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Challenges Facing Refining

Capital Projects In Todays Project


Environment Whitepaper

With expert insight from:

Challenges Facing Refining Capital Projects


In Todays Project Environment Whitepaper

Expert insight from:


Stephen Cabano, President, Pathfinder

John Fish, Director, Ford, Bacon & Davis

John Jenkins, Director, Jacobs Consulting

Vincent Long, Estimating Manager, Wood Group Mustang

Dan Morlang, VP Capital Projects, AP-Networks

Challenges Facing Refining Capital Projects


In Todays Project Environment Whitepaper

By Frank Zaworski, Petrochemical Update

Introduction
Despite recent dramatic swings in the price of crude oil, the US oil refining industry is in the midst of a capital expansion that seeks
to capture value from burgeoning feedstock supplies. There are a minimum of 30 refinery expansion projects with a total value of
more than $14 billion that are currently in various stages of development.
Will these projects reach start-up on time and on budget? That is the big hope of capital project leaders everywhere who can
spend many restless nights praying they have identified and mitigated for the multitude of risks facing their projects.
For example, the estimation of refinery capital project costs is fraught with risk.
There are few, if any, uncertainties influencing the refining and petrochemical industry as much as capital cost estimation, said
John Jenkins, a director for Jacobs Consulting. With even small projects costing hundreds of millions of dollars, undertaking
substantial engineering only to learn that a project is not economically viable is very costly. Owners need a way to obtain reasonable estimates early in a project.
How the project director or leader manages capital cost estimation, and deals with overall project execution risks from project
conception to start-up, will determine a projects successful completion.

PROJECT

COMPANY

LOCATION

INVESTMENT

STATUS

CAPACITY EST. YEAR OF


COMPLETION

ANACORTES REFINERY
UPGRADE

TESORO

ANACORTES
(WASHINGTON)

$390M

ENGINEERING

---

2018

RICHMOND REFINERY
MODERNIZATION

CHEVRON

RICHMOND
(CALIFORNIA)

$1,000M

PLANNING

---

2017

WOODS CROSS REFINERY


EXPANSION (PHASE I)

HOLLYFRONTIER
CORPORATION

WOODS CROSS
(UTAH)

$400M

UNDER
CONSTRUCTION

45MBPD

3Q 2015

WOODS CROSS REFINERY


EXPANSION (PHASE II)

HOLLYFRONTIER
CORPORATION

WOODS CROSS
(UTAH)

$1,000M

UNDER
CONSTRUCTION

60MBPD

2018

SALT LAKE CITY


REFINERY EXPANSION

TESORO

SALT LAKE CITY


(UTAH)

$180M

UNDER
CONSTRUCTION

62MBPD

3Q 2015

LAUREL REFINERY
HYDROCRACKER UPGRADE
& NEW HYDROGEN PLANT

LAUREL
(MONTANA)

CHS INC

$406M

PLANNING

55MBPD

2019

Challenges Facing Refining Capital Projects


In Todays Project Environment Whitepaper

PROJECT

COMPANY

LOCATION

INVESTMENT

STATUS

CAPACITY EST. YEAR OF


COMPLETION

CALUMET MONTANA
REFINERY EXPANSION

CALUMET
MONTANA
REFINING

GREAT FALLS
(MONTANA)

$400M

UNDER
CONSTRUCTION

25MBPD

1Q 2016

BAKER REFINERY

QUANTUM
ENERGY

BAKER
(MONTANA)

$250M

PLANNING

20MBPD

2017

MONDAK REFINERY

QUANTUM
ENERGY

FAIRVIEW
(NORTH DAKOTA)

$250M

PLANNING

20MBPD

2017

TRENTON DIESEL
REFINERY

DAKOTA OIL
PROCESSING

TRENTON
(NORTH DAKOTA)

$200M

UNDER
CONSTRUCTION

20MBPD

2016

STANLEY REFINERY

QUANTUM
ENERGY

STANLEY
(NORTH DAKOTA)

$250M

PLANNING

20MBPD

2017

THUNDER BUTTE CLEAN


FUELS REFINERY

THUNDER BUTTE
PETROLEUM
SERVICES INC.

