Small-project owners urged to prioritize value over cost and schedule
Prioritizing small-capex downstream projects can be as complex as for large projects, and small-project owners should focus on seeking the highest-value opportunities, Shawn Hansen, manager of capital project consulting for Asset Performance Networks (AP-Networks), said during the Petrochemical Engineering and Construction 2016 conference in New Orleans on June 7.
Speaking at the plant-based and small projects track at the conference, Hansen discussed ways to measure and improve the performance of smaller projects in the U.S. downstream energy sector.
Though they are mainly about sustaining capital, the number of plant-based capital projects in the U.S. is substantial, so selecting which ones have priority is important to capturing the best opportunities and growing overall business value, Hansen said.
While most of the ethylene, methanol and propylene capacity additions in the petrochemical sector are in the megaproject range, spending in the U.S. refining sector in the mid-term will be mostly driven by smaller, quick-return optimization & reliability projects, facility upgrades to address octane loss issues, as well as gasoline production increases as domestic refiners take advantage of cheap domestic feedstock, comply with environmental regulations and export more petroleum products to meet rising global demand.
Despite narrower refining margins in 2016 compared to 2015, U.S. petroleum refinery capital spending will remain robust in the next two years, with about $9.2 billion worth of active capital projects (scheduled for construction start in 2016-2018) planned for 2016 and $9.3 billion in projects in 2017, market research firm Industrial Info Resources (IIR) said earlier in 2016.
Some $8.1 billion worth of active projects in the U.S. with a construction kick-off in 2016-2018 are projected to be new builds and about $1.7 billion will be unit additions, based on the pipeline of announced projects, with the rest of the spending going into plant expansions and other in-plant capital.
What constitutes small, medium and large projects varies per company, however HollyFrontier have said the company would likely focus on the small-to-medium projects costing $20-30 million. Meanwhile, major integrated producers like ExxonMobil often define small projects as those under $100 million.
The most common risks to delivering small capital projects usually come from the early pieces of the project, such as the regulatory changes and dynamic business conditions that projects need to capitalize on, Hansen said.
Another challenge to planning is the big backlog of small projects, which stretches engineering and construction capabilities, as well as the shifting drivers for these capital investments, he added.
“If we look at all the challenges, we see that the prioritizing [smaller, plant-based] projects can be quite complicated, even more complicated than in the large projects,” Hansen said.
Almost 25% of small and plant-based projects do not deliver on their potential, whether due to technical issues or changing business conditions, according to Hansen. At the same time, some 25% of small projects also overrun their schedule by 50% or more, he said.
Moreover, the performance of plant-based projects has effects beyond the individual project itself. The amount of of capital project work (measured by the number of labor hours) during turnarounds has been rising recently, making cost and schedule performance more unpredictable. Cost overruns and schedule delays vary between 30% and 40% on average on turnarounds that have more than 50% of capital project work, according to Hansen.
AP-Networks’ database of medium and high-complexity turnarounds executed since mid-2012 in the onshore and offshore upstream, gas, refining, chemical, and power sectors shows that 32% were successful while 68% failed to meet their project goals (including 40% that AP-Networks categorized as “train wrecks”).
The main drivers for poor performance tend to be late project deliverables, such as late engineering work packages, late materials, or construction spilling into the turnaround, among others.
It is very hard to measure cost competitiveness of individual small projects relative to the industry, and the exclusive focus on individual project cost and schedule performance often misses the big picture, Hansen said.
Since the most important time to influence a capital project is early, if companies focus exclusively on evaluating projects on their cost and schedule compliance, they will be measuring practices and outcomes that come after a lot of other decisions have already been made, he added.
According to Hansen, project owners should instead evaluate metrics that focus on the overall portfolio and align with the wider business needs at the appraisal phase, such as:
• What benefits their project portfolio delivery
• Systematically identifying the right projects
• Effective and competitive site organization relative to comparable sites, particularly related to sustaining capital
• Percentage of capital spend on payback projects versus environmentally-driven projects, etc.
• Number of project managers relative to overall capital spend
• Effective work processes and interfaces
For projects that are in the planning phase, many companies can still use the same project planning practices as on bigger projects, but they need to be implemented in light of the wider project and business environment.
Project owners need to provide more allowance for front-end planning and procurement on their smaller projects since their schedules are more condensed, according to John Fish, director of project support services at Ford, Bacon and Davis, LLC. Owners also need to put their most experienced managers on the smaller projects as they often have to manage multiple small packages simultaneously, he said.
Smaller projects require more flexibility in planning and execution since they tend to be more schedule-driven, often don’t have as many resources supporting execution and, despite their smaller total investment cost, still follow the same overall project execution disciplines and could still have a big knock-on effect on the overall business if bad execution causes a lot of rework, James Elder, global procurement director at The Dow Chemical Company, said during the conference.
As owners and contractors in the current low-oil market environment look at cost-saving measures and extra due diligence when planning for their projects, many will also find efficiency gains in the design of a lean scope, according to experts at the conference.
Several years ago, BASF gathered a cross-functional team from engineering, operations, maintenance, construction and some ancillary support crafts for a value-stream mapping session, a lean tool to map out the team’s planning processes and ways to improve its scope definition for small and plant-based projects, said Bruce Babb, area manager of projects, CI/ED Plants at BASF.
The process confirmed the need for a conventional stage-gate process but also identified about 80 different ways to improve its front-end planning and tailor it to the needs of smaller and medium brownfield projects.
To stop frequent schedule and scope creep at its small capital projects, several years ago Lubrizol Specialty Products adopted a more flexible and compressed stage-gate process since the larger company process was too cumbersome for its smaller capital investments, said Michael Peart, manager - Major Projects at Lubrizol Specialty Products Inc.
The new process allows the company to cherry pick the best strategies at each stage gate for each project. To improve its scope development, Lubrizol also put an emphasis on gathering multi-functional teams from operations, maintenance, quality assurance and engineering early in the project to define and develop the project scope. That allowed the company to design a stage-gate process that all project disciplines could buy into.
To rate the scope definition on its smaller projects, GIS, Inc has created its own project definition index as an alternative to the Construction Industry Institute’s (CII) Project Definition and Rating Index (PDRI), which is most commonly used at larger projects, said William J. Clouatre, senior vice president of Onshore Construction, at GIS, Inc.
While the CII’s PDRI is based on a comprehensive list of 70 scope definition elements, GIS’s index – which is typically conducted by a third party – provides a score sheet for defining small projects, engaging all stakeholders and augmenting the stage-gate process based on 41 items associated with scope definition.
According to preliminary results, the leaner index developed by GIS has improved the process on small capital projects on a cost basis by about 15% and on a schedule basis by about 16%, Clouatre said.
Read highlights from the major projects track at the Petrochemical Engineering & Construction 2016 conference.