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Capital project life cycle management for oil and gas

Transforming major capital project effectiveness ..................1 The pitfalls between concept and commissioning ................................2 The consequences of risk .......................4 How to bypass the pitfalls and manage the risk ..............................5 Focus areas for effective capital project life cycle management................6 How Ernst & Young can help...................9 About Ernst & Young............................12

Capital project lifecycle management for oil and gas

Transforming major capital project effectiveness


Managing the complexity of major capital projects in todays oil and gas landscape has never been more critical. Against the backdrop of a decline in both global economic conditions and corporate revenues, stakeholders are demanding improved return on investment (ROI), reduced risk and exposure and greater transparency. Since capital construction projects in the mhklj]Ye gad Yf\ _Yk af\mkljq [gehjak] Y ka_fa[Yfl h]j[]flY_] of company spend, there must be a particular focus on predictability, transparency and reliability, including controlling and reducing the costs associated with these projects. Arguably as important, however, is the focus on managing joint venture relationships and overall project risk as it relates to safety, budget, schedule and reputation. For many years, the leading practice in planning for and executing major capital projects was based on building or spending ones way into the market. However, given the market environment and the lessons learned associated with the potential setbacks, there is a renewed focus on the complete life cycle of a capital project. That focus enables a holistic approach; one that is more balanced and inclusive of well-planned handoffs, healthy asset management in the areas of operations and maintenance and balanced project hgjl^gdagk YdoYqk oal` Yf ]q] gf l`] hgl]flaYddq [gfa[laf_ requirements of risk, cost and schedule. Understanding and managing the capital life cycle is crucial to the long-term success of an upstream capital project. Tremendous effort, time and resources are expended in delivering a project. However, poor decisions today may result in loss of value tomorrow. Despite a host of research, benchmarks Figure 1: Stage gates of the capital project life cycle and project guidelines, oil and gas companies continue to struggle with the same complex issues: budgets, schedules and execution. These issues alone, if managed poorly, can be the cause of dramatic losses in project value and prolonged disputes with vendors. Failure to consider design, construction, commissioning and operational issues during the planning phases of the project reduces the ability to positively affect project performance and value. Companies have learned the hard way that rushing into the construction phase without adequately developing a plan that considers the entire project life cycle may result in extended schedules, budgets and gh]jYlagfYd \a^[mdla]k& One of the most proven and effective ways to manage capital projects in the oil and gas industry is to take the holistic approach of a stage-gate model for evaluating progress and enabling informed decisions about next steps. Looking at the capital project through the lens of one comprehensive life cycle encourages collaboration across the stages and underpins the processes with the appropriate systems support. This approach to effective project management can mean less rework in front-end engineering and design, improved cycle time for certain stages and reduced impact of punch lists from handoff to maintenance. Each stage includes a clear set of deliverables that will enable the realization of opportunities and more effective longterm risk management. The best opportunity to make a positive impact on the life cycle of a major capital project is during early planning, even before the capital outlay occurs.

Project \]falagf

Engineering design

Project procurement

Construction

Hook-up and commissioning

Asset management

Decommissioning and dismantling

Contractor project management

Decommissioning

Fabrication and construction

Commissioning

Procurement

Sustainment

Dismantling 1

Front-end engineering

Detailed engineering

Conceptual

Operations support

Transport and install

Approve capital

Hook-up

By considering the long-term effect of the entire project during the conceptual and planning stages, project owners can better predict future risks and make decisions that allow them to appropriately allocate risk and control the projects value chain. The forward-thinking company will spend more time on strategic issues and the strategic development of a project management approach that aims for the balance between risk allocation and value retention.

The best opportunity to make a positive impact on the life cycle of a major capital project is during early planning, even before the capital outlay occurs.

Since no one has a crystal ball, what should the company consider? What are the factors in the upstream oil and gas industry, the marketplace and the business of engineering and construction itself that contribute to successful projects that result in commensurate rewards instead of a project fraught with risk and loss?

