By Herbert Fry, Senior Vice President – Oil, Gas & Chemicals, AECOM
The drop in price of a barrel of oil has had an understandable impact on major projects in the oil and gas industry. Three years ago, with crude trading above $100 a barrel, schedule was the overriding priority. As time delays were equated to lost revenue opportunity, there was less attention paid to the ultimate cost efficiency of a major project.
Today, with prices hovering around $50 a barrel, capital expenditure (CAPEX) budgets have been slashed, and the balance of cost versus schedule has reversed. Costs are being scrutinized much more closely to make sure that these projects are as economically viable as they can be before proceeding through each step in the stage gate processes and ultimately to the final investment decision (FID).
Despite this atmosphere of increased cost scrutiny, it still has been relatively rare to see oil and gas companies taking a full and frank look at enabling infrastructure. Although infrastructure costs might range from 10 to 40 percent of the overall project outlay, many procurers continue to parcel this topic up into a box marked “somebody else’s problem.” Typically, that somebody will be the engineering procurement construction (EPC) contractor chosen to build the hydrocarbon processing or production facility.
Enabling infrastructure elements, such as roads, airstrips, ports, water, power, sewerage, housing, and offices, are of course necessary to build and make any facility operational. The large oil and gas EPC contractors have historically taken on this work as part of a major project, but as it lies outside their core skill set, it is often given insufficient skill and attention to address the task adequately.
For the oil and gas company, bundling enabling infrastructure with the hydrocarbon components can seem to be highly cost efficient as well as a less risky way of executing projects, counting on a single EPC contractor to manage the consequent costs and risks. However, this approach can very easily become a false economy, as it rarely results in the most efficient, effective, and timely design and delivery of the infrastructure components.
In my view, it is a risk to treat infrastructure as an afterthought that somebody else will deal with when needed. Infrastructure components can very often lie squarely on a project’s critical path and consume an increasing portion of project cost. Early and active management of enabling infrastructure by suppliers that have this as their core competency is the solution — and a number of oil and gas companies are starting to move in that direction.
Consider, for example, the need for a jetty to bring construction equipment, materials, and modules for a major project ashore when operating hundreds of miles from the nearest port. To plan, permit, design, and construct this marine structure and prepare the site requires familiarity with local rules and regulators, local soils, weather, and ecological conditions, as well as local construction companies, techniques, and materials. Without this hard-won local expertise, it can be difficult to get any of the above completed on budget and on schedule, or even to plan the project correctly from the start.
Working directly with a specialist infrastructure contractor with deep local knowledge can ultimately increase efficiency, reduce CAPEX, and take a lot of the risk out of big projects, particularly in their earliest phases.
Of course, I am not the first person to notice this issue. Oil and gas companies have all had to deal with infrastructure that is late, poorly executed, badly designed, or over-specified. Very often, the question of who handles the infrastructure components boils down to project risk versus career risk. With billions at stake and caution in the air, not many project managers are brave enough to rock the boat.
Happily, we are starting to see some oil and gas companies breaking out of this self-defeating cycle. Driven by the need to deal with today’s tough cost situation, they are realizing that closer scrutiny with true infrastructure experts can reward the project with significant savings. As with all types of engineering, the earlier this is focused on and with the proper specialists, the cheaper it is to make necessary changes and allow the best decisions to be made throughout the stage gate process.
We are seeing oil and gas companies beginning to treat their enabling infrastructure components as a separate discipline — procured in its own right — with infrastructure contractors working alongside the EPC firm chosen to deliver the hydrocarbon portion of the project. This trend began on a project-by-project basis, and is continuing on a regional and in a few cases on a global basis, where oil and gas companies are selecting preferred infrastructure providers to partner with them to deliver consistent and improved early works and outside battery limits (OSBL) on their projects.
The change promises to deliver much needed cost efficiencies in today’s low-margin market. When the cycle moves on, as it surely will, to the next phase where time is once again of the essence, I suspect many oil and gas companies will find that dealing directly with infrastructure specialists delivers similar schedule value as well.