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ETCA_6

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  • 1. 1 Page
  • 2. EMERGING TRENDS IN PROJECT MANAGEMENT FOR COMPETITIVE ADVANTAGE IN OIL AND GAS SECTOR PROJECTSBalasubramanian R - General Manager, Engineering, Saipem India Projects LimitedSivakumar V - Manager, Engineering Management, Saipem India Projects Ltd
  • 3. Contents1. Abstract ........................................................................................................................................... 42. Introduction ..................................................................................................................................... 43. Challenges: ..................................................................................................................................... 54. Project Conceptualization ............................................................................................................. 5 4.1 Emerging Trends ................................................................................................................... 5 4.2 Challenges .............................................................................................................................. 6 4.3 Future Trends ......................................................................................................................... 65. Tendering ........................................................................................................................................ 6 5.1 Emerging Trends ................................................................................................................... 7 5.2 Challenges .............................................................................................................................. 7 5.3 Future Trends ......................................................................................................................... 76. Bid Estimation and Bid Management.......................................................................................... 8 6.1 Emerging Trends ................................................................................................................... 8 6.2 Challenges .............................................................................................................................. 87. Engineering Management ............................................................................................................ 9 7.1 Emerging Trends ................................................................................................................... 9 7.2 Challenges .............................................................................................................................. 98. Procurement ................................................................................................................................. 10 8.1 Challenges ............................................................................................................................ 10 8.2 Future Trends ....................................................................................................................... 109. Construction .................................................................................................................................. 11 9.1 Challenges ............................................................................................................................ 1110. Stake holder commitment and cooperation ........................................................................... 1111. Cost Control ................................................................................................................................ 1112. Future .......................................................................................................................................... 1213. Author’s Profile: .......................................................................................................................... 123 Page
  • 4. 1. AbstractDespite economic downturn, the steady price of oil above US $ 100 / bbl and surging demand forenergy has ensured mega investments in Oil and Gas sector. However the sector is witnessing largerprojects and program in terms of capacities, capital investment and technical complexity. Oilcompanies have moved away from reimbursable contracts to Lump Sum EPC and Lump SumTurnkey projects for execution of these mega Projects with intent to reduce cost, project schedule andto minimize their risk exposure. This has thrown a lot of challenges and has changed the way theprojects are executed. This paper analyses the impact, challenges and how the industry hasresponded to retain their competitive advantage through the life cycle of project execution. The trendsin India and opportunities for India are also discussed.2. IntroductionIndustry Trends: Despite the economic downturn towards the middle of the last decade, investmentshave continued in the Oil and Gas sector. This is the attributed to steady oil price above US $100 anda growing energy demand. Demand for Liquefied Natural Gas (LNG) has grown since unfortunateaccident and natural disaster in Japan.In recent years the size of the projects in this sector has increased many folds, with associated capitalinvestment. Today in this sector the projects are running into billions of dollars. About a Trillion US $worth investments are planned in the next 10 years, as per Industry reports. Major investments areplanned in Middle East, particularly in Saudi Arabia, Iraq and Kuwait. Oil exploration, processing inupstream and downstream sector is emerging with larger projects and program in terms of capacities,capital investment and technical complexity. For example Sadara Petrochemicals (Earlier called RasTanura Petro Chemicals) in Saudi Arabia, is planned with an investment of US $ 25 billion. Inupstream, Shah Gas development in Abudhabi is planned with an investment of US $ 10 Billion.Australia is investing more than US S 200 billion in Upstream LNG projects. Total and INPEXannounced the $34 billion dollar Ichthys liquefied natural gasproject in Australia in January 2012.InIndia Reliance Industries is expanding Jamnagar facilities in a big way and investing heavily inupstream offshore. Indian Oil is building a mega refinery project at Paradip. Many LNG RegasificationTerminal projects have been announced, each of them with an investment of about Rs 4000 crores.But thanks to economic downturn the way of doing business has changed completely.4 Page
