Performance improvement strategies for oil industry
By Vinodkumar Raghothamarao*
Oil and Gas companies operate in dynamic and complex environments, where they face constant challenges especially in terms of budget and cost overruns for capital project execution. After the 2014 oil price dip, across energy and process industries, about 55 percent of capital projects were negatively affected by either scaling back projects, postponing investments, or canceling projects all together. Now with oil prices hovering around 65$, capital spending bounced back as companies began to gradually invest, stimulated by the rising price of oil and gas and other raw materials.
The need of the hour is to overcome the challenges faced in the past with respect to productivity and performance improvement related to capital project portfolio execution. In the current environment, it has become increasingly important for oil and gas companies to manage capital projects in the most efficient manner possible – this in order to sustain and improve margins. It is also important to design revamped or new facilities with advanced solutions for the same reason. To manage capital projects efficiently, companies should develop a strategy or roadmap for capital project efficiency and performance improvement, which will help save on schedule, costs and lead to higher margins.
Around 65% of capital projects have more than a 10% overrun on costs and schedules, and nearly a third have more than 25% overrun on costs. Oil and Gas Companies can adopt best-in class project management and Industry 4.0 digitalization technologies to boost capital-project productivity. Value engineering, Design Standardization, digitizing processes and advanced analytics can all yield significant improvements.
Imitating such practices really does not help as each oil and gas project is unique. No oil and gas project is the same as the one that preceded it, and lead times are extremely long. Moreover, the project teams are dynamic and often change. Consequently, each new project brings a new set of challenges and a new learning curve, thus limiting the potential for boosting performance.
If oil and gas companies can adapt these practices to meet the needs of their unique environment, considerable improvement is possible: by our estimate, reducing development time alone has the potential to deliver 12 to 25 percent in cost savings.
Design standardization provides one of the greatest savings opportunities in capital projects. There could potentially be a five-to-tenfold increase in construction productivity possible if construction were to move to a manufacturing-like system of mass production, with more standardization and modularization.
Capital project designs are often bespoke, which may seemingly preclude the potential productivity gains of repeated manufacture and construction. But projects, particularly major capital projects, consist of many separate elements and packages – each of which can provide great opportunity for design standardization. Value engineering of large capital projects typically delivers cost savings of at least 10% vs. previous projects or initial concept designs, and also presents opportunities for value enhancement through additional functionality.
In addition to savings, project owners who incorporate standard designs often benefit from reduced contractor pricing, as contractors can establish facilities tailored to providing standard products. One upstream petroleum major realized a seven-month improvement in time-to-market by abandoning its legacy of tendering projects that required unique execution approaches (bidding, fabrication, and construction) for each project in favor of a standardized and modularized design. This move to standardization was made possible through detailed interviews and problem solving with contractors, partners, suppliers and owners to identify optimal solutions.
Industry 4.0 digitalization has immense potential to greatly improve a wide range of processes used in the oil and gas capital projects. Used in conjunction with automated engineering processes, five-dimensional building-information modeling (5-D BIM) will likely eliminate the manual execution of many repetitive tasks, reduce the effort required for contract management, and make it possible to automate some quality-control functions.
Digital technologies can make oil and gas capital projects more productive as well. Digital twins, real-time digital replicas of physical assets created by laser scanning of a construction site, make it possible to do site inspections and track progress in real time from the office. With the use of RFID tags, the value chain workflow of parts can be automatically tracked from manufacturer to installation site, improving schedule predictability. Used in combination, 5-D BIM and digital twins will likely soon become the new norm for designing and monitoring construction projects.
Virtual-reality tools help users view designs and prototypes, allowing them to interact with them as if they had already been constructed. That means they can see the exact size of various components before physical assets are fabricated. Similarly, advanced surveying tools help users understand as-built conditions and compare them with designs.
Supply Chain and Procurement 4.0 can streamline and improve procurement processes. Automating and digitizing purchase-ordering processes and communications with suppliers can greatly reduce the amount of manual work required, accelerating the supply chain while giving it a whole new level of transparency. Cloud-based should-cost modeling, which evolves from project to project, is used sparingly in the oil and gas capital projects and it is the same with e-auction and electronic-request tools. Digitizing the supply chain can reduce procurement costs for all purchases of goods and services by 20%, reduce supply chain process costs by 50%, and increase revenue by 10%.
Big Data offer a wealth of useful information for O&G capital-project teams. Project data can be used to determine the underlying drivers of better performance, while inspection data can be used to improve project quality. Data produced by tag-and-track technologies can help improve supplier performance measurement and monitoring, predictive site scheduling, and workforce management.
Using machine learning, data-ingestion engines, and innovative pattern recognition, oil and gas companies can now rapidly sort through millions of data points. With this capability, oil and gas capital project owners can compare the impact of hundreds of performance drivers on project or business outcomes. They can also identify the obstacles that raise costs and timelines. In some areas, advanced analytics may produce savings of up to 20 percent.
The time is right for oil and gas capital project owners to innovate themselves and rethink the way they carry out capital projects. Opportunities to improve productivity exist all along the development and construction cycle. Companies that seize them can complete construction projects faster, reduce costs, and improve schedule predictability.
To realize the true potential benefits that these new practices afford, oil and gas capital project owners in collaboration with the EPC/FEED and PMC contractors will need to rewrite the rules of the game related to policies, project management, engineering practices, IT, and supply-chain engagement. They will need to be willing to embrace new technologies. And they will need to instill collaborative practices not only among project owners but also between internal engineering, procurement, and construction teams and external suppliers. Although deep collaborations based on trust are currently rare in the O&G industry, they will be critical in the future.
Forward thinking organizations are using similar practices to improve the value of their capital project performance in terms of budget and schedule: increasing the use of standard designs, adopting greater modularization using low-cost country fabrication yards (where possible), improving procurement contracting practices, and implementing industry 4.0 digitalization and lean construction techniques. Linking project performance to contractors and project team remuneration paired with a deliberate strategy to retain key talent are considered pivotal practices for aligning incentives and project targets.
Oil and Gas Capital Project Owners that want to improve their capital project performance should focus on strengthening their portfolio management, reviewing and improving their project operating model, developing and embedding value-improvement practices in their project processes, and focusing on skill development and talent retention. It will be really interesting to see how oil and gas capital project owners can effectively manage their projects seamlessly coupled with the adoption of best in class capital project performance practices in 2019.
*Vinodkumar Raghothamarao is Director Consulting, Energy Wide Perspectives & Strategy, IHS Markit EMEA