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Asset management in the oil and gas, process and manufacturing sectors

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Asset Management in the oil and gas, process &
manufacturing sectors
John Woodhouse MA FIAM MSaRS
Managing Director, TWPL
Chair of Faculty, Institute of Asset Management
Project Director, BSI PAS 55

Abstract
The European North Sea oil and gas sector was one of the first to explore and develop a
more integrated approach to asset management - with spectacular results. This chapter
outlines some of the key learning points and the business templates that have emerged. It
also covers some of the component methods that have been widely adopted in process and
manufacturing sectors to improve asset systems performance, reliability and whole life costs.
Keywords:
Asset Reference Plan, Asset Whole Life Plan, Asset Manager, Life Cycle Cost, RCM, RBI,
TPM

1.1 Introduction
Integrated, whole-life optimised asset management, as described in BSI PAS 55, has been
developed in various guises, to various degrees of success and maturity, in several process
and manufacturing industries. Most notable, however, has been the oil and gas exploration
and production sector, where much of the modern thinking on the subject was developed in
the first place (and is reflected in PAS 55 content and structure). Accordingly, this chapter
will focus primarily on the best practices and experiences gained in this industry and now
adopted much more widely.
What is perhaps strange, given the common oil company parentage in several cases, is that
the ‘downstream’ oil industry (refining and chemicals) has been among the slower sectors to
absorb the lessons and achieve the substantial performance gains that are increasingly
proven to be available. Similarly, whereas many manufacturing industries have adopted a
number of component methodologies and good practices (such as Lean, Total Quality
Management/6-sigma and Total Productive Maintenance), they often lack the overarching
model or structure to connect corporate long-term value strategies down to day-to-day
issues, actions and priorities. Toyota, for example, has a well-deserved fame in leading the
innovation of good practices in quality management, value focus and workforce teamworking.
General Electric, Motorola, Du Pont and others have also developed, derived or re-packaged
variants of such tools and approaches.
Sadly, however, the implementation records in other process and manufacturing sites is
littered with temporary enthusiasms, partial ‘solutions’, unfulfilled initiatives and the over-
selling of confusing acronyms and methodologies. This is at least partly due to very tight
commercial margins and volatility of the businesses, causing a short-termism and reactive
habit, sometimes compounded by high management turnover (each manager needing to
make his or her mark in a short window of opportunity). People find themselves too busy
fighting the crocodiles to have time to plan and drain the whole swamp. The good examples
of strategic asset management thinking therefore stand out particularly strongly. Later in this
chapter, I summarise some of these cases – and the methods that have proven particularly
effective when correctly targeted and implemented.

1.2 Asset Management in the oil and gas sector

Many of the core principles of integrated, life cycle and optimised physical asset
management evolved in the North Sea oil and gas industry during the 1980’s and 1990’s.
The asset management business model, and its wide reaching implications and benefits,

© The Woodhouse Partnership 2009 1

emerged from a concentrated series of events in the 1980’s that threatened the very survival
of the industry. Oil prices crashed below the costs of production, the ‘easy’ oil started to run
out, and new land-based reserves were found in lower cost regions of the globe (such as
Kazakstan and South China). Finally, on top of the commercially life-threatening financial and
technology challenges, the Piper Alpha disaster occurred, killing 167 people in an horrific
example of several, relatively minor individual incidents combining to escalate into a major
catastrophic event. The subsequent Cullen Enquiry is credited with being a major contributor
to the modern approach to asset risk management, now incorporated into the UK COMAH
(Control of MAjor Hazards) legislation.
In addressing the underlying financial and performance issues, BP and Shell both observed
that, despite their extensive technical capabilities and presumed economies of scale, the
smaller production companies, such as Hamilton Brothers, were delivering much better
production margins and were able to exploit innovations and customised solutions much
faster. So the BP MAST experiment was born – the “Mature ASsets Team”. This was a cross-
disciplinary group given sole and complete responsibility for maximising the residual value for
some declining reservoirs and their associated production infrastructure. Subject only to the
obvious compliance requirements with legal and corporate regulations, the team had
complete freedom to determine what was worth spending, who (if anybody) to employ to do
what, and how to operate the systems. They were measured by their net contribution to the
bottom line (NPV) over the whole remaining life of the ‘asset’. This experiment – basically
unrestricted permission to use common sense, lateral thinking and fast decision-
making/action - was such a success that the model was adapted and adopted across all BP
Exploration & Production facilities all around the world. BP has moved from being a middle-
ranking performer in the North Sea, with unit production costs of around $15/barrel, to a
world-beater, producing oil from deeper water and more complex reservoirs, and under
tighter safety and environmental controls, for just $2/barrel.
Shell came to similar conclusions about the need for small, tightly integrated, cross-functional
teams given much greater freedom to optimise value-for-money at the level of discrete
production facilities (platforms and associated infrastructure). The resulting radical
improvements in performance confirmed that the approach represented a valuable template
for good life cycle asset management. In the space of just four years, for example, the Dunlin
Alpha platform raised production levels by 17% at the same time as reducing total operating
costs by 50% and improving all safety & integrity measures and winning a UK “Investors in
People” award.
Such a business model, however, is really a manifestation of good business practices
devolved down to specific systems, production units and/or physical installations – effectively
creating the dynamic, opportunistic culture of a small business within the power, resources
and leverage of a larger one. This is quite easy to visualise, but extremely hard to establish.
In both the BP and Shell cases, and others companies rapidly imitating them, the gains
required some radical changes to culture, business processes, roles and authorities,
decision-making, performance measures and risk management. Shell was particularly good
at documenting the resulting learning points, creating a template of ‘best practices’,
particularly centred around the construction of an “Asset Reference Plan” (ARP) for each
viable business unit ‘Asset’. To this day, this is one of the best checklists around for
establishing and maintaining a joined-up view of risk-based, whole-life optimised
management of a complex asset system, and is therefore described in more detail later in
this chapter.