FT. BERTHOLD INDIAN


RESERVATION
(NORTH DAKOTA)

$450M

UNDER
CONSTRUCTION

20MBPD

2016

BERTHOLD REFINERY

QUANTUM
ENERGY

BERTHOLD
(NORTH DAKOTA)

$250M

PLANNING

20MBPD

2017

DEVILS LAKE
REFINERY

EAGLES LEDGE

DEVILS LAKE
(NORTH DAKOTA)

$200M

PLANNING

20MBPD

2018

DAKOTA PRAIRIE
REFINERY

DAKOTA PRAIRIE
REFINING

STARK COUNTY
(NORTH DAKOTA)

$400M

UNDER
CONSTRUCTION

20MBPD

Q2 2015

PINE BEND REFINERY


EXPANSION & UPGRADE

FLINT HILLS
RESOURCES, LP

ROSEMOUNT
(MINNESOTA)

$700M

PLANNING

320MBPD

2019

MCPHERSON REFINERY
EXPANSION

CHS INC

MCPHERSON
(KANSAS)

$327M

UNDER
CONSTRUCTION

100MBPD

2016

CATLETTSBURG REFINERY
CONDENSATE SPLITTER

MARATHON
PETROLEUM

CATLETTSBURG
(KENTUCKY)

$255M

UNDER
CONSTRUCTION

35MBPD

2Q 2015

HOUSTON REFINERY
EXPANSION

VALERO

HOUSTON
(TEXAS)

$400M

PLANNING

90MPD

1H 2016

Challenges Facing Refining Capital Projects


In Todays Project Environment Whitepaper

PROJECT

COMPANY

LOCATION

INVESTMENT

STATUS

CAPACITY EST. YEAR OF


COMPLETION

WEST REFINERY
(PROJECT EAGLE FORD)

FLINT HILLS
RESOURCES

CORPUS CHRISTI
(TEXAS)

$600M

UNDER
CONSTRUCTION

230MBPD

4Q 2017

GALENA PARK
TERMINAL CONDENSATE
SPLITTER

KINDER MORGAN
ENERGY
PARTNERS

HOUSTON
(TEXAS)

$369M

UNDER
CONSTRUCTION

100MBPD

4Q 2015

MCKEE REFINERY
EXPANSION

VALERO

MCKEE
(TEXAS)

$140M

UNDER
CONSTRUCTION

195MBPD

2H 2015

BEAUMONT REFINERY
EXPANSION

EXXONMOBIL
CORPORATION

BEAUMONT
(TEXAS)

---

STUDY

---

2020

SWEENY REFINERY
CONDENSATE

PHILLIPS 66

OLD OCEAN
(TEXAS)

---

FEED

---

2018

CORPUS CHRISTI
CONDENSATE SPLITTER
AND BULK TERMINAL

CCI CORPUS
CHRISTI

CORPUS CHRISTI
(TEXAS)

$500M

PLANNING

100MBPD

2017

CORPUS CHRISTI
REFINERY EXPANSION

VALERO

CORPUS CHRISTI
(TEXAS)

$350M

PLANNING

70MPD

1H 2016

CORPUS CHRISTI
CONDENSATE SPLITTER

MAGELLAN
MIDSTREAM
PARTNERS

CORPUS CHRISTI
(TEXAS)

$250M

PLANNING

50MBPD

2H 2016

PORT ARTHUR REFINERY


HYDROCRACKER
EXPANSION

VALERO

PORT ARTHUR
(TEXAS)

---

PLANNING

15MBPD

2018

MCPHERSON REFINERY
EXPANSION

CHS INC

MCPHERSON
(KANSAS)

$327M

UNDER
CONSTRUCTION

100MBPD

2016

CATLETTSBURG REFINERY
CONDENSATE SPLITTER

MARATHON
PETROLEUM

CATLETTSBURG
(KENTUCKY)

$255M

UNDER
CONSTRUCTION

35MBPD

2Q 2015

GARYVILLE REFINERY
RESIDUAL OIL
UPGRADER EXPANSION
(ROUX)

MARATHON
PETROLEUM

GARYVILLE
(LOUISIANA)

$2500M

ON HOLD

520MPD

2018

ST. CHARLES REFINERY


HYDROCRACKER
EXPANSION

VALERO

ST. CHARLES
(LOUISIANA)

