Minimizing Risk and Restoring Confidence in Energy Capital Project Investment

Minimizing Risk and Restoring Confidence in Energy Capital Project Investment

 
Minimizing Risk and Restoring Confidence in Energy Capital Project Investment
Minimizing Risk and Restoring Confidence in Energy Capital Project Investment


As oil prices have climbed over the last year, the number of stalled capital improvement projectsfinally cleared for takeoff has climbed with them. According to industry analysts, investment in oil and gas projects was cut in half from 2014 to 2016, but is now projected to grow by 37 percent through 2020.

That’s good news, of course. But it only underlines the importance of a fundamental truth: In energy capex, as in every other kind, the number of attractive investment opportunities will never grow as fast as the opportunities for them to fail.

Consider this shocking fact: More than 65 percent of all big projects – defined as more than $1 billion – fail, when failure is defined as a cost overrun of more than 25 percent or a completion deadline missed by more than 50 percent. Rolled up, it amounts to nearly $430 billion wasted annually in capital project excess.

Perhaps that’s why the market these days seems to reward the companies that show discipline and frugality in their spending.

The success of ConocoPhillips suggests that investors are looking for something different from big oil companies these days,” this story from The Wall Street Journal reports. “An increasing number of investors want conservative, stable returns—not unlike why some look to the utility industry.

So how can companies bring financial discipline to their big capital projects? How can they help contractors, producers and their financial partners stay on time and on budget? One way is to fundamentally transform the way projects are bid, engineered and executed. That’s no simple task, of course. And yet, it involves the adoption of just three basic principles – eliminate costs, reduce complexity and embed more flexibility to accommodate late changes.

Here’s an example: A big oil and gas company planned not long ago to erect a fixed platform in turbulent ocean waters. Roles would be required for several international teams and multiple manufacturers – that much was obvious. In turn, the execution complexity of the platform’s automation systems would be immense and the project changes numerous. Yet global market conditions dictated tight cost controls and on-time scheduling.

A remote virtual office (RVO) for cloud engineering provided one part of the solution. An RVO  enables project teams, clients and suppliers to collaborate, independent of location, in virtual engineering and testing environments. 

With assigned privileges, team members can view project files, contribute knowledge, configure the automation system and build the project, all in a collaborative, virtual environment – without physical hardware.The architecture encompasses multiple engineering centers working with server farms around the world to provide intelligent redundancy and virtual engineering systems.

As helpful as this may sound, it’s even more impactful when you consider current workforce trends. Many companies have either eliminated or radically reduced the size of their internal automation and control engineering departments. At the same time, skilled labor is often scant in the areas where plants are being built, and skilled workers at many firms are aging out of the labor force. 

RVOs solve these problems handily. Here’s what also proved critical in the case of the offshore project I mentioned: a flexible engineering strategy, designed to accommodate the kinds of late changes that so often doom these projects to hideous delays and overruns. 
 
For this project, the hardware was shipped to the jobsite before the software was finalized on a digital twin of the plant. That removed construction delays by eliminating the often nightmarish task of retrofitting the hardware in the field. Flexible “electronic marshalling” technology was used instead – no retrofitting required.

Everything fell into place, on time and on budget. That kind of approach can bring certainty to the design of big projects of almost any description. Using automation technology as a strategic lever overcomes the usual sources of project failure and results in improved performance of the entire project. 

Its elements include greater focus on standardization, utilization of new technologies and project methodologies, strategic sourcing, and bidding strategies that reduce costly change-orders. 

For decades, the industry has suffered from costly project overruns and delayed return on investment for capital investments. If we tackle these problems together, our future can be different. 

The Author : Jim Nyquist

 

About : 
Jim Nyquist is a technology and engineering executive with over 35 years of experience. Jim has served as Group President, Systems and Solutions for Emerson Automation, Solutions, a $10 billion business unit of Emerson since 2010. Prior to this Jim held positions as the President of Global Sales and President Europe, with Emerson Process Management. Jim Nyquist is a member of Emerson’s Process Executive Group, and a Group President for Emerson. Jim holds a bachelor’s of science degree in Mechanical Engineering from Kansas State University and resides in Austin, Texas.
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