1.3 AN ASSET MANAGEMENT BUSINESS MODEL

1.3.1 Definition of the “Asset”
As subsequently reflected in PAS 55, physical equipment assets are only part of the
functional systems that deliver an organisation’s goals. To optimise total value to the
business, it is these complex systems that must work cost-effectively: it is no good designing
a chain with some links made of titanium and other of paper. To run a successful oil & gas
business, an oil reservoir must be found or acquired and developed, extraction facilities (such

© The Woodhouse Partnership 2009 2

as platforms) constructed, operated, maintained and ultimately decommissioned, a wide
range of services obtained (e.g. helicopter transport, catering, IT, telecoms, materials
purchasing, recruitment and training etc). These require physical infrastructure, of course, but
also a wide mix of personnel, data and knowledge, licenses, supply chain relationships and
logistics systems. A North Sea “Asset” to be managed as a viable business contributor
therefore comprises the best combination of dedicated elements that enable maximum life
cycle value to be obtained for the whole system. It was also found that, to clearly allocate
costs and resources in relation to the resulting outputs, the Asset boundaries needed to be as
clear as possible. This usually corresponded to the treatment of each discrete oil or gas
reservoir, with its associated production infrastructure and operating staff, as an ‘asset
business unit’, albeit a very complex one, with lots of very different component sub-systems
and equipment types. A typical North Sea production Asset includes:

• A mining operation
• An oil and gas separation and processing facility
• A gas treatment unit
• A water treatment plant
• A compression/pumping station
• A power station
• A ship harbour
• A communications centre
• A heliport
• A hotel
• A workshop and store
• A clinic
• An emergency control centre

Such a diversity of component asset and system types, operational processes, people and
skill requirements comprise the dedicated Asset resources, whose cost is fully attributed to
the asset as a business unit. Similarly, it is the net total output of all these systems and
processes working together that represents the Asset’s performance.

Intermittently required resources and functional services that could be shared between two or
more Asset business units, were treated as external and discretionary – the Asset manager
holds the purse-strings and determines if, what and when such resources were worth paying-
for. Corporate functions and departments, therefore, lost their budgets altogether. The UK
Human Resources Director, for example, needed to ‘sell’ the value-adding services that his
team could provide to the various Asset ‘customers’. Like Total Quality Management (TQM)
methodologies, this power shift forced a better focus on real requirements, sensitive to the
individual Assets and their different needs or opportunities. In particular, such ‘overhead’
departments were forced to demonstrate positive value-for-money contributions compared to
obtaining of such services from the open market (Asset Managers were free to choose the
best value option). In a large organisation this represented a major culture shock and a 180º
reversal of the traditional ‘command and control’ style, whereby Human Resources,
Information Technology or Finance departments forced generic policies or methods onto
everyone, irrespective of local suitability or needs.

Subsequent maturity of understanding has since adapted this extreme model somewhat; now
some power and budget is still held by corporate/centralised functions to ensure the
spreading of best practices or adoption of processes that rely heavily on inter-asset alignment
(such as performance measures, data standards, recruitment and education requirements).
Such centralised resources or services, however, still have to demonstrate net positive value
compared to alternatives – such as outsourcing - and that the advantages of adopting a
common process outweigh the local opportunity variations of individual Assets.
Nevertheless, the organisational earthquakes resulting from the initial total transfer of
budgets and decision-making to the discrete asset management teams was a key factor in
shaking up old habits, challenging/terminating low-value activities and in focussing on what is
really worthwhile. It helped to break the cycle of just chasing efficiency gains from ‘doing the
same thing quicker/cheaper’ and forced a first-principles consideration of what was worth
doing in the first place.