The pitfalls between concept and commissioning


With the oil and gas industry moving deeper into emerging assets and frontier areas, as well as improved technology plays (such as unconventional), recovering these reserves will require high levels of transparency and investment. Consequently, we are witnessing a ramp-up of mega projects to commercialize these reserves. These mega projects are generally managed via joint venture arrangements between and among national and international oil and gas companies. The combination of leading edge technology, new geographies, multibillion dollar capital expenditures and multi-party governance means that these projects require high levels of assurance for cost, timeline and risk management. These requirements, together with todays market and economic factors are giving rise to a range of opportunities that affect short and long-term project performance. This in turn begs the question of why so many companies tend to overlook the impact of capital project life cycle management. However, with challenges also come opportunities. To capitalize on these opportunities, it is crucial to focus on major project decisions, the scale of the project and the level of investment, all in light of their impact on governance and project support. Many companies are inclined to plan their projects expecting to encounter certain risks and possible pitfalls along the way. However, knowing what and where the pitfalls are and ^Y[lgjaf_ l`]e aflg kljYl]_a[ hjgb][l eYfY_]e]fl ak l`] jkl kl]h lg Ynga\af_ l`]e& The current uncertain economic situation demands a more systematic and pragmatic risk management approach that makes project owners and stakeholders keenly aware of the pitfalls up front. Following are some of the most common pitfalls that arise in the planning and execution of major capital projects: Finance and credit risk: 9 jakc kljYl]_q fgl Yda_f]\ oal` l`] [`Yf_af_ fYf[aYd eYjc]l [Yf `Yn] Y ka_fa[Yfl aehY[l gf l`] ^]YkaZadalq g^ Y hjgb][l Yf\ ]n]f gf l`] fYf[aYd stability of some companies. The gap typically occurs when the project sponsors dont take into account the global nature of the business or the current market and credit risks. Problems can also arise if the project portfolio is not diverse enough to handle market shifts or margin volatility. Schedule delays: There is an adage that says failing to plan is planning to fail; this describes the typical genesis of schedule delays. Plans often leave out the necessary schedule management elements of schedule development, acceptance, progress measurement and reporting, and relationships to other project management disciplines. Failure to implement appropriate schedule management and time-tracking tools could lead lg ka_fa[Yfl \]dYqk Yf\ Yf afYZadalq lg a\]fla^q Yl%jakc Y[lanala]k Yf\ l`]aj aehY[l$ Yj]Yk g^ mf[]jlYaflq$ afkm^[a]fl Ykkmehlagfk gj hgl]flaYddq \][a]fl k[`]\mdaf_ e]l`g\gdg_a]k&

Capital project lifecycle management for oil and gas

Af]^^][lan] [gkl eYfY_]e]fl Yf\ dY[c g^ fYf[aYd ljYfkhYj]f[q2 Ineffective contract administration and monitoring of contracts both causes and results in a lack of visibility that complicates the planning of project costs for reporting and budgeting activities. The end result is likely to be an inaccurate perspective on the total costs incurred, limited YZadalq lg Y[[mjYl]dq ^gj][Ykl [Yk` go$ Zm\_]l gn]jjmfk Yf\ l`] af[dmkagf g^ mfYhhjgn]\ costs. At the same time, not automating the cost management software tools and failing to integrate them into a comprehensive project management information system necessitates reliance on manual controls and associated increased risk tolerance related to potential delays in identifying and reporting issues that may affect project performance. Inertia and a lack of urgency: 9k hjgb][lk Yj] ka_fa[Yfldq \]dYq]\$ hYjla[ahYflk Yj] often subject to inertia and lose the sense of urgency and the focus on completing the project, and maintaining quality. Simply put, when a project becomes a process, it can be problematic. It is important to voice concerns regarding the reliability or accuracy of the current cost and schedule estimates at completion, challenge original assumptions and assess if they are still valid. Momentum can be lost if the cumulative impact of missing [jala[Yd hjgb][l ead]klgf]k j]_mdYlgjq$ fYf[aYd$ gh]jYlagfYd$ [gfljY[lmYd Yf\ dgf_%d]Y\ equipment) is not adequately addressed and if management accepts a fatalistic attitude about future impacts. Mf[d]Yj \]falagf g^ jgd]k Yf\ j]khgfkaZadala]k2 One of the big pitfalls of a joint venture is unclear governance, which can lead to the project owner taking on unacceptable risks. The cause is typically attributable to a combination of failing to assess the risks l`gjgm_`dq$ [d]Yjdq \]faf_ Yf\ [geemfa[Ylaf_ Ydd jgd]k Yf\ j]khgfkaZadala]k ^gj hYjla]k involved, and building both contract and governance structures that take risk into account and include adequate controls and monitoring. Operational impact: Operating and maintenance strategies are rarely planned at the design phase and built into the ongoing project management strategy. Once the project l]Ye `Yk ]p][ml]\ l`] `Yf\g^^$ l`] eYafl]fYf[] Yf\ kmhhgjl gj_YfarYlagfk eYq f\ that the policy and procedural foundation is missing, the right people arent in place or Yj] mf^YeadaYj oal` l`] dYf\k[Yh] Yf\ fYddq kqkl]ek$ l][`fgdg_q hdYl^gjek Yf\ kg^loYj] enablers are absent or inadequate. Companies are sometimes too quick to segregate duties and may have been imprecise in identifying competency requirements or aligning l`]e Y[[mjYl]dq oal` l`] hjgb][l gj_YfarYlagf [`Yjl Yf\ klY^f_ hdYf& New operational challenges: Companies increased focus on E&P in deepwater and ultradeepwater areas means more projects in challenging and unfamiliar environments, which can require a new generation of technical and operational solutions as well as different ljYafaf_ Yf\ kmhhgjl ^gj h]jkgff]d af l`] ]d\& L`] [gklk Yf\ h`qka[Yd \Yf_]jk afngdn]\ far exceed previous levels and add to owners risk, all with little or no assurance that prices will continue to justify heavy investments in these areas. Asset integrity: An aging infrastructure can pose serious operational threats to companies and jeopardize their public reputations and business relationships. These structures require continuous inspection, monitoring, maintenance and repair, and may not comply with current environmental standards and regulations. Cross-border controls: Projects that involve entities from more than one country carry special considerations, requiring that processes and controls be adaptable to local markets, business customs and international compliance standards. This is one key point in the project life cycle where the relationship between owning risks and reaping reward may diverge.

