Comment: Smart approach in investment planningby Arabian Oil & Gas Staff on Apr 19, 2017
Smart approach to investment planning and project implementation are very important in the refining and petrochemical manufacturing business, opine RPME's monthly columnists Colin Chapman and Ekaterina Kalinenko.
Failure to plan is planning to fail – this is especially valid when we consider major capital projects in our industry. In order to achieve project success, one should always go through a rigorous evaluation and planning process. In the refining and petrochemical sectors, the global markets are becoming more and more competitive. When considering new project investments, it is essential to follow the proven route of ‘(Evaluate - Select - Define = FEL) - Implement - Operate’ conse-cutive steps.
If we take as an example a company looking to invest in a residue upgrading project, such projects require huge investment and there is no room for mistakes. Most projects need external financing; so, it is important to manage all project risks up front and be able to deliver the project on time, within the budget and meeting all quality requirements.
Why do projects fail? Analyses show that, in practically all cases, it is due to poor Front End Loading (FEL).
Some of the key failure factors and consequences are: poor definition of basis and scope => inaccurate project evaluation results; lack of good and comprehensive FEL => changes during implementation; inefficient planning and cost control => project is completed over budget and behind schedule; inexperienced project team => coordination problems; inappropriate contract strategy => no single point of responsibility; inefficient procurement procedures => cheapest option is not the best; and lack of independent inspection and quality control => problems during start-up and operation, increased maintenance costs, and unplanned shutdowns.
In our opinion, it is vital to have a strong focus on the first three stages: evaluation, selection and definition, i.e., FEL. The residue complex would need to operate reliably and safely over a period of 30 years or more. When evaluating options, it is important to understand the local and export market demands and opportunities. This means also understanding all competitive factors such as competing projects in the region, which configuration best suits your specific business strategies, in medium and long term. This will help to select the scheme within which these goals would be achieved. It is also important to understand future possible changes in regulations such as changes in specifications for bunker fuels.
For a resid upgrading project, the choices are numerous, including residue hydrocracking, residue hydrotreating, delayed coking, flexicoking, gasification, solvent deasphalting, visbreaking and combinations of these technologies. A key factor will of course be the types of crude available to be processed. It is crucial to select technologies that are proven and flexible to best meet future requirements.
What can go wrong? In many cases, there are problems associated with site selection, understanding logistic limitations or access for large equipment items such as reactors and columns. At the outset of the project, it is vital to evaluate the local infrastructure and available space as well as other key elements such as climatic windows in certain areas that may limit transportation etc. at certain times of the year.
Once we understand the critical construction and site issues, we can then assess the global procurement market to identify several possible suppliers who can deliver on schedule and within quality requirements. The global procurement market is changing; therefore, it is important to keep ourselves up-to-date and understand the reliability of potential suppliers. This often can depend on current workload etc. Once all information is available, this can be used to set the basis for basic engineering and front-end engineering design (FEED). This is a reverse approach to what many companies follow.
Why is FEED important? The FEED stage will allow clients to understand the full scope of the project and also obtain an accurate Class 2 cost estimate. FEED will include all required integration between OSBL (outside battery limits) and ISBL (inside battery limits) for the complex. During the ‘evaluation’, ‘select’ and ‘define’ stages, it is important to have all parties on board to address the key project issues. In many cases, the client is supported by an independent PMC (project management consultant) company. The client can then decide on whether the project is viable and if so, can then choose the most suitable implementation strategy. At the conclusion of FEED, the client can verify the real project economics and then decide on whether or not to implement the project. This is also a very important stage for potential lenders so they can assess the project risks.
In summary, having a solid basis to move the project forward will minimise the risk of changes having to be made during the project implementation. Such changes would always lead to delays and cost increases etc. Therefore, we recommend the following: focus on strong FEL; and select the optimum project implementation strategy, which best suits your requirements and also that of lenders.