© The Woodhouse Partnership 2009 3

1.3.2 The Asset Manager
Just like a whole organisation ‘asset’, where the Chief Executive is an ‘Asset Manager’
charged with optimising inputs (expenditures), outputs (production, service, safety etc) and
sustainability, each North Sea business unit Asset required a specific individual with personal
accountability for all costs and resulting outputs over the Asset economic lifespan. Such a
‘single point of accountability’ proved to be a vital part of the business model: it involved
equipping a specific person with the freedom to optimize the mix of capital investment,
operating expenditures, short- and long-term production benefits and compliance/risk
management, but in return for accountability for the net value of doing so. Clearly such a
critical role required not only detailed asset knowledge (of all the systems and sub-systems)
but also commercial acumen, leadership skills, communication skills and risk management
skills. Given the strong engineering/technology and financial/management polarisation of
traditional recruitment, education and career paths, however, the required cross-section of
skills in one person was not common. BP identified 20 natural Asset units in the UK
Continental Shelf (UKCS) portfolio, but only 13 individuals with the requisite range of skills to
become the ‘mini-business CEOs’ (Asset Managers) to lead them. Accordingly, smaller
assets were originally bundled to construct just 13 Assets until such time as additional multi-
skilled Asset Managers were developed. As a matter of note, this recognition of
requirements in BP also yielded a valuable succession planning process that was not
adequately established in Shell. So, as the Shell multi-skilled Asset Managers have moved
on (upwards, internationally or outwards through retirement), their exploration and production
business model in the North Sea has slipped back to a more function-silo’ed and cost-
focussed style.

1.3.3 The Asset Management team

As described above, the team leader or Asset Manager must have clear, single-point
accountability for the capital and operating expenditures and for the performance results for
the asset. He holds the formal, signed mandate that defines the decision freedoms and
constraints, asset management objectives and responsibilities for managing the asset as a
mini-business.
The Asset Manager is supported by the heads and/or nominated representatives of each
function or department. For a North Sea Asset, this would include:
o Production
o Reservoir Development & Geology
o Drilling
o Infrastructure
o Maintenance
o Human Resources
o Contracts and Procurement
o Energy
o Transport
o Finance
o Other focal point personnel who are responsible for any critical external
Service Providers

The Asset Management team is a cross-disciplinary management group, with shared

responsibility for assisting the Asset Manager in optimization and delivery of the ARP. They
work with an overall asset ‘dashboard’ or similar performance scorecard, and have an
obligation to seek the best overall value or asset performance irrespective of localised or
departmental ‘vested interests’.

1.3.4 The Asset Reference Plan

The Asset Reference Plan (ARP or “whole life asset management plan”) is a cross-functional,
integrated picture that considers long-term and short term issues and opportunities, and how

© The Woodhouse Partnership 2009 4

they impact performance, cash flow, resources and profitability of the asset and its support
activities and stakeholders. Strengths, weaknesses, threats and opportunities that can affect
the asset during its operational life are systematically considered and managed. The ARP
provides a shared and consistent basis for quantifying and optimising activities for best net
value to the parent (asset owner) organisation.
The ARP contains key information such as the Asset Strategy, Base Case Plan, End of Field
(Economic) Life predictions and, most importantly, references to more detailed information
sources such as the production forecasts, resource requirement assumptions, services
dependency forecasts, SWOT analyses and sensitivities to possible changes. The ARP also
documents the main assumptions and uncertainties, and summarises the growth and
development opportunities for an asset business unit. In short, it is the ‘single source of truth’
that represents the collective understanding of what the asset is, what should be done to
maximise its whole life value-for-money and how this maximised, sustained value will be
assured.
An ARP is the binding document that translates corporate objectives into asset-specific
realities, opportunities and plans. It covers:
➢ Clarifying the nature, boundaries and characteristics of the Asset
➢ Developing and defining the whole life Asset Management Strategy,
➢ Long term exploitation and production planning (the Asset utilisation view)
➢ Integration of planned actions, responsibilities, assumptions & uncertainties
(including the asset investment and asset care/maintenance views)
➢ Identifying growth opportunities, and risks, and how they will be managed (projects,
innovations, contingency planning & alternative scenarios)
➢ Understanding and optimizing the life cycle costs and production values associated
with these activities and opportunities (the net value-for-money view)
It is used to:
➢ Define the boundaries of the asset at which cashflows and all aspects of performance
are measured
➢ Provide a clear management mandate (the responsibilities, ‘ownership’ and limits of
decision-making within the asset)
➢ Professionalise asset planning, sub-surface studies, facilities design and equipment
selection by providing for better cost estimation, forecasting and "what if'” scenarios
➢ Integrate all process and functional strategies into a single picture, including key
external dependences on service providers.
➢ Integrate the management team and functional contributions – all commit to a single
shared purpose rather than often conflicting departmental goals.
➢ Continuously assess key event dates and critical decision points in the development
projects, operation and abandonment stages of the asset life cycle (the manifestation
of real continuous improvement, including record of why things are being done)

The content of an ARP evolves over time (see Figure 1) from initial design stage (with lots of
assumptions and uncertainties) to infrastructure construction & commissioning, steady state
operations and ultimate decline (including any life extensions, re-usage and/or
abandonment). Nevertheless, this ‘live’ document acts as a maintained central register of the
knowledge, assumptions and plans for the asset, pooling the contributions of all relevant
parties and functional disciplines. Success in any one area of activity is only measured in
terms of the net impact on the total picture.