The pitfalls
Finance and credit risk Schedule delays Ineffective cost management and lack g^ fYf[aYd ljYfkhYj]f[q Inertia and lack of urgency Mf[d]Yj \]falagf g^ jgd]k Yf\ responsibilities Operational impact New operational challenges Asset integrity Cross border controls

A closer look at the oil and gas landscape


Barclays Capitals report, Original E&P Spending Survey, forecasts that worldwide E&P spending budgets will rise by 10.8% in 2011 to US$489.5 billion, up from 2010 budgets of MK ,,)&0 Zaddagf& Ka_fa[Yfl =H spending increases are expected for the super majors next year, with the big six projected to increase international spending by an average of 18%. This is a fglYZd] _mj] ^gddgoaf_ Y q]Yj af o`a[` spending for the group was virtually unchanged from previous year levels. The Latin America region is leading the way globally for exploration and production spending during 2011 with an expected increase of 20%; the Middle =Ykl Yf\ 9^ja[Y Yf\ 9kaY%HY[a[ j]_agfk forecast relatively modest increases of 11% and 9%, respectively. When the E&P budget was based upon an average oil price of $77.32 per barrel, the survey reported that 45% of respondents expected to spend a greater share of their capital expenditure on exploration in 2011. The survey also reported that the majority of these companies would increase budgets further with oil prices at $90 per barrel. Considering that the current price per barrel was already over $100 in the jkl imYjl]j g^ *())$ l`ak ^gj][Yklk Y near-certain increase in capital budgets. >gj l`] hYkl n] q]Yjk$ l`] hja[] h]j barrel has increased an average of 6.25% annually, a trend indicating that the oil and gas market will continue to see increases in the price per barrel and associated investment.