  • 5. In the past, the projects in this sector were reimbursable with the few sections of the plant executedas EPC/ LSTK by specialist contractors. Owners have started to look for reduced completion time,with maximum risk shifted to contractors.Recently large, complex, high value projects in these sectors have started to emerge as Lump SumEPC (Engineering, Procurement and Construction) and Lump sum turnkey (LSTK) Projects.Certain downstream programs in this sector are also emerging as Build Own, Operate Projects. SouthKoreas and Japanese companies have been more successful in the emerging scenario and havecornered a large proportion of the EPC / LSTK contracts.3. Challenges:As the projects are getting larger and complex, it is inevitable that there will be challenging schedule,increased risks and opportunities for both the operating companies and contractors.In order to be successful in the emerging EPC/ LSTK execution mode of the projects both contractorand the Owners (operating oil companies) will be required to reengineer the way the projects areexecuted.Through the life cycle of projects, how this has impacted the project execution is analyzed in thispresentation. How companies have managed to retain their competitive advantages is narrated.4. Project ConceptualizationProject conceptualization is done by the operating oil companies , subsequently the FEED (Front EndEngineering Design) is prepared by a design engineering contractor and the detailed designing isdone as a part of Lump Sum EPC contract.A good FEED with sufficient definitions of the facility, with scope clarity and expectations of the stakeholders is of paramount importance.4.1 Emerging TrendsOwner operating companies are facing a challenge to reduce the cycle time between the investmentdecision and the award of EPC contract as a part of overall compressed implementation schedule ofthe projects.As a result of this, not fully developed FEED is tendered, and responsibility for providing a safe,operable facility meeting the performance requirement and the associated risks is shifted downstreamto EPC contractorsThe bid preparation time for a large complex facility has drastically reduced and typically it isanywhere between three to four month from the time of tender out to bid submission.5 Page
  • 6. 4.2 ChallengesThe emerging trend relies upon contractor’s expertise, and ability to develop a preliminary design in ashort time frame to provide a competitive lump sum bid.The challenge faced by the contractor is To carry out preliminary design and come up with quantities for pricing Mobilize adequate resource for carrying out the pre bid engineering and bid estimation in a short duration Increased bid preparation costThese challenges are being met by strength of the technical expertise in a particular area like off shore, deep water, refining etc., ofthe contractor Prior experience on the owners expectations, procedures Constant bench marking of the particular type of project Alignment among contractors by way of joint ventures to synergize the expertise Diversify into related areas for wider spectrum of opportunities4.3 Future TrendsThe contractors will have to gear up for development and standardization by way of a generic designof the facility and a wider data base which will be tailored to suit the requirement of each bid.Alignment and long term relation with other Contractors and Owners for synergyAs the FEED design, and endorsement is shifting to the EPC contractors, owners will be willing to payfor the FEED endorsement to EPC contractors5. TenderingIn the past most of the projects were reimbursable and managed by the operating companies whereinE&C portion was performed by specialist contractors and entire procurement by the operatingcompanies.6 Page
  • 7. 5.1 Emerging TrendsIn the emerging scenario tenders are lump sum and re-measurable or reimbursable portion of theentire value is very limited. Risk -The emerging EPC/LSTK projects, the entire risk is shifted to the contractor in terms ofdesign, procurement, construction and project management. Financial capability - As the projects have gone up in size the financial ability of the contractor willhave a major role in prequalifying the contractors Vendor selection The operating companies are forced to a careful selection of EPC contractors asthe success of the project depends on the financial, technical and management ability of thecontractor. Interface management - Owner operators are shifting to multiple EPC/ LSTK package mode bysplitting the project into number of EPC/ LSTK packages. This mode of project management hascreated a complex interface management and a position of Interface Manager is emerging to managethe complex interface.5.2 ChallengesIn the emerging scenario the Owner companies challenge is to award to a financially soundContractor with technical expertise. This will shift the current position to sellers’ market and attractonly fewer bidders.These challenges are being met by Alignment by way of Joint Ventures, Partnerships of contractors to capitalize, compliment strengthsand expertise. Project Managers are trained to adapt to different company cultures, methods of working, differentgeographical locations, of JV partners and deliver the project. Mitigation is by encouraging financial stake for the contractor in the project. This is emergingespecially in remote, hard geographical area projects where fewer contractors have the capability todeliver the project.5.3 Future TrendsTrend will be to shift towards risk sharing approach. EPC contracts will shift towards target price withrisk and reward scheme where over runs and under runs are shared rather than the entire risk carriedby contractor and eventually projects will be delivered with optimum cost.Project Management professional will be required to be mobile, work in multi-cultural team and adaptto changing way the projects are awarded and will be executed.7 Page
