Is it a sea change, or sand dune? The last decade has been called 'the time of never-ending changes' and during that time, the most progressive and profitable companies have proven to be those which best adapted to the landscape – or rather looked beyond it. The cycles of growth and crisis are shortening and sometimes long-term planning is somewhat sacrificed for fast wins. We are now seeing an unprecedented impact on the usual business practices due the Covid-19 pandemic.
We have seen companies optimising workforce (distant work, shorter hours, shifts, and, unfortunately, layoffs, too) and planned investment projects are being re-evaluated, and for the most part, put on hold. However, certain strategic projects, aimed at benefitting the long-term development – like residue upgrading to complying with IMO (International Maritime Organization) 2020 product rebalance, gas-to-chemicals, refining-petrochemical integration, and chemical production (like fertilisers), which address peak demand and can benefit from cheaper feedstock availability – all these have to move ahead for the sake of industry survival at the cost of ‘killing’ other previously attractive projects.
All the above-mentioned changes have led to market vulnerability for engineering and construction contractors as well. Risks that are included in contract contingency clause (especially for engineering, procurement and construction contracts) in some cases do not cover all possible damages; otherwise the risk premium would be too high. We have been supporting our partners that have been faced with difficulties on a major construction project – a project that has been greatly affected by combination of negative circumstances, including contractor workforce not able to enter the country and continue planned works on site, equipment manufacturers stopping production for uncertain period of time, contractors having no funds to pay to subcontractors, etc.
In this scenario, which is the case for a number of ongoing projects, it is near impossible to predict the possible delays and final impact on the budget. The client can insist on terminating the contract if the force majeure measures are not followed in full by the contractor and look to claim damages, but they risk the contractor filing for bankruptcy – meaning not being able to restart activities after the lifting of restrictions – not forgetting that in these times, not many suppliers will be willing to complete construction and take extra responsibility knowing that the client may also face difficulties with making payments.
In situations like these, it is important to mediate and to help parties discuss mitigation options, understand each other – partnership is more important now than ever as the legal processes are long and expensive, and everyone has one common goal – project completion. For future contracts, companies will have a unique opportunity to forecast a situation like this – a perfect storm – to define in much more detail their financial security policy in the contract. We would like to call this process ‘Learn as you go’.
How can projects survive with this uncertainty?
The right planning and change management is the key. One of the areas we are focusing with our clients is the importance of FEL (front-end loading) phase. The more issues resolved during preparation and design stages, the fewer corrective measures and changes will be required going forward – modifications that often lead to schedule delays and cost overruns.
The wish list for good project decisions are: (i) clear set of objectives and aims; (ii) early planning involving business and technical teams; (iii) collect as much data at an early stage to support the rational of the project; (iv) structure project plan subdividing into inter-connected stages; (v) clear definition of functions and accountability within each project team; (vi) continuous flow of information and active collaboration between project teams throughout various stages of the process; (vii) adoption of clear checks and balances between senior management and project teams; and (viii) on-going reviews of project value and evaluation of risks.
Another approach that provides expertise on key support and flexibility to the client is the use of an independent CPE (Client’s Project Engineer).The CPE approach helps train customer team – possibility to build an integrated team; specialists are engaged only when required; enables customer control and systems; lower cost; and experienced team can manage any proposed change orders effectively. The only issue to be resolved during the initial phase is overall responsibility and distribution of functions between CPE and client’s team. From the typical costs, we can understand the difference between the CPE approach and a traditional PMC (project management contract) approach.
We agree with AVEVA’s recent findings, which state that changes are inevitable, but one does not necessarily have to put the business under risk, especially when now the cost of risk, or a mistake could result in severe losses, or even in some cases the existence of the company.
Only digital will survive this crisis
Let us also reflect on trends emerging during these hard times. Firstly, ‘forced’ digitalisation – in the past couple of months, the lockdown has become a major source of headache for IT departments throughout the industry. The companies we spoke with recently – from Middle East, Europe, Russia – stated that this transformation was not spontaneous and unexpected, but they have been following the path they have chosen 3-5 years before and have now got a strong external stimulus to implement these processes at a quicker pace. We were pleasantly surprised to learn that setting up home office access to 40,000+ workers can be done effectively in short period of time.
Supplier companies have all the necessary instruments in place to provide technical support to operators during lockdown. An interesting case was an ‘online’ hydrotreating catalyst loading that was performed by Axens for their CIS refinery client in order not to postpone the loading – it was done without actual visiting of the site by technical specialists, and we are pleased to report that it went smoothly.
As EY recently highlighted at a conference, ‘‘only digital will survive this crisis’’. Speaking with the leaders of those companies, we learned that they do not think it possible for the oil and gas industry to move all activities onto distant/digital basis. Many operations, including asset improvement strategies, require physical presence onsite, face-to-face meetings and discussions. So, even if there will be more artificial information, information technology and cloud solutions adopted during this period, the role of people and real-time communication will not lose its importance.
Project meetings can now be held remotely through video conferencing. Some critical control issues such as independent inspection of equipment fabrication are a challenge due to travel restrictions but this can be overcome by outsourcing such activities. Also management of construction is now a difficult activity, again due to travel restrictions. That is why, for instance, we do not foresee moving many of our own conferences and seminars into a web-based format as we appreciate the feeling of engagement our partners get when meeting face-to-face and the great interactivity – however, our training modules can and shall be changed partly into online format to provide more flexibility.
Taking alternative routes
Another major topic is diversification – the proverb ‘do not put all eggs in one basket’ has never been more accurate – companies look into alternative routes that will help them save existing processes. Optimisation of existing facilities has come to the forefront of companies’ focus and they will have a chance to investigate where significant improvements can be achieved at relatively low cost and in a short period.
Also, renewables are being looked upon with great interest once again as they can provide sustainability to energy giants in the future – we will be reviewing the topic in more detail in the next month.
What happens to the crude oil price will have an impact on the future viability of many projects. So, it is important for companies to evaluate the different scenarios before deciding upon investments, etc. The key factors for success are: (i) a well structured and comprehensive project plan; (ii) integrating technical and commercial functions at project concept stage; (iii) life-cycle perspective and stage gate approach (which we cover next) leads to more efficient project management and development; (iv) tight control on costs and schedules; (v) continuous monitoring of project value and risks; (vi) owners/senior managers playing active role at all stages; (vii) finding the right people for the right job; (viii) focusing on the economic model to test options; (ix) on-time and on-budget approach; (x) timeline connects to ‘critical path’ to carry out the ‘right decisions’ and the ‘right course of action’; and (xi) leadership role being critical.
Conclusions and recommendations
Companies will have to rethink their planning. A trendy ‘agile’ approach could work during turbulence – smaller focused teams, monitoring progress and determining short clear goals. We suggest to absorb certain losses and to proceed on sprints with care.
Strategic thinking – putting aside sentimental value of projects and clearly prioritising is important. Companies in our industry can adopt the approach of finding ‘blue oceans’ and reorganising structure in the best way to reflect present environment – evaluating opportunities to move more into chemicals and petrochemicals.
Good time for learning – investing in company’s key specialists (not only in terms of training, but also via leaders sharing the values across the company, keeping the atmosphere of connection between and inside teams) will result in quality boost when the period of revival finally comes. Another important factor is evaluating local resources to assist in future projects.
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