The consequences of risk


The oil and gas industry wouldnt exist if not for risk takers. What separates success from ^Yadmj] ak `Ynaf_ Y [d]Yj \]falagf g^ o`Yl [gfklalml]k Y[[]hlYZd] jakc ^gj Y hjgb][l$ l`]f avoiding or mitigating the risk that remains. Being caught in the common pitfalls or failing to address risk in a way that is proactive, realistic and transparent can lead to consequences that span the spectrum from mere inconvenience to grave danger. Following are some of the consequences, many of which are avoidable and all of which are manageable with proper planning and forethought. Regulatory noncompliance: Failure to develop appropriate project controls could result in non-compliance with governance, legal and regulatory standards. Similarly, failure lg hjgh]jdq ljY[c Yf\ Y\]imYl]dq ^gj][Ykl [gklk [gmd\ j]kmdl af eakklYl]\ fYf[aYd klYl]e]flk gj afY\]imYl] \ak[dgkmj]k af hmZda[ daf_k& Fgf%[gehdaYf[] [Yf d]Y\ lg f]k$ forfeitures and business restrictions, and could damage the reputation of the company. L`] dY[c g^ [gehdaYf[] Yf\ ]^^][lan] [geemfa[Ylagf [Yf ka_fa[Yfldq af[j]Yk] hgl]flaYd hazards on projects as well as damage the brand image, which can lead to risks in the Yj]Yk g^ afn]klgj [gf\]f[] Yf\ klYc]`gd\]j ljmkl& Damage to reputation: An unexpected event that leads to environmental concerns is a key focus area for governments and the public in general. The recent oil spill in the Gulf of Mexico raised awareness and negatively affected the oil industry in terms of hjglYZadalq Yf\ j]hmlYlagf$ d]Y\af_ lg af[j]Yk]\ hgdala[Yd jakc Yf\ j]kmdlaf_ d]_akdYlagf mf\]jeafaf_ Ykk]l hgkalagf$ f]k Yf\ \YeY_]k ^jge [jaeafYd gj [anad [`Yj_]k& @]f[]$ increased regulations, inspection times and potential liabilities need to be factored into global operations. Limited prompt and strong attention to any unforeseen situation can have irreversible consequences. Loss of competitive advantage: Oil and gas companies must continue to adopt new technologies to mitigate the risk of losing their competitive advantage. This calls for a strategic commitment to research and development, ongoing investments to upgrade existing facilities and development with technology providers. Oil and gas companies l`Yl gh]jYl] Yk l][`fgdg_a[Yddq Y_fgkla[ Yj] Z]ll]j YZd] lg eYaflYaf ]paZadalq Yf\ Yddgo alignment with leading practices evolving in oil and gas and other industries. Claims and disputes: Undertaking a comprehensive assessment of contract claims risk requires recognizing the interdependencies of the contracts, people, processes and technology across the program. Contract language and detail should be clear with regard to pricing arrangements, incorporation of critical path method scheduling techniques and allocation of risk. Failure to develop appropriate procurement, invoicing and change management controls could lead to potential claims. Equally important is evaluating how [dYaek Yf\ \akhml]k Yj] j]hgjl]\$ Yk o]dd Yk `go [gfljgd _Yhk Yj] a\]fla]\ Yf\ jakck ]k[YdYl]\& =Y[` [dYae emkl Z] hjgehldq Yf\ ]^[a]fldq Y\eafakl]j]\$ o`a[` j]imaj]k understanding the document management sources and locations. Fraudulent reporting of costs could lead to misappropriation of assets, public relations damage and problems in the future relating to these assets. Owners should assess the risk associated with [gfljY[lgj Yf\ kmZ[gfljY[lgj [dYaek Yf\ \]n]dgh Yf gof]jk l]Ye e]l`g\gdg_q lg mitigate, defend and manage claims as the project develops. The right information at the right time can turn a risk into an opportunity when the owners hjgh]jdq Yddg[Yl] Z]lo]]f l`]ek]dn]k Yf\ l`]aj n]f\gjk fgl gfdq fYf[aYd jakc Zml Ydkg l`] risks associated with quality, safety, control and reputation.

Capital project lifecycle management for oil and gas

How to bypass the pitfalls and manage the risk


Given the range of disparate factors that comprise the oil and gas landscape and the challenges and pitfalls inherent in capital projects, is it possible to develop an integrated project team approach that can help these projects succeed? The short answer is yes, as long as the framework of the deal and the framework for project management are part of the process from the beginning. The enemies of a successful project can be costly: excessive unplanned downtime, lack of project controls, missed milestones and overall operational underperformance. If a capital project is to survive or, better yet, prevent the impact of these, it must be grounded in an integrated process with critical success factors built into the DNA of the project management plan. Figure 2: Oil and gas capital project value driver tree
Value proposition Value driver Improve capital project success rate Increase revenue Optimize project mix Portfolio management Focus area Effective project management Regional execution

Simply put, in order to move toward success, a risk planning process must be implemented as part of the strategic development of the hjgb][l$ \]faf_ l`] akkm]k l`Yl emkl Z] Y\\j]kk]\ Yf\ [gehd]l]\ in order for the capital project to succeed at each stage gate in the supply chain. Creating value throughout will improve ROI, strengthen the relationship between the owner and engineering and construction companies, and help drive a proper balance between owning the risk and reaping the rewards.

Hjg[]kk ]^[a]f[a]k

Operating model design

Identify poorly performing projects sooner :]f]lk Reduce costs Reduce effort/ headcount (FTE)

Effective project management Total cost of ownership

Operating model design Supplier performance management

Project delivery costs reduction

Effective contract management Cost management

Project schedule

Governance, controls, policies and procedures Healthy stage gates Handover management

Reduce risk

Operational impact

Risk assessment and reduction Safety

Competitive advantage

R&D, upgrade existing facilities, development with technology providers

Focus areas
1. 2. 3. 4. 5. 6. 7. 8. 9. Effective project management Cost management and cost reduction Supplier performance management Healthy stage gates