---

PLANNING

15MBPD

2018

Challenges Facing Refining Capital Projects


In Todays Project Environment Whitepaper

Brief History of Estimating


In years past, the first estimates made for a projects capital costs were typically based on curve
fits. The concept of a curve fit simply involves plotting actual project cost data versus capacity,
resulting in a least-square trend line. Years ago, the data was probably consistent, Jenkins said,
because many US projects had similar parameters.
As the refining industry evolved, projects were rarely done at the same time in the same place
so it became necessary to adjust for time and place. As Jenkins notes, differences in design
parameters well beyond size influence the cost of units. A crude unit designed for Eagle Ford
cannot be compared to a crude unit designed for BCF-17.
As process engineering progressed, it was possible to improve the estimate by defining the
process equipment requirements and estimating equipment costs, then applying a factor to
account for installation. Since major equipment makes up only about 25% of total project costs,
the factor is obviously largearound 4.0. These estimates were more accurate than cost curves,
but had a bias to be low, Jenkins said. This occurs because the estimator may be able to define
equipment costs reasonably well but is likely to leave out items or fail to see an unusual situation
that increases costs.
As front-end engineering progressed on a grassroots project, the other elements of capital
costthe amount of piping, cement and steel, instruments, electrical equipment, and the
amount of labor requiredbegan to evolve, said Jenkins. Vendor quotes were obtained to firm
up the equipment cost estimates. However, this information historically was not integrated into
the estimate as the work progressed. Instead, normal practice was to provide the next level of
estimatethe detailed or take off estimatewhen 30 to 40% of all engineering was completed.
The arrival and evolution of computers and software allow engineers today to quickly find
answers to problems and challenges in the estimation process. Our best young engineers can
complete a reasonable heat, material, and pressure balance simulation with indicative equipment sizes for most refinery units in a day or two, a process that used to take weeks, Jenkins
said. Cost estimating software has allowed us to use the equipment list to develop quantities for
cement, steel, wiring, cable, instruments, insulation, paint, and, most importantly, labor, very
quickly. With all of these capabilities, how do we still go wrong?

Refining Capital
Projects Conference
& Exhibition
November 16-17 2015
Hilton Doubletree,
Greenway Plaza, Houston
www.petchem-update.com/
refining-projects

Challenges Facing Refining Capital Projects


In Todays Project Environment Whitepaper

Identifying Risk in Early Refining Project Estimates


Realistic cost estimates are only as good as the engineering deliverables, said Vincent Long,
estimating manager for Wood Group Mustang. Therefore, the scope must be clearly defined,
and agreed upon, prior to any estimating effort.
Basically, cost estimates have three components, according to Jenkins.
1. Definition of Scopewhat is it you are trying to build, in detail?
2. QuantitiesA list and quantities of things one must buy (and labor is a thing).
3. An estimate for the cost of each thing.
Fish notes that there is a fourth aspect: Work Packaging and Phasing. This is especially true
when working within an existing facility. All estimates should based on a Work Breakdown
Structure that may include phases. An example of phases may be the work to be preformed
prior to an outage and the work to be performed during an outage. The scope of work must be
defined and estimated for each package and each phase. In many cases, the outages will drive
the schedules, the procurement plan, and equipment deliveries. The Construction Industry
Institute (CII) has performed extensive research on the ability to improve productivity by taking
the time to align the construction and engineering work packages in the Scope Definition phase
of the project.
The greatest source of errors in cost estimates is omissions, Jenkins said. If an item is missing
from your list, the estimate is likely to be off the mark. The estimate should be as detailed as
possible, particularly early in the project.
If the project is going to require revamp of a flare system, the cost should be in the estimate,
even if the initial estimate of this cost is little more than an allowance, Jenkins said. Owners
costs are an example of an item that is often omitted in project estimates, he says. Rather than
simply using a percentage (or even worse, leaving it out), the project team should have an
estimate of these costs based on the number of people assigned to the project, the schedule,
and a reasonable reflection of other anticipated owners costs.
Jenkins notes that inflation and contingency should be separately itemized. That is, an estimate
should not have a single contingency and escalation line. Contingency and escalation are
completely different. Given an estimate of annual inflation and a spending curve, inflation can be
calculated easily. Contingency, on the other hand, cannot.
Another omission in early project estimates is failing to include Operations staff in the planning
process, said John Fish, Director of Project Support Services for Ford, Bacon & Davis. Operations engineers are always busy keeping things running and usually do not have the spare time
to devote to helping a capital projects estimating team. What sometimes happens is that
operations personnel will delay meeting with the estimators and the design team until the
estimators become frustrated and plow ahead without operations input. When operations
engineers finally see plans for what the design engineers have created, they go ballistic.

