire project during the conceptual and planning stages, project owners can better predict future risks and make decisions that allow them to appropriately allocate risk and control the projects value chain. The forward-thinking company will spend more time on strategic issues and the strategic development of a project management approach that aims for the balance between risk allocation and value retention.
The best opportunity to make a positive impact on the life cycle of a major capital project is during early planning, even before the capital outlay occurs.
Since no one has a crystal ball, what should the company consider? What are the factors in the upstream oil and gas industry, the marketplace and the business of engineering and construction itself that contribute to successful projects that result in commensurate rewards instead of a project fraught with risk and loss?
Af]^^][lan] [gkl eYfY_]e]fl Yf\ dY[c g^ fYf[aYd ljYfkhYj]f[q2 Ineffective contract administration and monitoring of contracts both causes and results in a lack of visibility that complicates the planning of project costs for reporting and budgeting activities. The end result is likely to be an inaccurate perspective on the total costs incurred, limited YZadalq lg Y[[mjYl]dq ^gj][Ykl [Yk` go$ Zm\_]l gn]jjmfk Yf\ l`] af[dmkagf g^ mfYhhjgn]\ costs. At the same time, not automating the cost management software tools and failing to integrate them into a comprehensive project management information system necessitates reliance on manual controls and associated increased risk tolerance related to potential delays in identifying and reporting issues that may affect project performance. Inertia and a lack of urgency: 9k hjgb][lk Yj] ka_fa[Yfldq \]dYq]\$ hYjla[ahYflk Yj] often subject to inertia and lose the sense of urgency and the focus on completing the project, and maintaining quality. Simply put, when a project becomes a process, it can be problematic. It is important to voice concerns regarding the reliability or accuracy of the current cost and schedule estimates at completion, challenge original assumptions and assess if they are still valid. Momentum can be lost if the cumulative impact of missing [jala[Yd hjgb][l ead]klgf]k j]_mdYlgjq$ fYf[aYd$ gh]jYlagfYd$ [gfljY[lmYd Yf\ dgf_%d]Y\ equipment) is not adequately addressed and if management accepts a fatalistic attitude about future impacts. Mf[d]Yj \]falagf g^ jgd]k Yf\ j]khgfkaZadala]k2 One of the big pitfalls of a joint venture is unclear governance, which can lead to the project owner taking on unacceptable risks. The cause is typically attributable to a combination of failing to assess the risks l`gjgm_`dq$ [d]Yjdq \]faf_ Yf\ [geemfa[Ylaf_ Ydd jgd]k Yf\ j]khgfkaZadala]k ^gj hYjla]k involved, and building both contract and governance structures that take risk into account and include adequate controls and monitoring. Operational impact: Operating and maintenance strategies are rarely planned at the design phase and built into the ongoing project management strategy. Once the project l]Ye `Yk ]p][ml]\ l`] `Yf\g^^$ l`] eYafl]fYf[] Yf\ kmhhgjl gj_YfarYlagfk eYq f\ that the policy and procedural foundation is missing, the right people arent in place or Yj] mf^YeadaYj oal` l`] dYf\k[Yh] Yf\ fYddq kqkl]ek$ l][`fgdg_q hdYl^gjek Yf\ kg^loYj] enablers are absent or inadequate. Companies are sometimes too quick to segregate duties and may have been imprecise in identifying competency requirements or aligning l`]e Y[[mjYl]dq oal` l`] hjgb][l gj_YfarYlagf [`Yjl Yf\ klY^f_ hdYf& New operational challenges: Companies increased focus on E&P in deepwater and ultradeepwater areas means more projects in challenging and unfamiliar environments, which can require a new generation of technical and operational solutions as well as different ljYafaf_ Yf\ kmhhgjl ^gj h]jkgff]d af l`] ]d\& L`] [gklk Yf\ h`qka[Yd \Yf_]jk afngdn]\ far exceed previous levels and add to owners risk, all with little or no assurance that prices will continue to justify heavy investments in these areas. Asset integrity: An aging infrastructure can pose serious operational threats to companies and jeopardize their public reputations and business relationships. These structures require continuous inspection, monitoring, maintenance and repair, and may not comply with current environmental standards and regulations. Cross-border controls: Projects that involve entities from more than one country carry special considerations, requiring that processes and controls be adaptable to local markets, business customs and international compliance standards. This is one key point in the project life cycle where the relationship between owning risks and reaping reward may diverge.
The pitfalls
Finance and credit risk Schedule delays Ineffective cost management and lack g^ fYf[aYd ljYfkhYj]f[q Inertia and lack of urgency Mf[d]Yj \]falagf g^ jgd]k Yf\ responsibilities Operational impact New operational challenges Asset integrity Cross border controls
Simply put, in order to move toward success, a risk planning process must be implemented as part of the strategic development of the hjgb][l$ \]faf_ l`] akkm]k l`Yl emkl Z] Y\\j]kk]\ Yf\ [gehd]l]\ in order for the capital project to succeed at each stage gate in the supply chain. Creating value throughout will improve ROI, strengthen the relationship between the owner and engineering and construction companies, and help drive a proper balance between owning the risk and reaping the rewards.