A closer look at the focus areas for effective capital project life cycle management
Since the beginning of the upturn, oil and gas companies are demonstrating an increased focus on the entire life cycle of a project, including a deeper commitment to beginning the planning process earlier and ensuring that the quality of the execution is held to a higher standard relative to cost, schedule and execution. These are some of the capabilities that, when executed well, can prove to be game changers on large capital projects: 1. Effective project management: Make sure the plan includes appropriate focus on safety, costs and schedule attributes that need not be mutually exclusive. All parties involved should be in alignment with the baseline schedule and must understand the projects critical path. Critical milestones play a major role in maintaining momentum; developing a continuum of optimistic, realistic and pessimistic potential completion dates based on actual progress can help maintain focus on the project. Cost management and cost reduction: The best strategy is to develop an integrated cost management function that aligns all cost-related processes and functions and incorporates data developed or maintained in other processes. Emphasis should be placed on budget control, approved corporate budget changes and project management internal budget transfers. Expenditure tracking should include actual cost to date, accruals and total cost incurred. Look for cost reduction opportunities, along with opportunities to reduce planning budgets, engineering hours and cycle time, at every stage of the life cycle. Pay particular attention to the larger line items in the construction budget and operate with a mentality that helps promote accountability. Supplier performance management: An improved approach to risk and exposure on costs and delivery and improved management of stakeholders and suppliers can help optimize third-party performance and keep relationships with stakeholders on an even keel. It is important to analyze the contractors baseline as-planned schedule and its cost loading, including the complete scope of work, and to identify the contractors [jala[Yd hYl` Yf\ [gfljY[l ead]klgf]k& Jakck Yf\ ]klaeYl]k g^ aehY[l emkl Z] a\]fla]\$ especially for critical and near-critical activities. Healthy stage gates: Develop a holistic capital projects program with a stage-gate model for evaluating progress and enabling informed decisions about next steps. In addition to minimizing rework on front-end engineering and design, improving cycle time and generating punch lists for handoff maintenance, this disciplined decisionmaking framework is designed to move projects through the development pipeline to facilitate more effective planning and evaluation of projects, which will translate into better capital effectiveness. Early involvement in the process from all disciplines and cross-functional participation throughout the development process will result in better integration and alignment of activities. Risk assessment and reduction: To help ensure a satisfactory degree of success, project teams must control costs, ensure quality delivery, meet deadlines and identify Yf\ eala_Yl] ^mlmj] jakck& Bm__daf_ km[` \an]jk] Yf\ g^l]f [gfa[laf_ gZb][lan]k ak Y major challenge. The capital project team is often too close to the day-to-day activities to be able to take an objective view of performance. Consequently, shortcomings are often recognized too late, by which time overall objectives in terms of cost and quality are jeopardized or schedules slip, affecting both business strategy and operations. This is when projects can erode, rather than support, the creation of business value.

Risk assessment and reduction Safety Handover management Regional execution Total cost of ownership 2.

10. Governance, controls, policies and procedures 11. Operational model design 12. Contracting strategy

3.

4.

5.

Capital project lifecycle management for oil and gas

6.

Safety: Safety risks evolve throughout the capital project life cycle, so those risks must be considered at each stage of development. Engineering and procurement personnel must make decisions that allow for the safe construction of the project as well as its safe operation. Construction and operations personnel must be trained properly, comply with safety regulations and processes and utilize the safety controls provided. Equipment or control failure could impact personal safety as well as hinder the operations of a facility. An approach to safety on all these fronts needs to be an integral and proactive component of ongoing project management, not just an emergency response. Handover management: To avoid the impact of poor handover management, operating teams must be mobilized at the right time and given ample opportunity to work with the project team at appropriate stages in the project life cycle. Likewise, equipment needs to be easily serviceable and maximize commonality wherever possible, with bills of materials, and operating and maintenance instructions accurately captured and readily accessible. Regional execution: Integrated oil companies and national oil companies are increasingly investing in new projects through joint venture arrangements, with the national oil companies offering more concession agreements to the integrated oil companies for the rights to their reserves. These agreements are perfect candidates for comprehensive risk reviews. The integrated oil companies need the growth to offset stagnant home territories, while the national oil companies need to generate more income for their burgeoning populations and budgets while diversifying their economies. Total cost of ownership: The total cost of ownership (TCO) for a capital project includes the total of all costs to design, purchase, construct and operate. Most of the costs for these elements can be internal or indirect costs paid to external parties. Furthermore, costs to prepare bid lists and equipment kh][a[Ylagfk Yj] ]Ykq lg a\]fla^q o`]j]Yk kge] gl`]j nYjaYZd]k$ km[` Yk gh]jYlaf_ [gklk Yf\ dgkl hjgl ghhgjlmfala]k$ Yj] em[` egj] \a^[mdl lg a\]fla^q& Af gj\]j lg ljmdq ljYfk^gje a procurement strategy, an understanding of the major contributing elements of TCO is essential.