Senior Managements Role in Improving Project Estimating


While the responsibilities for estimating oil refinery capital improvement projects are typically
delegated to a companys estimate manager or estimate team leader, senior management plays
an important role in the process.
Jenkins offers the following as a guide for senior management:

Refining Capital
Projects Conference
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Estimates and Project Data are a Companys Intellectual Property.


Many operating companies treat estimates and real project data as having little value, either
discarding them or putting them in a drawer somewhere. In fact, good quality data in which a
project is tracked in a consistent manner from early estimating through completion are rare and
valuable.

Challenges Facing Refining Capital Projects


In Todays Project Environment Whitepaper

Close out projects.


Conduct a post completion review of results and archive the findings. This may add a small
amount of engineering cost, but it is worth it to know where you have been. If it makes sense to
update your models, do so.
Develop / Update the Systems.
Cost estimating models are wonderful tools, but they are just that: tools. An artist can produce a
sculpture with a hammer and a set of chisels; most people produce a pile of rocks. A cost
estimating program offers a template and approach, but it does not have all the answers. To be
useful, cost estimating programs must be updated and calibrated with real field data. There is no
easy answer.
Ensure transparency and consistency.
Management should insist that the estimate form is sufficiently granular and have enough
definition to track progress. The format used for the initial estimate should be used throughout
the project.
Be Reasonable.
Overly optimistic assumptions regarding efficiency, schedule or other key cost parameters do
not usually turn out accurate.
Train estimators. Select some of your best and brightest estimators and let them experience all
of the elements of the projectfrom early process design until mechanical completion and
handover. The best cost estimators have a sense of the equipment they are defining and the
work processes required to complete a project.
Get involved if necessary.
If a project is beginning to drift in the field and appears to be out of control, take action. It is very
unlikely to get well by itself.
Long points out that communication and understanding the scope of the project, and the
deliverables that go with that scope, will help senior management keep a tab on the process.

Refining Capital
Projects Conference
& Exhibition
November 16-17 2015
Hilton Doubletree,
Greenway Plaza, Houston
www.petchem-update.com/
refining-projects

Challenges Facing Refining Capital Projects


In Todays Project Environment Whitepaper

Mitigating Project Execution Risks


Evaluating and mitigating project execution risks from project conception to facility start-up is a
major issue today, said Stephen Cabano, president of Pathfinder LLC, because the experience
base of most owner organizations is less than what it used to be.
The industry is suffering from a depleting resource pool of highly-experienced project managers and project support personnel, Cabano said. Understanding the potential risks involved in a
project, such as safety, cost, schedule, procurement, execution environment, and more, and
what mitigation strategies are available typically comes from experience and lessons learned,
both of which are weak in todays marketplace.
A company can avoid and mitigate some project risks by filling gaps in the project teams
experiential deficiencies, either from within company ranks, from outside through selective
hiring, or the use of independent experts.
The evaluation and mitigation of project risks begins with keeping the end in mind, said Dan
Morlang, vice president of Capital Projects for AP-Networks.
The project team must know what the project performance goals are at the outset, Morlang
said. A robust plan with operations input that takes risks all the way through from risk process to
risk closeout needs to have ownership by the team. Teams involved should be cross-functional
and understand they must finish what they start.
Lurking near the surface of every refinery capital project is any number of unknown risks. A
major challenge is to identify these risks and determine what they mean for project objectives,
and how their overall impact can be mitigated.
Cabano cited the following examples of some of the unknown risks in the current market:
Resource availability for project execution this relates to the activity in the US gulf coast and
the draw for labor (may be easing due to oil pricing)
Execution resource capability what experience does the team have
Scope stability owners constantly tweaking the scope
Engineering quality and timeliness experience base in our engineering contracts shops and
related productivity issues
Competing projects in the area higher levels of project activity in the downstream oil/petro
chemical sector
Market condition uctuations pricing and timing for materials and equipment are pressured
by demand (this may be changing due to oil pricing)
Counterfeit materials major issue that requires a higher level of procurement oversight
especially if buying on a international scale
Morlang adds a few more risks such as political upheaval, legislative changes, capacity changes,
and contractor issues such as bankruptcy or other financial constraints.
All the above will impact the issues of project cost and execution duration, and some may even
impact issues such as operability, maintainability and safety of the facility, Cabano said.
Strategies to mitigate resource type issues would range from additional field training to acceptance of the productivity loss due to the risk, which would include the estimated time for
construction and cost, Cabano added, while field mitigation activities might include innovative
Just-in-Time training in the field, additional craft team supervision (1 supervisor for every 5
workers vs 1 for every 10), etc.