© The Woodhouse Partnership 2009 5

 Development (typically 1-3 years) Operation (10-50 years) Abandon

Figure 1 Evolution of an ARP during asset life cycle stages

1.3.5 Questions that an ARP needs to answer

The ARP must contain a clear description of the asset and its characteristics (including
strengths, weaknesses, opportunities and threats), the strategic development and production
plan, the key events, risks and assumptions or uncertainties and the component resources
and functional activity plans; it is therefore the asset management “single source of truth”. It
should answer the following vital questions about the asset:
➢ What is it, and what condition is it in, today?
➢ Where are we going with it? (commitments, strategies, objectives, challenges)
➢ Why? (corporate business drivers and policies, Asset strengths, weaknesses,
opportunities, threats)
➢ What to do, by who, when? (life cycle plans)
➢ What value will this generate? (economic and other stakeholder views such as
safety, customer satisfaction, compliance, reputation etc.)
➢ What are the alternative options, risks & contingency plans?

These elements map very closely into the requirements that have been incorporated into
PAS 55, and also align with the elements of asset management documentation that have
since emerged in other industry sectors.

1.3.6 What goes into an ARP?

One of the important learning points of the Oil and Gas Asset Management experience is that
the creation of the ARP is, itself, a very valuable catalyst activity towards the necessary
changes of organisation focus and behaviour. For example, long-term consideration of
resourcing, investments and cost-effectiveness is forced by the need to construct a whole life
production (asset utilisation), financial and ‘economic life’ view of the Asset. All relevant
activities, assumptions and cost elements, such as engineering design, operating scope,
financial values, maintenance requirements, logistics, contractors and materials assumptions,

© The Woodhouse Partnership 2009 6

are needed to construct such a jigsaw puzzle, and all parties can then see the whole picture
(see figure 2).

Other Parties
Production and Planning Govt Depts Logistics
Hydrocarbon Register Unions Contracts
Production reports Contractors Purchasing
Modelling tools Land Owners Transport
Business reviews Service agreements

Operations
Field activities Maintenance
Treatment Plants Equipment Register
Oil Production Maintenance systems
Gas Production Asset Maintenance Management
Inspection schedules
Reference Performance Monitoring
Plant Availability
Engineering Plan
Infrastructure (ARP)
Projects Legal
Power supply Concessions
New installations Licences
Compliance

Development
Reservoir Models Human Resources
Production forecasts Manpower Requirements HSE
Technology Plans Competency Registers Legislation
Development Skills Registers Standards
Drilling schedules Employment practices Monitoring Reporting
Retention Strategies

Figure 2 Inputs to the ARP come from nearly all areas of the business

Once such a full picture is assembled (including recognition of uncertainties and risk
elements), both the immediate priorities and the long-term plans can be made to ensure best-
value delivery. So, for example:
o Capital investment requirements can be prioritized and justified with greater
credibility and relevance
o Human resource requirements can be met with adequate development
(recruitment and/or training) lead-times
o Physical infrastructure, equipment and facilities can be developed, operated
and maintained in line with the whole life business values.
o Future technology developments can be identified, explored and exploited
more flexibly
o New legal requirements, concession/license changes and other constraints
identified and mitigated more readily
o Information and data requirements specified more appropriately in relation to
identified needs (e.g. performance criteria or key uncertainties/vulnerabilities)

The ARP provides a consolidated view of the asset current status (and future plans) at a
specific moment in time. It cannot hold, of course, all the detail about all the activities – if it
did, it would be come totally unwieldy, unreadable and constantly out-of-date. This means
that a distilled summary of each contribution is needed at the ‘total picture’ level, creating a
good and useful discipline for each contributor, to encourage clear explanation of what is
needed in each area, why and when, with what likely or possible outcomes (and risks). Again,
the collective creation of an ARP acts as a valuable catalyst to improve individual

© The Woodhouse Partnership 2009 7

competencies and teamworking: encouraging all to think and present their proposals in more
business-like terms and to communicate in a language that others can understand.
Because the information in each area is being continuously updated, the ‘latest view’ ARP
still needs to be frozen at a specified points so that corresponding assumptions can be made,
net value/logic can be checked and resource implications, costs and plans developed or
adjusted. For example, the production potential for a new reservoir, including 10%/50%/90%
confidence bands, must to be agreed before the facilities requirements, drilling plans and
human resources can be developed accordingly. Subsequent emergence of a new drilling
technology, or changing environmental constraints, would change these assumptions, so the
ARP content will need to be reconsidered and updated – possibly in all respects. For an oil
and gas company, this involves a review of the ARP at least annually plus, of course,
following any significant external event. Other sectors would need to update their asset
management strategies and plans on different cycles or ‘triggers’, depending upon the
stability of the embedded assumptions and the external business influences.

