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Refined Article, \'The Capital Project Gamble\'

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Article submitted for an energy magazine describing the current and future world of Capital Projects

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Refined Article, \'The Capital Project Gamble\'

  1. 1. Refined Article – Nov 2009 Rory Allingham The Capital Project gamble Capital Projects – the long-term investment projects requiring large sums to acquire, develop and/or maintain a capital asset - are the lifeblood of any major energy firm. With such enormous investments required, many energy players now realise their largest Capital Projects will not only define their production capabilities, but will underpin the success and continuity of their business: the future of their organisation. This article will explore the three principal components to managing successful Capital Projects: organising, resourcing and performing. Through analysis of these components, it will identify the main threats to the energy players and, in doing so, explore the strategies they are adopting to overcome them. According to the International Association for Energy Economics (IAEE), the oil and gas CapEx required to meet global energy demand in 2016 will exceed $1 trillion, rising to $2 trillion by 2026.i The majority of this expenditure (76%) is associated with Capital Projects in terms of upstream exploration, development, and maintenance of the hydrocarbon supply. Yet the current economic issues of stagnated commodity prices, higher construction costs, reduced access to skilled labour and a tightening in the ability to acquire capital investment mean it is even more critical that these projects are delivered on time, on budget and to the required specification. The reality is often different. According to research at the Institute of Independent Project Analysis (IPA), 56% of surveyed projects with a budget of over $1b were classified as industry failures (based on criteria of 25%+ overspend and/or 25%+ schedule slippage),ii these failings being traced back to poor organisation of the project. Clearly, a defined organisation and accountability structure is necessary for the balancing of such interactive factors as economics, environment, design construction and human resources, as well as for synchronising activities in terms of time, cost, and location. Indeed, where project management lacks clarity in its organisational roles and responsibilities or has poor visibility and communications with senior asset management, the project performance will inevitably suffer. Centralise to Capitalise Many of today’s major energy firms, especially those with widely dispersed assets, are looking to centralise their operational structures, shifting accountability away from the asset and towards the centre. It is widely recognised that the degree of centralisation is one of the most critical organisational features of a project’s performance. The benefits are numerous: improved quality and consistency in developing projects; a faster rate of improvement across project teams; and a more efficient use of supporting competencies. In addition, a centralised model improves collaboration, leveraging personnel across the organization and encouraging lessons learned through mutual knowledge management and the creation of standardised tools, processes and services. Leadership is also a major factor in the success of a Capital Project. The project manager should lead by example with a thorough understanding of all processes and the functions undertaking them and fast track access to the senior manager. And though the project manager may have specialist skills, he/she needs to act as the 'general practitioner'. Except for the individual specialists themselves, to whom the manager should be ready to refer, he/she should be as knowledgeable as anyone about the economic and regulatory environment, engineering technology, project planning, scheduling and cost accounting, as well as construction. Their job is to interpret the client's requirements for the 1
  2. 2. Refined Article – Nov 2009 Rory Allingham specialists and direct their efforts to achieving the best combination of the project's key criteria: scope, cost, time, and client satisfaction. Notwithstanding good leadership and organisation, energy firms must also focus on harmonising their cross-functional processes and activities in order to achieve operational excellence. Historically, E&P companies have not effectively integrated subsurface and facility groups. This presents a major problem: little interaction results in a lack of communication across project teams, leading to a disorganised project. To overcome this, many of the energy players are trying to standardise their activities into clearly defined and manageable roadmaps. This promotes a common approach to the way organisations manage and deliver their business opportunities, moving effectively and efficiently from origination, through definition and delivery, to a reliably operating asset. Who’s in the mix? Good leadership needs the right people in place; even the best organisational structures and performance capabilities will yield project failures without a strong team. As resourcing a team with the best mix of skills is critical to the success of any Capital Project, it is unfortunate that this is proving to be one of the biggest challenges faced in the energy sector today. According to Richard Lambert of the CBI, over three-quarters of UK energy companies expect a shortfall in recruitment this year due to the lack of engineering graduates coming out of UK universities. At the other end of the spectrum, over 50% of oil and gas field professionals are set to retire in the next 5 to 10 years (National Petroleum Council).iii This combination of factors is set to leave a deep gap in the skilled labour pool, leading to the delays and/or cancellation of projects. In response to this, many firms are now looking towards the developing world to fill the void. According to a recent Schlumberger Business Consulting study, there is an average annual surplus of 1.1m engineering graduates in China, India, Mexico and Venezuela. This bounty of engineering talent has been noticed by many of the energy players, who are consequently adapting their recruitment strategies. Indeed, many of those with the required skill mix are located close to the major oil and gas reserves. Recruiting from a local talent pool can significantly reduce personnel costs in terms of cheaper labour and reduced travel and repatriation costs. Responding to this geographical imbalance will prove to be a key issue for the energy majors in the coming years, requiring innovative action plans in order to achieve the right balance of workforce capabilities to meet ambitious growth targets. Meeting the future energy demand is one of the key issues on the global agenda. In the 20th century, low cost and abundantly available energy fuelled global prosperity and expansion. Now, as urban populations expand and living standards rise, satisfying the rising demand for energy has become one of the world's biggest challenges. To meet this demand in an age of diminishing natural resources, energy players of all types will have to improve their performance in terms of organisational structure, leadership ability, process definition, and the recruitment of affordable and suitable talent. Whatever energy mix is decided on, the same outcome seems inevitable: those who acted early to embed the mindset of efficiency in their Capital Projects will prevail, and those who resisted change, gambling that their current techniques will ‘see them through’, will fall by the wayside. By Rory Allingham 2
  3. 3. i A forecast of Capital Requirements for the Oil and Gas Industry through 2030, L.G. Chorn, Platts Analytics, IAEE. www.iaee.com ii Managing Successful Megaprojects, IPA Institute, Module 1-13 (2007) iii Facing the Hard Truths About Energy: A Comprehensive View to 2030 of Global Oil and Natural Gas, National Petroleum Council (Washington, D.C.: National Petroleum Council, 2007)

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