11. Operating model design: Many different internal and external factors drive businesses to undertake organization redesign. The impact of their decisions can be both positive and lead to outstanding growth, or negative and lead to a further need to restructure. There is no single solution when designing an organization; a one-off solution is required in every instance. Numerous interdependencies need to be considered, including how affected stakeholders will be engaged and consulted during the process. By taking a structured and systematic approach to the design process, organizations give themselves a much improved chance of achieving and sustaining their kljYl]_q Yf\ j]Ydaraf_ l`] Z]f]lk g^ j]kljm[lmjaf_& 12. Contracting strategy: Contracting strategy goes beyond the pricing arrangement decision; it includes decisions about if and how to compete the work, how to segregate the project scope aflg nYjagmk ogjc hY[cY_]k$ a^ Yf\ `go lg gZlYaf fYf[aYd guarantees from vendors (such as bonds or letters of credit), and how to allocate the risks and rewards of performance. An upstream capital project is a complex set of engineered facilities, systems and subsystems, and each of the contracts j]imaj]k Y [Yk]%Zq%[Yk] [gfljY[laf_ kljYl]_q \]falagf& Overall contracting strategy and approach should be determined after carefully considering the owners capabilities, experience and ability to manage the chosen contract type. Contract language development, including critical operational, eYfY_]e]fl Yf\ fYf[aYd [gfka\]jYlagfk$ Yk o]dd Yk l`] contract risk assessment is crucial to understanding the af`]j]fl jakck g^ l`] fYdar]\ [gfljY[l Yf\ \]n]dghaf_ management strategies to cover those risks. Independent of l`] fYd kljYl]_q k]d][l]\$ ]Y[` e]eZ]j g^ l`] hjgb][l l]Ye must understand and be able to quantify the risks accepted and transferred and be prepared to manage the nuances of obligations owned under the strategy. The holistic approach to managing capital projects is proving to be one of the most effective ingredients to a successful project. While engineering and construction professionals often focus publicly on the positive lessons learned, and privately on the negative ones, Ernst & Young has found that the most effective deterrents to project failure are based on a companys ability to structure a capital program that not only encourages, but depends on collaboration across the functions, business units and stage-gates. We are seeing healthy stage-gate approaches that are embedded and supported internally, while driving transparency and collaboration externally with joint venture partners, local governments and contractors. Finding the balance between and among the interests of these stakeholders and the interests of the project is the most effective strategy for transforming project effectiveness.

7.

8.

9.

10. Governance, controls, policies and procedures: Corporate boards, joint venture partners and other stakeholders expect their capital projects to be run with a governance model that enables transparency and reliable reporting. Owners must insist on the same. Processes and procedures must be proactively enforced by monitoring, detecting, preventing and j]hgjlaf_ Yfq Y[lagfk l`Yl jakc l`] [gf\]flaYdalq$ afl]_jalq and availability of project information. Systems must be able to identify and manage current risks and evaluate current performance, including the appropriate use of resources.

Are you ready?


All too often a business advisor is called in at the end of the project life cycle to conduct a post-mortem rather than at the beginning, during concept development and pre-planning. L`] lYkc g^ Y _gg\ Y\nakgj ak lg `]dh alk [da]flk \g l`]aj bgZk egj] ]^[a]fldq Yf\ ]^^][lan]dq$ managing their risks and realizing their rewards. Asking focused questions such as these upfront can help avoid having to ask tough questions later: Is your capital projects program holistic, with a stage-gate approach? @Yn] qgm [d]Yjdq \]f]\ o`g Z]Yjk l`] mdlaeYl] j]khgfkaZadalq ^gj l`] km[[]kk gj ^Yadmj] of a project an individual, management or the steering committee? Does your approach realistically match your organizations capabilities? Is your capital project structured to balance the needs of various stakeholders? How will you measure and track progress? Do you have a plan for optimizing the performance of your suppliers? Do you have a realistic budget that factors in historical success rates in meeting projected scope, schedule and quality goals? Are policies and procedures in place to manage and mitigate project risk? Ak l`]j] Y [geegf mf\]jklYf\af_ g^ l`] kljYl]_a[ aehda[Ylagfk Yf\ fYf[aYd consequences of project failure?