1.3.7 ARP development process

The development of a first ARP is very challenging, particularly in an organisation used to
working in rigid silos (NB these may be functional silos, such as ‘operation’, ‘maintenance’
and ‘inspection’, or asset-type silos, such as ‘instruments’, ‘telecomms’ or ‘civils’) : In such
environments, staff are often not familiar with cross-functional working, long-term thinking or
business value language. In the oil and gas sector (and in others industries subsequently) it
has been found that resistance can be reduced, and confidence built, by breaking down the
development into carefully planned, simple steps, with good programme management,
leadership and allowing enough time for the development of understanding and ‘ownership’
among the contributors. The first phase in particular (usually an intensive training workshop
and coaching period – see figure 3) should involve all the key personnel that will be involved
in developing the ARP and working together in the future to optimise the whole life
performance and value of the asset. Thereafter, the work comprises a mix of parallel activities
(each area assembling, filtering and clarifying their contribution to the total picture) and team-
based mutual explanation, integration, alignment and iterative ‘what if?’ consideration of
alternatives, barriers, implications and contingency plans.

© The Woodhouse Partnership 2009 8

 Corporate New corporate
Vision initiatives,
Mission concessions, Corporate
Values & exploration support & service Other asset
Strategy plans departments plans & alignments

Team Values,
Principles,

Integration & Optimisation checks

Behaviours
Corporate Feed back to
Strategic Asset long term Key
Stakeholder & events Corporate
Plan Strategy
communication
plan Strategic Plan
plans

Asset Risk Draft Final

SWOT register
Base Case ARP ARP
Production &
Development Scenarios Costs
IMPLEMENTATION
Plans (/area) & sensitivity & NPV Asset
& Business
testing forecasts mandate improvements
& • Short term
Corporate scorecard • Long term
Policies, Function & Function
Suppliers, Resource
services SWOTs
HR, IT Requirements
dependencies & Plans
& finance
functions

Initial team Assigned Full ARP team Peer & expert

training & teams work consolidation reviews
workshops

Figure 4 Development steps in building an ARP

1.4 ARP Base Case & risks/uncertainties

The ARP Base Case should describe the current state of the asset and future ‘most likely’
development plans, including only the production and development/cost assumptions that
have reasonable expectations of success or occurrence (in oil and gas terms, this is
described as P50, representing a 50% probability of achievement). This represents the
baseline against which future developments, innovations and improvement options can be
tested for incremental value. The combination of such potential ‘stretch’ improvements
comprises the ‘optimistic’ case (e.g. P10 – with 10% chance of achievement). Conversely,
any threats, vulnerabilities or uncertainties about the achievement of the base line plan are
regarded as risks, which need to be managed (including prevention, mitigation and
contingency plans). The P90 (90% confidence of delivery) represents the ‘worst case’
scenario, assuming such risks and problems are encountered. Figure 5 shows a typical
production forecast example and similar graphics might be used for the capital investment
programme, various operating expenditures, human resource requirements and other
dimensions of the ARP – provided that the assumptions are pooled and aligned (i.e. the base
case expenditures, resources and production/performance assumptions work together, and
similar logic applies to the ‘improvement opportunities’ scope and to the identified risks).

© The Woodhouse Partnership 2009 9

 millions Life Cycle Production forecast for Asset 'X'
Bbls/year

14
Optimistic case
12 Most likely (P50)
10 Worst case

8 Opportunities
6
Risks
4

07 08 009 10 11 12 013 14 15 16 017 18 19 020 21 22 23 024 25

20 20 2 20 20 20 2 20 20 20 2 20 20 2 20 20 20 2 20

Figure 5. Asset Life Cycle performance forecasts

Finally, based on many cycles of developing such a cohesive, Asset-centric view of strategic
plans, a key requirement of the ARP development process has proven to be the
understanding and agreement of what is included in a credible Base Case. It is imperative
that, in compiling the Base Case, only realistic and approved development assumptions are
included, and ‘most likely’ costs estimated. ARP teams should not include immature
proposals which may have a low probability of success, or resource requirements/budgets
that include contingencies and spare capacity. Such project proposals or budget
contingencies should always be handled as possible variants from the Base Case; either as
improvement opportunities (with their individual cost/benefit/risk appraisals) or as identified
risks (with appropriate probability and severity consideration, and prevention/ mitigation/
contingency justification).

1.5 Methods used in manufacturing, process & mining sectors

In most other process, manufacturing, pharmaceutical, mining and other industries, the term
‘asset management’ is still strongly associated with equipment maintenance or asset care.
There are some excellent examples of cross-functional team-working, risk-based thinking and
operational reliability and sustainability initiatives, but they tend to be discrete initiatives to
address perceived performance problems and do not have an over-arching philosophy other
than the desire to maximise profit margins within constraints. Despite this susceptibility to
short-termism and ‘temporary enthusiasms’, there are some undoubtedly valuable lessons
and transferrable good practices to be found in these sectors. The following methodologies
are, for example, increasingly recognised to be part of the asset management toolkit, albeit
sometimes mis-applied or poorly implemented.