Refining Capital
Projects Conference
& Exhibition
November 16-17 2015
Hilton Doubletree,
Greenway Plaza, Houston
www.petchem-update.com/
refining-projects

Other risks might be resolved by Project Assurance reviews to guarantee full team input into the
project scope, detailed site studies to fully understand the local activity and site access, etc. The
procurement issues might require a higher level of quality control and/or vendor inspection.
Mitigation techniques typically result in additional time and cost commitments. They need to be
budgeted and built into the project execution plan in order to get a clear representation of the
expected cost/schedule for the eort.

Challenges Facing Refining Capital Projects


In Todays Project Environment Whitepaper

Fish notes that more and more owners are demanding "compressed schedules." However, the
owner approval process to purchase project critical engineered equipment appears to be taking
more time. In addition, the lead times for vendor data and the delivery of engineered equipment is increasing. Vendor Data is primary input the design team. When vendor data is missing,
the design team is forced into performing "out of sequence work" (OSW). Working Out of
Sequences results in inefficiencies, excessive changes, rework, and quality issues. To meet
schedules, our industry needs to explore creative ways to ensure that we can purchase the
equipment in a manner that provides the design team with the vendor data to support the
compressed schedule.

Effective Project Governance


Building a capital project that will operate smoothly without any bugs for 30 years and more is
the objective of any refining company. Thinking about the project for the long term at the
outset is the challenge.
The unit may run for 30 years, said Cabano, but if a corner was cut in the design of the facility
to minimize capital cost, that decision may cause operating inefficiencies for the life of the
facility.
Owners today need to assess the life-cycle cost of an asset not just the initial one-time capital
cost, Cabano said. The data the project team provides needs to be evaluated with the expected
revenue over time. Operability issues, maintenance costs, turnaround/shutdown philosophy of
the plant, etc., all need to be evaluated when deciding to authorize a project.
Cabano points to modularization as a good example of why thinking in the long term is
valuable.

We typically design and fabricate modules of a plant in order to address field labor issues, site
conditions, and other factors, he said, but we often forget the impact of modularization on
operations and maintenance. When units are modularized, they are designed and built as
compressed as possible in order to transport and install efficiently.
The compressed nature of the modules makes them very difficult to operate and maintain on a
day to day basis. The capital cost savings potentially realized by modularization is often negated
by the productivity lost in operations and maintenance activities that go on for the life of the
facility. Modularization decisions are often made because of the capital cost pressure projects
have. But they really need to be looked at holistically across the life of the facility.

Refining Capital
Projects Conference
& Exhibition
November 16-17 2015
Hilton Doubletree,
Greenway Plaza, Houston
www.petchem-update.com/
refining-projects