Capital project lifecycle management for oil and gas

How Ernst & Young can help


It isnt enough to give good advice on the technical issues related to project and asset management. Ernst & Youngs objective is to be a business advisor, looking at the overall goals of the organization, determining how a given project aligns and what we can do to help it succeed. With that perspective in mind, we have designed the following offerings in the major capital projects area:

Capital project risk assessment


Our major capital project risk assessment offers the greatest ability to positively affect the full life cycle management of a project. Risk assessment efforts should focus on the issues with the greatest potential to impact objectives. Strategic risks include environmental considerations, investment and resource allocations and market dynamics. Operational risks include supply chain, individual performance of team members, contracts, information technology (IT), safety and physical assets. Financial risks include market conditions, liquidity and credit, accounting and reporting, international currency m[lmYlagfk$ [YhalYd kljm[lmj] Yf\ lYp]k& ;gehdaYf[] jakck af[dm\] _gn]jfYf[]$ [g\] g^ conduct, legal and regulatory requirements. Our risk assessment approach looks at the interdependencies of these risks and how they are affected or mitigated by existing people, hjg[]kk Yf\ l][`fgdg_q Ykk]lk& O`]f _Yhk Z]lo]]f a\]fla]\ jakck Yf\ ]paklaf_ [gfljgdk Yj] a\]fla]\$ o] Ykkakl gmj [da]flk af \]n]dghaf_ Yf\ aehd]e]flaf_ eYfY_]e]fl hdYfk lg mitigate, transfer, or, when necessary, prepare for the acceptance of these risks. 9k l`] hjgb][l hjg_j]kk]k af eYlmjalq$ l`] ghhgjlmfalq lg afm]f[] alk \]ka_f Yf\ performance is reduced proportionately, while the cost of making changes increases. Our capital project risk and control services provide a structured review of the overall strategy, planning, procurement, design, implementation and completion of capital projects. The aim is to highlight performance weaknesses and determine future areas of jakc Yf\ ghhgjlmfala]k ^gj aehjgn]e]fl$ o`ad] Zmad\af_ Zmkaf]kk [gf\]f[] Yf\ ]f`Yf[af_ overall project performance.

Project contract management


L`] [gfljY[l ak l`] n]`a[d] l`Yl dYj_]dq \]f]k Yf\ Yddg[Yl]k j]khgfkaZadalq ^gj ]Y[` g^ the parties share of the project risks. In recent years, contractors and project owners have developed new, innovative and complex approaches to contract structure, pricing arrangements and risk allocations, which have included such elements as alliance agreements, incentive fees and hybrid pricing arrangements. Depending on the relative sophistication of the contracting parties, their familiarity with the nuances of the contracting strategy, understanding of the associated risk allocation, and organizational capabilities to mitigate those risks, each may be inadvertently accepting more risk or risk that is different from what was originally planned. Ernst & Young has broad cross-industry experience advising clients during the development of their contracting strategy, including advising on potential contractually required controls and remedies to mitigate the risk of the selected strategy. We have assisted clients in the development of progress reporting requirements, invoicing protocols, schedule management requirements, cost tracking and reporting, subcontracting requirements and contract compliance monitoring programs.

Supplier performance management


Oil and gas companies have been using suppliers to carry out a large part of their required ]d\ gh]jYlagfk ^gj \][Y\]k& L`] \Yqk g^ gad Yf\ _Yk [gehYfa]k `Ynaf_ l`]aj gof [Yhlan] ]]lk g^ \jaddaf_ ja_k Yf\ Ykkg[aYl]\ gad]d\ k]jna[] [YhYZadala]k Yj] dgf_ hYkl& Gof]jk Yj] now deeply engaged with a supplier base that is both effective and mobile. However, with l`] af[j]Ykaf_ mk] g^ kmhhda]jk Y[jgkk l`] Zmad\ Yf\ gh]jYl] Yj]Yk g^ l`]aj Zmkaf]kk$ Y new range of issues needs to be effectively managed. We can help our oil and gas clients address this situation by assisting them in adopting a more holistic view of supplier performance management. Within our Advisory capabilities, we combine our competencies in a way that provides a tailored solution to address this client need, encompassing the areas of enterprise risk management, procurement transformation, technology enablement and contract compliance.

Capital project integrated project team


An increasing focus on capital life cycle management is beginning to emerge, putting more emphasis on the front-end planning for the larger program management effort. The management team typically tasked with this effort understands immediately that the project life cycle must be controlled at every level of the organization. Our integrated project team (IPT) approach focuses on the functions that are crucial to the capital project that support the planning, development and execution of a portfolio of activities. The IPT creates effective project oversight and control, minimizes project confusion and promotes greater project success, keeps management well-informed, improves integration of vendor and workgroup activities, builds project management ]ph]jlak]$ Yf\ `]dhk \]f] Yf\ Y[`a]n] f]Yj%l]je hjgb][l gZb][lan]k Yf\ l`] [gehYfqk long-term, post-project goals. Companies that try to manage projects via uncoordinated, disconnected efforts discover that risks and execution issues ultimately lead to widespread failure. Setting up an IPT can be challenging, but this is not uncharted territory. The road is well-traveled, and many gj_YfarYlagfk$ dYj_] Yf\ keYdd$ Yj] j]Ydaraf_ l`] Z]f]lk l`Yl [gfkakl]fl [gfljgd gn]j projects provides.