  • 8. 6. Bid Estimation and Bid Management6.1 Emerging TrendsAs the projects are larger and complex, in order to be competitive, bid estimation and tenderinginvolves substantial cost spent on preparing the bid. The difference between competitors in EPC bid is emerging to be very narrow The margins are getting smaller. A very careful due diligence are being done to arrive at bid or no bid decision. This process is emerging to be more stringent in Oil and Gas sector as the order book position is no more an indicator of the health of the company.6.2 ChallengesThe emerging trends are: Shorter bid preparation time High risks Increased bid preparation cost, Tighter margins for the contractors Lengthy pre bid clarifications (typically 2000 question answers) Very challenging exercise to align the bids, for the ownerThese challenges are being met by: The challenge of bid preparation time is managed by standardized design, maintaining a up to date technical data base Risk management by past experience and awareness of the geographical area, and owners expectations Mobilizing pre bid engineering resource from India and other countries Alignment with suppliers and construction subcontractors. This is emerging to be very critical as without this support estimation and providing optimum competitive cost would be very challenging. Pre agreement with equipment suppliers are emerging to be a must for EPC contractor, otherwise vendors/contractors are reluctant to support the bid process. Fit for purpose design is emerging as the difference between winning and losing the bid Induction of Project Manager during the bidding phase to maintain continuity during execution. Hence Project Manager role is getting wider and complex and demanding to be involved in strategies right from bid stage. By adopting a transparent fair bid management and change management practices the owner operators are willing to accept fit for purpose design, accept competitive sources for procurement from Asian countries8 Page
  • 9. 7. Engineering ManagementIn oil and gas sector the overall cost of engineering is a very small portion of the project cost, butmanagement of engineering is a very crucial aspect.Engineering management has undergone tremendous change in the recent years7.1 Emerging TrendsEngineering software has made the design faster and accurate and provides capability to analyze andoptimize the design. This has resulted in reduction of design safety factors which were added due touncertainties and produce an economical design and gain competitive advantage.With the available engineering tools, it is possible to share the work across multiple engineeringcentres across the world. This helps to reduce overall engineering schedule as engineers are workinground the clock.Another emerging trend in engineering is that, engineering centers are being operated as productioncentres, similar to a manufacturing unit, between 60 and 80% of detail engineering stage whereengineering is accelerated to produce most of the documents. During this phase multi shift working isemerging to utilize the infrastructure in terms of software licenses, IT optimally.7.2 Challenges The engineering resource in oil and gas sector is emerging to be a challenge globally The team composition of finding a right mix of experienced senior level personnel and junior, middle level team membersThese Challenges are met by As the projects have gone up in size and complexity, the availability of skilled engineering resource is emerging as a constraint. India is now identified as one of the strong source of skilled engineering resource for oil & gas industry. Almost all leading global companies in oil & gas business will have an engineering office in India. Multi location engineering teams will be the order of the day and this is due to the development of Information technology. The emerging trend in engineering especially at junior level is to depend more on software and apply less and less engineering judgment. This has resulted in demand of highly experienced and senior most engineers. Engineering companies are realizing this gap and utilizing experienced engineers for mentoring the juniors. This trend will open up more close interaction of oil and gas industry with universities to bridge the gap. As this demand has increased the cost of engineering has considerably raised in the EPC and more and more of outsourcing, use of contract staff has also increased.9 Page