Challenges Facing Refining Capital Projects


In Todays Project Environment Whitepaper

Owner-EPC Contracting Strategies


Contracting the services of an Engineering, Procurement and Construction (EPC) firm for capital
projects is common practice in the refining industry. Crafting a contract that ensures a project
reaches completion on time and on budget takes a hefty amount of knowledge, time, and
sometimes good fortune. Removing luck from that equation is just the first step in developing a
successful contracting strategy.
The overall contracting strategy for a project is just as important as the technology selection
and design basis, Cabano said. The optimal contracting strategy needs to become intertwined
with all other aspects of the project execution plan. You cannot divorce one aspect from the
other as they are all related. There is no one strategy that is the best for all projects.
Selecting a contracting strategy will have a huge impact on the costs and scheduling of a
project.
Cabano said a schedule-driven project, for example, may opt for a sole source, negotiated
approach with a select contractor in order to eliminate the overall competitive bid process
which could take months. This approach, however, may not yield the most favorable cost but
may address schedule constraints.
The sole source, negotiated approach may be used if the owner believes that contractor
availability may be an issue, as it locks in a contractor early and keeps them on board through
the detailed design and construction phase.
On the other hand, a competitive bid process typically yields a better price for the owner
because the contractors need to sharpen their pencils to win the work, said Cabano.
Cabano adds that many organizations today are applying both cost and schedule risk analysis to
assure they are comfortable with the forecasted cost estimate and timeline schedule.
Many owners have used alliance contracts for in-plant project development and execution,
Cabano said. These alliances work well for routine projects with similar scopes and single
discipline-type projects. As the projects become larger and more complex, the benefits of an
alliance contractor start to be overshadowed by the benefits of contracting to the open marketplace.
There are numerous issues to consider when contracting to the open market:

Confidence in the
completeness of
the scope of work

Capability of
the contractors

Activity in
the industry

Owner capabilities to
manage different
contract types

Project
schedule

Owner willingness
to stop changing
the scope

Interactive Planning:
Refining Capital
Projects Conference
& Exhibition
November 16-17 2015
Hilton Doubletree,
Greenway Plaza, Houston
www.petchem-update.com/
refining-projects

Fish adds that about halfway through the Scope Definition phase of a project, the entire team
(Owners, Engineers, Subject Matter Experts, Operations, and Maintenance, and Construction
representatives) should meet in one room and conduct a detailed Interactive Planning Process.
The Interactive planning process is used to validate the contracting strategy, procurement
strategy, work packaging, and overall project execution plan. What looks good on paper to
achieve the best value for the owner may not be achievable once all the players are involved to
identify what they need to accomplish their tasks and meet the required project critical
milestones.

Challenges Facing Refining Capital Projects


In Todays Project Environment Whitepaper

There is an age-old controversy around incentivized contracts, Cabano said. Some believe that
incentivized contracts can be beneficial as they prompt the contactor to optimize certain
project drivers. Others believe that they deteriorate the basic contract agreement and drive bad
behaviors.
Cabano added that incentives, if applied, need to abide by certain principles:
1. They must be self-funding additional money to the contractor needs to come from the
value the project delivers
2. They must be ecient to administer no additional burden on the owner to track
3. They must drive positive project behaviors no bonus is earned if people get hurt!
4. And, they must not be used to recover from poor performance

Conclusion
Estimating refinery capital project costs and mitigating project execution risks while providing
excellent project governance and selecting the ideal EPC contract strategy are a daunting set of
challenges for refining companies looking to expand production or build a plant from scratch.
As Jenkins said above, the greatest source of errors in cost estimates is omissions. The project
estimate needs to be as detailed as possible, particularly in the earlier development phases.
Evaluating and mitigating project execution risks from project conception to facility start-up is
difficult. Seek expertise from both within and outside your company. A vast number of resources
are available.
The project you are planning will be expected to perform at a high level for many years. Think
over the long term, about the risks that will arise down the road.
Think carefully, also, about how EPC-Owner contracts will be crafted so as to best ensure a
project reaches completion on time and on budget.
With the application of goodly amounts of research, applied experience, sound ideas from
in-house and outside experts and an eye always on company objectives, capital projects can be
completed on time and on budget.

Refining Capital Projects Conference & Exhibition


November 16-17 2015, Houston
Boost the cost, schedule, and operability performance whilst mitigating project
execution risks from your refining capital project.
35+ speakers including:

Refining Capital
Projects Conference
& Exhibition
November 16-17 2015
Hilton Doubletree,
Greenway Plaza, Houston
www.petchem-update.com/
refining-projects

Ed Winston, Principal Engineer Turnarounds and Maintenance, Holly Frontier


Frank Williamson, Senior Vice President, Process Plants & Industrial Business Unit,
Wood Group Mustang
John Fish, Director of Project Support Services, Ford, Bacon & Davis, LLC
Bryan Trocquet, Business Unit General Manager; Downstream, WorleyParsons
Richard Westney, Founder/Director, Westney Consulting Group
Ray Topping, Director, Fiatech

More info: http://www.petchem-update.com/refining-project