Below par US capital projects provide warning to petchems developers
Almost two thirds of the major capital projects in the United States do not meet their budgets and schedules, and most industry executives are not happy with the performance of their systems, according to Brett Schroeder, managing director of strategic consultancy Asset Performance Networks (AP-Networks).
Some 72% of more than 800 capital projects (over $25 million) in AP-Networks’ database executed since 2002 have failed to satisfy all of their performance goals (+/10% of budget, +/- 10% of planned schedule and no major operability failures after start-up), Schroeder said during Petrochemical Update’s Engineering & Construction Conference on June 16.
API services oil, chemical and energy companies in the Americas, Asia, Europe and the Middle East.
One in four projects in the firm’s database grossly exceeded one or more of their success criteria metrics, meaning that they either overran their budget or schedule by 30% or had a major operability failure that prevented them from achieving steady operations, according to Schroeder.
“This record [shows] that there’s a lot of opportunity for improvement,” he said while drawing parallels with the current slate of North American petrochemical construction projects, many of which are scheduled to come on stream around 2018-2019.
A recent AP-Networks survey of eight US refining megaprojects (over $1 billion) reconfigured in recent years to accommodate the increased crude capacity from Canada’s oil sands indicates that almost all of them suffered major problems, even though they had governance and assurance processes in place, including benchmarking and external reviews.
Six of the megaprojects built since 2006 had significant cash flow constraints and were delayed by more than a year. At least four experienced a regulatory delay. Many of the projects identified a lack of major project experience and used modular construction to overcome local labor constraints.
The average cost overrun on six of the projects for which there is publicly available data was more than 30%, while none achieved the mechanical and completion cost within 10% of the initially announced budget.
The US petrochemical industry is facing similar risks as it prepares to add some 10 mtpa of new ethylene capacity by decade’s end amid a heated downstream construction market, looming skilled craft labor shortages and increasingly complex projects involving multiple contractors and locations.
“The challenge for the [petrochemical industry] is to avoid [this performance record],” Schroeder said.
Controlling construction costs will be key to US petrochemical producers in the next five years, especially to companies that will be exporting much of their production and need to offer very competitive prices. Margins are occasionally very tight, and companies need to ensure construction costs remain under control if they are to recoup their capex investment.
“Increasingly, as we look at the project framework of what the root cause of success and failure is, organization capabilities come into the forefront,” Schroeder said.
“Companies are struggling to get the right level of skill, definitely around craft and labor, but also project engineering and project management talent. When the industry gets a surge in project work, it struggles to execute.”
According to Schroeder, traditional project governance and assurance processes are often misreporting the true state of front-end loading (FEL), or project definition, and instilling a false sense of confidence in decision makers, particularly about the quality estimate and schedule.
He said that checklist-driven approaches to front-end deliverables, the heavy focus on front-end at the expense of post-full-funds authorization activities, inexperience in managing big projects, lack of effective follow-through and mitigation plans to risk registers, misalignment among stakeholders and inaccurate estimates are among the most common pitfalls in capital projects.
The current crop of petrochemical projects on the US Gulf Coast are also facing many “non-traditional risks,” such as decreasing labor productivity and shortage of local skilled craft, according to Stephen Cabano, president of project management consulting and training firm Pathfinder LLC.
The latter issue, in particular, is forcing more and more companies to incorporate per diem rates in their budget estimates in addition to the more traditional hourly rates.
Per diem rates are currently the most volatile aspect of worker compensation in industrial construction projects on the US Gulf Coast, especially for experienced craft labor, which is in short supply and seeing wage escalations.
Wage rates for welders, for example, were up 7% in 2014 in the Greater Baton Rouge in Louisiana.
At the same time, the current per diem utilization in the area is holding stable around 40%, while per diem rates range from $65 to $100, for an average of about $72, according to Robert Clark, project director, US Mega Projects at Sasol.
Lessons learned early
Petrochemical owners are starting to apply different strategies to identify risks and apply lessons learned in the early phases of construction projects amid a resource-constrained project environment.
TPC Group, a Houston-based provider of C4-based products and services, is “doing a paradigm shift to take the lessons learned and bring them forward into the FEL 2 and FEL 3 and to the FEED stage” and produce detailed whitepapers, Nathan Heimeyer, staff project manager TPC Group, said during Petrochemical Update’s conference.
TPC Group is also developing a new searchable live database, which has metadata with lessons learned from the FEL 2 and FEL 3 phases for all its projects, to mitigate construction and operation risks.
The key to taking a lessons learned approach, according to Nigel Carling, project director at Chevron Phillips Chemical, is to collect and coordinate feedback from both the project execution teams and the long-term operations teams soon after a start-up is commissioned.
To mitigate risks, Chevron has also begun convening project managers, operations leads, chief engineers and business units very early on in the project’s life to define the frame and scope of each project. Previously, operations and business development teams stepped in at a much later stage, which increased the risk of late changes and overruns.
Moreover, to maintain communication among multiple contractors and vendors at major projects, Chevron now requires all companies in the value chain, regardless of where they are located, to strictly follow the exact same standards and execution processes, which are defined centrally as early as FEL 2 and FEL 3, Carling said.