  • 10. All of the above has resulted in requirement of highly experienced Project Engineering Managers,who are able to operate min multi-centre, multicultural work environment who are in short supply.8. ProcurementAs increased amount of risk is shifted to the contractor and the major cost of EPC is in procurement,performance and management of vendors is very important.8.1 Challenges Assured timely supply at best price Getting timely engineering inputs to progress engineeringThese challenges are met by: Major oil producing companies and contractors continuously evaluate and qualify the vendors. Very clear fair, transparent rules and policies are emerging to get win-win for all the stake holders. Pre agreement between equipment suppliers and EPC contractors is the emerging trend even during the bidding phase to get the optimized cost. Rate contracts are emerging to reduce effort and assured supply. Standardization of certain bulk items is the emerging norms to minimize spare, reliability. Frame agreements are entered by the oil producing companies for supply of instruments, piping bulks etc., This is to get a competitive price and those frame agreement rates are passed on to the contractors. Emerging trend is to buy the material especially (Steel for example) at a favorable cost and the engineering is developed around the available material8.2 Future TrendsGlobal procurement has become the trend and for procurement management (especially post orderactivity) India is emerging as a centre. Most of the global players will have office in India procurementteam in their engineering centre.Emerging global procurement trend will open up avenue for Asian companies as increasingly Asiansuppliers are getting approved as a source of supply.As the global procurement emerging the associated risk of foreign exchange rate variation brings arisk and Project procurement Managers will have to gear up to meet this challenges10 Page
  • 11. 9. ConstructionVery challenging construction environment is required to be competitive. Constructability study hasemerged as a mandatory requirement. Innovative construction methodologies are emerging likemodularization, dressing of equipment to optimize schedule.9.1 Challenges Vendors for modularization ; As the concept of modularization and pre assembly is emerging even for on shore oil and gas facilities, developing good vendors has become a challenge, India will emerge as one of the source for fabrication and modularization Alignment with various EPC contractors has resulted in complex interface management and planning. HSES All the stake holders emphasize on Health, Safety, Security and Environment aspects and safety is one of the key success factors. Stakeholder management at site. Managing various stake holders like local Government, regulatory authorities, community has always remained a complex and difficult issueChallenges are met by: HSES Management -The required policies are enforced by independent team who are not under project management team. Interface management challenges are met by creating a new functional Interface management is being introduced in the project management organization Stake holders are managed by proactive engagement.The recent trend is to build welfare measures required for the work force specifying, accommodation,transport, food, annul leave, recreation requirement etc. in the contract. Stake holder managementespecially of the local community will need to be focused for successful completion of projects.10. Stake holder commitment and cooperationAs the stakes have increased, owner operators are working as part of the team. The contracts havebecome transparent; Change management has become fair and transparent. Owner operators usehis power and influence to support contractors in difficulties beyond contractor’s control .11. Cost ControlApart from regular well established cost control and project performance, target based incentive is theemerging trend. The incentive is based on certain targets and resultant benefit quantified in terms ofmoney, to motivate the team and achieve.The cost control is emerging to be from bottom to Top, from junior most designers to ProjectManager. Project control budget has become transparent and accountability has spread across the11 Page
  • 12. team. This trend has made the role of Project Manager more challenging in controlling the budgetwithout sacrificing the integrityMost of the EPC companies started to operate a well-structured incentive schemes.12. FutureThe future of oil and gas projects will be very challenging, with tighter schedules, higher complexity,multi centre executions with number of interfaces. This will give immense opportunity for India as oneof the sources for engineering talent and to meet the requirement of senior engineering management,project management professionals.Oil and gas sector will see lot of mergers, Joint ventures to bring synergy and competitive edge.Contracting strategy will shift from buyers market to more transparent and optimum risk sharingmethodologies13. Author’s Profile:R BalasubramanianA graduate Chemical Engineer, R. Balasubramanian has 33 years of experience in oil andGas industry. He has wide experience in project Management right from conceptualizationthrough commissioning of oil and gas facilities. He has held senior management positions ininternational EPC contracting and operating oil companies in Middle East and India such asReliance Industries, SABIC, Lummus, Saudi Arabian Kentz, Foster Wheeler. He is presentlyworking as General Manager Saipem India Projects Ltd and involved in management ofmega projects and engineering development of high value bidsE-mail: balasubramanian.r@saipem-india.comV. SivakumarA graduate mechanical engineer and a post graduate Industrial engineer, Sivakumar has 27years of experience in oil and Gas Industry. He is currently a Project Manager and Head ofProject Engineering and Engineering Management Department for Foster Wheeler IndiaPrivate Limited. He has worked on mega projects for Saudi Aramco, Exxon Mobil and IndianOil in Foster Wheeler. Earlier he was employed with Petroleum Development Oman andHindustan Petroleum Corporation Limited. He has worked in engineering, construction,contract management, Operations and maintenance functions. He is a CharteredMechanical Engineer with the Institution of Mechanical Engineers, UK and a PMP.E-mail: Sivakumar_venkatasubramanian@fwuk.fwc.com12 Page

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