1.5.1 Life Cycle Costing (LCC)

The quantification of whole asset lifetime costs, usually in the procurement phase, has a
confused history of occasional spectacular success and fairly frequent lip-service-only
adherence. We are all aware of the risks of purchasing the initially ‘cheap’ option and then
paying high operating costs thereafter; ink-jet printers, mobile telephones are often sold on
this basis, reflecting the profit margins available from sale of consumables and airtime
compared to the production costs of the ‘hook’ equipment. Similar ratios are found in
industrial equipment also – a Boeing 747 jet, for example, costs around $100M to purchase,
but this only represents about 5% of the full ‘costs of ownership’ during its economic life.
‘False economy’ decisions in the capital projects environment are therefore common: it might
seem attractive to shave 5% of the purchase price (it seems a big saving) but, if it results in
just 1%/year ongoing operating costs, this can be an expensive option, even when we

© The Woodhouse Partnership 2009 10

consider the deferred cashflow of the later costs compared to the ‘up-front’ expenditure.

Although we understand the importance at an intellectual level, however, the business

discipline of making decisions based on whole life cycle cost is often eroded by affordability
constraints, short-termism in performance measures (e.g. capital projects to be delivered ‘on-
time, on-budget’) and conflicting vested interests (purchasing expenditures incurred by one
department, operating costs by another). There is also the significant matter of how to
include a ‘cost’ element to represent asset reliability or performance. Many definitions of life
cycle cost only include capital expenditures and through-life operating costs (e.g. energy,
consumables, maintenance), ignoring the impact of functional inadequacies, downtime,
inefficiency that may differ significantly between acquisition options. Some organisations try
to mitigate this by specifying a required minimum service level or availability, which does at
least level the playing field a bit. However this method can also distort the picture, as the
differences in performance-for-price can be crucial considerations in the value-for-money
(maybe an 80% solution for 20% of the price is an acceptable compromise, or the 110%
solution might be worth the premium cost).

The longest standing formal adoption of the principles of whole life costing (a term used
interchangeably with LCC) has been in the defence sector – with military procurement
ostensibly based on the life cycle cost of ownership rather than just the ‘cheapest purchase
price’ option. Back in the early 1970’s the US Department of Defence MIL STD 1388 for
Logistics Support Analysis (now replaced by HDBK 502) introduced a requirement for
operating costs to be incorporated into acquisition decisions. The UK MOD standard (Def
Stan 00-60) has gone further, specifying that “The supportability of design options shall be
assessed and influenced, and the whole life-cycle cost shall be balanced against performance
in identifying the optimum support solution”. This also recognizes the need to consider
value-for-money differences that incorporate performance attributes, but it fails to go as far as
clarifying that identifying the ‘optimum solution’ is not a ‘balancing’ act, i.e. seeking an equality
of significance. It should be the summation of actual costs and ‘lost opportunity costs’ (due to
performance inadequacies, risks etc) and we are seeking the best value combination or total
business impact (see PAS 55:2008-2) over the asset life.

The adoption in other sectors, LCC has been selectively at best - usually involving some
pragmatic compromises such as pre-determining a constant assumed or required ‘life’ to
compare different options (whereas a common difference between an expensive option and a
cheaper alternative is the longevity achieved). Again, the North Sea oil and Gas sector has
done some interesting work in the field, with a ‘Joint Industry Project’ during the 1990’s that
involved over 20 operators, constructors and major equipment vendors in developing a
checklist and guidance documentation for major project whole life costing (now embodied in
ISO 15663). Application of these principles in, for example, the BP Andrew platform is
claimed to have achieved c.30% savings in total costs of ownership. Nevertheless, despite
the very large number of organisations professing to support and apply the principles of Life
Cycle Costing, relatively few can stand up and demonstrate a systematic implementation in
their procurement processes or capital investment projects.

1.5.2 Reliability Centred Maintenance (RCM)

RCM was originally developed within the USA civil airline industry and provides some logic
‘rules’ for determining what type of maintenance strategy is appropriate for different
combinations of component failure mechanisms and consequences. Credited with a ten-fold
improvement in aircraft reliability, it is also particularly suited to complex process or
manufacturing plant where there are many potential failure modes to be considered. It
provides a structured method, using seven key questions, to consider equipment functions,
potential losses of function (failures and their consequences) and any warning signs. In this
stage, it is much like the long-established disciplines of Failure Modes and Effects Analysis
(FMEA), with some additional consideration of the equipment’s function in the first place. In
the RCM process, however, a decision tree is then used to select appropriate predictive,
preventive, detective (failure-finding) and mitigation actions. This decision tree has evolved
over the years and, although the JAE 1011 standard produced by the Automotive industry is

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the most known, some of the industry variants have added steps and options that were not so
commonly encountered in the aircraft environment (such as lubrication or painting options to
extend equipment/component life).