Hjg[]kk ]^[a]f[a]k
Identify poorly performing projects sooner :]f]lk Reduce costs Reduce effort/ headcount (FTE)
Project schedule
Governance, controls, policies and procedures Healthy stage gates Handover management
Reduce risk
Operational impact
Competitive advantage
Focus areas
1. 2. 3. 4. 5. 6. 7. 8. 9. Effective project management Cost management and cost reduction Supplier performance management Healthy stage gates
A closer look at the focus areas for effective capital project life cycle management
Since the beginning of the upturn, oil and gas companies are demonstrating an increased focus on the entire life cycle of a project, including a deeper commitment to beginning the planning process earlier and ensuring that the quality of the execution is held to a higher standard relative to cost, schedule and execution. These are some of the capabilities that, when executed well, can prove to be game changers on large capital projects: 1. Effective project management: Make sure the plan includes appropriate focus on safety, costs and schedule attributes that need not be mutually exclusive. All parties involved should be in alignment with the baseline schedule and must understand the projects critical path. Critical milestones play a major role in maintaining momentum; developing a continuum of optimistic, realistic and pessimistic potential completion dates based on actual progress can help maintain focus on the project. Cost management and cost reduction: The best strategy is to develop an integrated cost management function that aligns all cost-related processes and functions and incorporates data developed or maintained in other processes. Emphasis should be placed on budget control, approved corporate budget changes and project management internal budget transfers. Expenditure tracking should include actual cost to date, accruals and total cost incurred. Look for cost reduction opportunities, along with opportunities to reduce planning budgets, engineering hours and cycle time, at every stage of the life cycle. Pay particular attention to the larger line items in the construction budget and operate with a mentality that helps promote accountability. Supplier performance management: An improved approach to risk and exposure on costs and delivery and improved management of stakeholders and suppliers can help optimize third-party performance and keep relationships with stakeholders on an even keel. It is important to analyze the contractors baseline as-planned schedule and its cost loading, including the complete scope of work, and to identify the contractors [jala[Yd hYl` Yf\ [gfljY[l ead]klgf]k& Jakck Yf\ ]klaeYl]k g^ aehY[l emkl Z] a\]fla]\$ especially for critical and near-critical activities. Healthy stage gates: Develop a holistic capital projects program with a stage-gate model for evaluating progress and enabling informed decisions about next steps. In addition to minimizing rework on front-end engineering and design, improving cycle time and generating punch lists for handoff maintenance, this disciplined decisionmaking framework is designed to move projects through the development pipeline to facilitate more effective planning and evaluation of projects, which will translate into better capital effectiveness. Early involvement in the process from all disciplines and cross-functional participation throughout the development process will result in better integration and alignment of activities. Risk assessment and reduction: To help ensure a satisfactory degree of success, project teams must control costs, ensure quality delivery, meet deadlines and identify Yf\ eala_Yl] ^mlmj] jakck& Bm__daf_ km[` \an]jk] Yf\ g^l]f [gfa[laf_ gZb][lan]k ak Y major challenge. The capital project team is often too close to the day-to-day activities to be able to take an objective view of performance. Consequently, shortcomings are often recognized too late, by which time overall objectives in terms of cost and quality are jeopardized or schedules slip, affecting both business strategy and operations. This is when projects can erode, rather than support, the creation of business value.
Risk assessment and reduction Safety Handover management Regional execution Total cost of ownership 2.
10. Governance, controls, policies and procedures 11. Operational model design 12. Contracting strategy
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Safety: Safety risks evolve throughout the capital project life cycle, so those risks must be considered at each stage of development. Engineering and procurement personnel must make decisions that allow for the safe construction of the project as well as its safe operation. Construction and operations personnel must be trained properly, comply with safety regulations and processes and utilize the safety controls provided. Equipment or control failure could impact personal safety as well as hinder the operations of a facility. An approach to safety on all these fronts needs to be an integral and proactive component of ongoing project management, not just an emergency response. Handover management: To avoid the impact of poor handover management, operating teams must be mobilized at the right time and given ample opportunity to work with the project team at appropriate stages in the project life cycle. Likewise, equipment needs to be easily serviceable and maximize commonality wherever possible, with bills of materials, and operating and maintenance instructions accurately captured and readily accessible. Regional execution: Integrated oil companies and national oil companies are increasingly investing in new projects through joint venture arrangements, with the national oil companies offering more concession agreements to the integrated oil companies for the rights to their reserves. These agreements are perfect candidates for comprehensive risk reviews. The integrated oil companies need the growth to offset stagnant home territories, while the national oil companies need to generate more income for their burgeoning populations and budgets while diversifying their economies. Total cost of ownership: The total cost of ownership (TCO) for a capital project includes the total of all costs to design, purchase, construct and operate. Most of the costs for these elements can be internal or indirect costs paid to external parties. Furthermore, costs to prepare bid lists and equipment kh][a[Ylagfk Yj] ]Ykq lg a\]fla^q o`]j]Yk kge] gl`]j nYjaYZd]k$ km[` Yk gh]jYlaf_ [gklk Yf\ dgkl hjgl ghhgjlmfala]k$ Yj] em[` egj] \a^[mdl lg a\]fla^q& Af gj\]j lg ljmdq ljYfk^gje a procurement strategy, an understanding of the major contributing elements of TCO is essential.