Operating model development


Our approach to organizational design differentiates Ernst & Young by delivering kmklYafYZd] aehjgn]e]fl af n] oYqk2 We deliver integrated designs by adopting a systematic and structured approach, aligning all interdependent components of an organization before completing designs. O] [gfje gj_YfarYlagfYd \]ka_fk Yj] kmklYafYZd] Zq Zmad\af_ af ]paZadalq Yf\ d]Ynaf_ Yf YZadalq lg j]f] l`] \]ka_f oal` l`] [da]fl& We facilitate stakeholder collaboration throughout the project journey that helps make sure the solution is developed and owned by the client. O] lYadgj l`] \]ka_f lg \]dan]j Y ]paZd] Yf\ ]^^][lan] gj_YfarYlagf& We use a range of innovative tools and methods to bring designs to life in order to create a workable and pragmatic solution.

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Capital project lifecycle management for oil and gas

Following is a more comprehensive list of our capital project effectiveness service offerings: Capital project life cycle management
1. Capital project risk assessment 2. Capital project integrated project team 3. Operating model development 4. Project portfolio strategy 5. Project contract team

Asset management
1. Operations and maintenance assessment 2. Asset integrity assessment 3. Maintenance readiness assessment

Supply chain
1. Supplier performance management 2. Procurement transformation 3. Supply chain rapid assessment 4. Logistics & network planning 5. Procurement process improvement 6. Sales & operations planning 7. Tax effective supply chain management

Contract risk services


1. Project contract management 2. Contract risk assessments 3. Negotiation support 4. Compliance monitoring 5. Litigation support and dispute resolution 6. Regulatory support

Program/project advisory services


1. Business process improvement 2. Organizational design 3. Project management oversight 4. Project and process reviews 5. Strategic planning 6. Turnarounds and workouts

Cost management
1. Cost management and control 2. Cost allocation 3. Change order reviews 4. Project cost audits

Detailed description for bolded services found on page 9 or 10.

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About Ernst & Young


Ernst & Youngs Oil & Gas Performance Improvement practice works with global clients to develop, design and implement capital project life cycle management programs. Our team is composed of advisors with experience in oil and gas, engineering, construction and construction management, architecture, performance improvement and risk management. We differentiate ourselves through the following: We understand the complexities associated with the development of large capital projects. We have deep oil and gas, engineering and construction industry knowledge gained l`jgm_` q]Yjk g^ ogjcaf_ oal` ]phdgjYlagf Yf\ hjg\m[lagf$ \jaddaf_ Yf\ gad]d\ k]jna[]k [gehYfa]k$ Yf\ d]Y\af_ ]f_af]]jaf_ Yf\ [gfkljm[lagf jek& We provide a leading approach to project life cycle management, construction management, risk management, cost control and supply chain transformation, based on our extensive involvement with more than 250 projects annually. We value our independence and objectivity on every project we undertake. For more information on capital project management contact: United States Jason Brown +1 312 879 4377 jason.brown1@ey.com Mark Costello +1 212 773 0142 mark.costello@ey.com Bill Hale +1 713 750 8383 bill.hale@ey.com David Blanc +1 713 750 5129 david.blanc@ey.com Australia: Bradley Farrell +61 8 9429 2336 bradley.farrell@au.ey.com Canada: Doug Burcham +1 403 206 5304 doug.burcham@ca.ey.com Great Britain: Paul Allison +44 20 7951 3654 pallison@uk.ey.com Malcolm Bairstow +44 20 7951 3685 mbairstow1@uk.ey.com Netherlands: Peter Spaans +31 88 40 78810 peter.spaans@nl.ey.com

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Capital project life cycle management for oil and gas

Ernst & Young Assurance | Tax | Transactions | Advisory

About Ernst & Young Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 152,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit www.ey.com How Ernst & Youngs Global Oil & Gas Center can help your business The oil and gas sector is constantly changing. Increasingly uncertain energy policies, geopolitical complexities, cost management and climate change all present significant challenges. Ernst & Youngs Global Oil & Gas Center supports a global practice of over 9,000 oil and gas professionals with technical experience in providing assurance, tax, transaction and advisory services across the upstream, midstream, downstream and oilfield service sub-sectors. The Center works to anticipate market trends, execute the mobility of our global resources and articulate points of view on relevant key sector issues. With our deep sector focus, we can help your organization drive down costs and compete more effectively to achieve its potential. 2012 EYGM Limited. All Rights Reserved. EYG No. DW0085 1203-1338642