The rigorous RCM process requires a multi-disciplined team to look at the very large number
of components and their failure modes, so it is very labour-intensive. As a result, many RCM
implementation programmes in manufacturing and process environments during the 1980’s
and 1990’s ran out of steam and failed to deliver the promised benefits. More mature
understanding in the last decade has led to much more selective use of the method, using a
criticality analysis of assets and their functions to determine which systems should be studied
in the first place, and to what level of detail.

There is also plenty of debate on the various flavours of RCM that have emerged, particularly
in the validity of ‘streamlining’ or reversing the process (i.e. starting with existing maintenance
tasks, and challenging their justification by looking for failure modes that might justify them).
Defendants of the ‘traditional’ approach argue that such short-cuts introduce risks of oversight
– allowing potentially significant failure modes to go un-analysed – and indeed some
streamlining methods sacrifice integrity for cost- and time-savings. Criticality-selective
studies, however, are largely accepted as necessary, and my own observations (a sample of
about 75 implementation programmes) is that full RCM rigour is worthwhile for about 30-50%
of the installed asset base if it comprises a mix of mechanical/electrical and rotating/static
systems. Higher dominance of static equipment and/or electrical systems leads to lesser
value from RCM-level review (and Risk-Based Inspection or Condition Based Maintenance
reviews become more appropriate). Lesser rigour methods (e.g. Reverse-RCM) and the use
of templated studies can account for the remainder of lower criticality items with little risk or
performance penalty but at a fraction of the analysis cost.

It should also be noted here that there are also some very unsafe messages sometimes being
taught as ‘facts’ within RCM training programmes – such as the proportions of components
that exhibit particular failure patterns. A study of 23,000 aircraft components in the 1960’s is
sometimes quoted as a universally applicable distribution of the ways in which components
fail, whereas other asset systems and industrial environments will have a very different mix of
failure patterns representing ‘infant mortality’ or maintenance-induced, random and
degradation-related risks. Similarly, a sometimes unnoticed weakness within RCM is the
reliance on subjective judgement to assign appropriate inspection or maintenance intervals to
the emerging tasks; the guidance that does exist is very shallow and can lead to inappropriate
budgeting, resourcing and downtime requirements.

Nevertheless, the core value of RCM discipline is undeniable: it is a concise summary of the
questions that need to be asked in order to determine what type of maintenance is likely to be
appropriate. Appropriately targeted to critical assets and asset risks, it has both reduced
maintenance costs and improved system reliability in many organisations. Where sensibly
applied in the process and manufacturing sector, it is credited with reductions of maintenance
costs in the 20-40% range, while simultaneously yielding system availability improvements of
between 2 and 15% compared to traditional ‘one size fits all’, fixed-interval maintenance
strategies.

1.5.3 Risk Based Inspection (RBI)

RBI provides a systematic criticality assessment of static equipment, and the choice of
appropriate condition monitoring methods. Documented in the American Petroleum Institute's
Recommended Practice 580, it defines and codifies the different risks and degradation
mechanisms found under different operating conditions, equipment design, metallurgy etc.
and the effectiveness and appropriateness of different inspection or condition monitoring
methods. Using a score-based ranking of failure probabilities and consequences, it yields four
levels of integrity management rigour and recommended inspection methods.

It is heavily hydrocarbon processing-focussed (presuming hydrocarbon containment, with

various corrosion & other deterioration mechanisms, vessel and pipe materials characteristics

© The Woodhouse Partnership 2009 12

etc), but cross-industry variants are already appearing. Its strengths lie in the systematic
nature of the survey, the 'probability x consequence' view of criticality, and the mass of
technical data available on corrosion rates, materials properties and inspection methods (in
the Base Resource Document RP 581). It is notably weak, however, in determining how much
to spend on the inspections/ condition monitoring (where cost/benefit/risk trade-off must be
considered), and in pointing to alternative risk-treatment options (where RCM is strong).
Nevertheless it has proven to be a big step forward in plant integrity management and, as part
of the improving maturity of industrial risk management (including the UK COMAH
regulations, ‘safety case’ approach and ALARP principles of proportionate risk control versus
costs) it has allowed greater transparency and trust to develop with safety regulators, thereby
allowing significant extensions in mandated inspection intervals and plant shutdown cycles
etc.

1.5.4 Total Productive Maintenance (TPM) and Lean Manufacturing

TPM, Lean Manufacturing and TOC represent a group of related excellent asset management
practices and principles, widely adopted in the manufacturing sector and in some process
environments. TPM and Lean principles were originally developed within Toyota to improve
the operator-maintainer teamworking, focus on the total picture (overall effectiveness and
efficiency) and customer value-for-money. So effective were these techniques in raising
productivity, in production performance and in stimulating continuous improvement activities,
they were soon copied widely. Dupont, Exxon, Kodak, BP, Pirelli and others have adapted
and adopted TPM with great success. Nowadays there are few significant manufacturing
companies that have not got some form of TPM and/or Lean Manufacturing at the heart of the
business.