11. Operating model design: Many different internal and external factors drive businesses to undertake organization redesign. The impact of their decisions can be both positive and lead to outstanding growth, or negative and lead to a further need to restructure. There is no single solution when designing an organization; a one-off solution is required in every instance. Numerous interdependencies need to be considered, including how affected stakeholders will be engaged and consulted during the process. By taking a structured and systematic approach to the design process, organizations give themselves a much improved chance of achieving and sustaining their kljYl]_q Yf\ j]Ydaraf_ l`] Z]f]lk g^ j]kljm[lmjaf_& 12. Contracting strategy: Contracting strategy goes beyond the pricing arrangement decision; it includes decisions about if and how to compete the work, how to segregate the project scope aflg nYjagmk ogjc hY[cY_]k$ a^ Yf\ `go lg gZlYaf fYf[aYd guarantees from vendors (such as bonds or letters of credit), and how to allocate the risks and rewards of performance. An upstream capital project is a complex set of engineered facilities, systems and subsystems, and each of the contracts j]imaj]k Y [Yk]%Zq%[Yk] [gfljY[laf_ kljYl]_q \]falagf& Overall contracting strategy and approach should be determined after carefully considering the owners capabilities, experience and ability to manage the chosen contract type. Contract language development, including critical operational, eYfY_]e]fl Yf\ fYf[aYd [gfka\]jYlagfk$ Yk o]dd Yk l`] contract risk assessment is crucial to understanding the af`]j]fl jakck g^ l`] fYdar]\ [gfljY[l Yf\ \]n]dghaf_ management strategies to cover those risks. Independent of l`] fYd kljYl]_q k]d][l]\$ ]Y[` e]eZ]j g^ l`] hjgb][l l]Ye must understand and be able to quantify the risks accepted and transferred and be prepared to manage the nuances of obligations owned under the strategy. The holistic approach to managing capital projects is proving to be one of the most effective ingredients to a successful project. While engineering and construction professionals often focus publicly on the positive lessons learned, and privately on the negative ones, Ernst & Young has found that the most effective deterrents to project failure are based on a companys ability to structure a capital program that not only encourages, but depends on collaboration across the functions, business units and stage-gates. We are seeing healthy stage-gate approaches that are embedded and supported internally, while driving transparency and collaboration externally with joint venture partners, local governments and contractors. Finding the balance between and among the interests of these stakeholders and the interests of the project is the most effective strategy for transforming project effectiveness.
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10. Governance, controls, policies and procedures: Corporate boards, joint venture partners and other stakeholders expect their capital projects to be run with a governance model that enables transparency and reliable reporting. Owners must insist on the same. Processes and procedures must be proactively enforced by monitoring, detecting, preventing and j]hgjlaf_ Yfq Y[lagfk l`Yl jakc l`] [gf\]flaYdalq$ afl]_jalq and availability of project information. Systems must be able to identify and manage current risks and evaluate current performance, including the appropriate use of resources.
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Following is a more comprehensive list of our capital project effectiveness service offerings: Capital project life cycle management
1. Capital project risk assessment 2. Capital project integrated project team 3. Operating model development 4. Project portfolio strategy 5. Project contract team
Asset management
1. Operations and maintenance assessment 2. Asset integrity assessment 3. Maintenance readiness assessment
Supply chain
1. Supplier performance management 2. Procurement transformation 3. Supply chain rapid assessment 4. Logistics & network planning 5. Procurement process improvement 6. Sales & operations planning 7. Tax effective supply chain management
Cost management
1. Cost management and control 2. Cost allocation 3. Change order reviews 4. Project cost audits
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About Ernst & Young Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 152,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit www.ey.com How Ernst & Youngs Global Oil & Gas Center can help your business The oil and gas sector is constantly changing. Increasingly uncertain energy policies, geopolitical complexities, cost management and climate change all present significant challenges. Ernst & Youngs Global Oil & Gas Center supports a global practice of over 9,000 oil and gas professionals with technical experience in providing assurance, tax, transaction and advisory services across the upstream, midstream, downstream and oilfield service sub-sectors. The Center works to anticipate market trends, execute the mobility of our global resources and articulate points of view on relevant key sector issues. With our deep sector focus, we can help your organization drive down costs and compete more effectively to achieve its potential. 2012 EYGM Limited. All Rights Reserved. EYG No. DW0085 1203-1338642