TPM contributes five underlying strategies:

➢ Maximise Overall Equipment Effectiveness (OEE)
➢ Establish a comprehensive planned maintenance system covering the whole
equipment life
➢ Involve all departments that plan, use and maintain equipment
➢ Involve all employees from top management to front-line workers
➢ Promote planned maintenance through motivation and small autonomous work teams

All these elements are all in line with modern optimised asset management thinking, and they
encourage attention to detail, a whole life cycle view, cross-functional collaboration and a
more holistic OEE view (although this measure does not adequately incorporate risk and
sustainability attributes). This is why the TPM title is somewhat misleading – it is much more
than just improving awareness and role of the maintenance contribution.

I also group the Lean Manufacturing principles in this area of observed good practices within
the manufacturing sectors (and could extend the list to include Just-In-Time, the Theory of
Constraints, Kanban, Kaizan and a host of contributory techniques). Lean Manufacturing
shares its origins with TPM in the Toyota Production Systems, and contributes a useful
checklist of seven areas in which to seek and eliminate waste. It also reminds us (like Total
Quality Management covered below) of the need for strong and sustained customer focus.

The many checklists, motivational triggers, organisation development messages and

performance criteria from this family of ‘good practices’ have generated substantive
productivity and efficiency gains for those who have persisted beyond the ‘temporary
enthusiasm’ level. They tend to be rather methods-led (‘following the steps’) rather than self-
sustaining and adaptive, so they can be dependent upon continued championing by senior
personnel and/or upon ‘institutionalising’ the requirements to ensure continued adherence
and motivation. Nevertheless, the success stories far outweigh the failures, so the asset
management environment is much richer for their contributions.

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 1.5.5 Total Quality Management (TQM) and Six-Sigma (6-)
These cover a range of old (from 1950’s), proven and thoroughly respected bundles of
'continuous improvement' techniques. From Deming’s quality management successes in
Japan during the 1950’s to Motorola’s more recent re-packaging in the ‘Six-sigma’
manifestation, these methodologies represent a push for quality in all process steps, in
greater client-focus and in teamwork. They work through multi-disciplined analytical and
improvement activities, using strongly fact-based reasoning and are excellent catalysts for
communication, clearly-focussed objectives and problem-solving. The associated toolbox
reflects, perhaps, the predominant usage in high volume consumer goods production – with a
strongly statistics-based analytical approach (Statistical Process Control methods). As a
result, some of the adoption in high-integrity infrastructure management environments of 6-
has been rather inappropriate (“a solution looking for an appropriate problem”). Similarly there
are some quality management systems that are decidedly cosmetic in the implementation –
obtaining an ISO 900x certificate by having thick quality management manuals on the shelves
rather than truly embedding the culture and habits of continuous improvement and customer-
focus.

1.5.6 Root Cause Analysis & Reliability Analysis

The data analytics part of asset reliability is a confused fighting ground in process and
manufacturing sectors. On the one hand, increasing availability of asset condition and
performance data, and maintenance or reliability history means that more and more is known
about the equipment. On the other, the analytical weapons and understanding of what can be
learnt is very patchy and, in some cases, fundamentally unsound. This is due to the
underlying complexities of the subject as well as the poor availability of relevant education in
normal engineering or technical training programmes. In summary, the process and
manufacturing sectors are in the middle of learning the following lessons:

➢ More data is not always good news – in some cases it simply yields more confusion
➢ Knowing how the information will be used is necessary before determining what data
to collect to supply such information
➢ Structured capture and use of existing ‘tacit’ knowledge (of subject matter experts:
often front-line employees) is often perfectly adequate
➢ Root cause analysis training and discipline is essential to avoid leaping to
conclusions, and not just in the major ‘post-mortem’ cases.
➢ Reliability data is good for identifying what? and where? of problems, but extremely
rarely helps with answering the ‘why?’ questions.

1.6 Conclusions
It can be seen, therefore, that the oil and gas, process and manufacturing sectors span the
extremes from fully-developed, integrated and even world-leading asset management
business models, to a patchwork of component technical or methodology ‘fixes’. The cycles
of enthusiasm and decay are certainly evident, with a fair amount of reinventing, or at least
rediscovery, of the wheel. Nevertheless an emerging consensus is slowly becoming apparent
and, providing we can see through the over-selling of contributory elements, it is gratifying to
see that PAS 55:2008 embodies many of these conclusions. There is not enough cross-
pollination between industries sectors yet, as most industries are still strongly tribal and prefer
to compare ‘like with like’ in their benchmarking activities, professional networking and
journals/conferences. Asset management good and ‘best’ practices are, however, highly
transferable across different asset types and industrial environments, albeit with different
stresses and implementation flavours. This chapter has, I hope, shown you just a little of
what others are doing, and given you a feel for the scope to learn from such environments.
John.woodhouse@twpl.com

© The Woodhouse Partnership 2009 14

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