Capital Projects Do your homework. CIM Toronto October 2014 Rocks and Stocks Chris Twigge-Molecey

Transcription

1 Capital Projects Do your homework CIM Toronto October 2014 Rocks and Stocks Chris Twigge-Molecey

2 2 Causes of capital over-runs Old news The symptoms: Persistent over-runs Late start-up Poor ramp-up to full production Poor safety Poor relations with neighbours Poor ROI and value destruction

3 3 Over 30 years ago (Rand Corp) Ed Merrow s criteria of failure: >10% over budget >3 months late at start-up >1 year to 85% capacity Only 18% were successful In 2011 >25% over peers cost 1 year longer to start-up than peers >2 years to full capacity Only 30% of 43 projects successful

4 4 Terry McNulty Curves (1998)

5 5 Analysis of failures (2003) 43 failures, $20+billion in CAPEX 70% not phased properly 42% turnkey lump sum contracts 63% had no team continuity 50% major new technology 40% Front end issues >100% Multiple causes of failure

6 6 Summary Findings (2014) $133 Billion in CAPEX in 45 Problem Projects Project Types and Challenges # of Projects % of Problem Projects CAPEX ($billion) % Problem Project CAPEX Problem Projects % % Technical Challenges 19 42% 49 37% Organizational Challenges 24 53% 75 56% Environmental & Social Challenges 27 60% 95 72% Homework Challenges 29 64% 68 51% >2 Challenge Areas 30 67% 98 74% >3 Challenge Areas 15 33% 45 34%

7 7 Not all bad news McNulty (2014) 23 of 81 projects 28% From 4 independent data sets

8 8 Technical Challenges $49 billion in CAPEX, or 37% of the CAPEX associated with Problem Projects Remote Locations Infrastructure More Complex Processes More complex deposits Challenges to commission New Technologies Inadequate testing

9 9 Project Risk Triangle Business Risk

10 Risk Management Failure 10 Less Profit Less Reliability, Availability etc. Poor Risk Management

11 11 Generic Risk Management Process

12 12 Summary of Technical Failure Factors Incomplete feed characterization Fast track project execution (Design & Construction) Unusually complex process conditions Design & build prior to process understood Pilot plant testing incomplete or minimal Pilot plant testing for product not process Product quality ignored in test-work Misunderstood process chemistry Prototype key equipment Minimized engineering design expenditures Serious design flaws

13 Technical Failure Factors (cont d) 13 Serious Discontinuity in the project technical team Capital cost reduced by cost reduction pressures First process license Multiple new steps Prototype key equipment Turnkey contracting of novel process Minimized engineering design expenditures Serious design flaws Raw solids feed vs.gas or liquid Unusually severe process conditions

14 Overseas Projects - Issues Vary 14 Developed countries vs. Developing Countries Form of government Legal system Physical location Technology Skills Levels Financing Civil Society Community Expectations

15 15 Key Concerns Different design approaches Different Procurement approaches Different contracting approaches Social issues Cultural issues So how will we manage this?

16 16 Front End Loading (FEL) Framework

17 17 Gate Reviews at each Project phase 1. Gate Reviews performed at the end of each phase 2. To validate the readiness to progress to the next phase 3. Three areas:

18 Project Lifecycle Accuracy of Capital Cost Estimates (Association for the Advancement of Cost Engineering-AACE) Front end study work is only a small portion of the project Capital cost 18 Project Stage Scoping Study Pre-Feasibility Study Feasibility Study Project Execution Operations Major Activities & Milestones +80 Choose project & process, complete trade-off studies Study and scoping, get funds for development Select Project, Process Alternative Complete project definition, obtain final project sanction Order Engineering for Major Equipment Complete design, reaffirm project sanction, fabricate equipment, delivery to site, install equipment and construct all facilities Decision to Proceed, Order Major Equipment Reaffirm Project Sanction Engineering Maximum Capital Cost Test equipment & systems (no feed) Start Verification of Equipment Installation First operation Mechanical Completion. Introduce Feed Material Sustained operation Design Capacity Reached. Close Project 90 Estimate Accuracy (percent of actual cost) Initial Assessment of Viability AACE Class 5 Maximum Overestimate Minimum Overestimate Minimum Underestimate Maximum Underestimate Conceptual Project Sanction AACE Class 4 Preliminary Project Sanction AACE Class 3 Final Project Sanction AACE Class 2 Engineering Minimum AACE Class 1 AACE Estimate Classes, Uses and Methodology Class 5: Concept screening, long range capital planning, assessing initial viability. Stochastic (cost/capacity curves, scale factors and other parametric modelling techniques). Extremely limited data Class 4: Confirmation of technical/economic feasibility, approval to proceed to next phase. Stochastic (equipment factors, unit cost ratios and other parametric modelling techniques). Limited data Class 3: Full budget approval, cost control. Deterministic for major items, stochastic for minor items. Normally used for funding and cost control Class 2: Detailed cost performance measurement baseline. Highly deterministic. Detailed control baseline Class 1: Current control estimate fo final control baseline. Extremely deterministic based on actual design quantities. Discrete parts of the project for check estimates of contractors quotations Capital Cost or Engineering (percent of total) Project Duration (months) 36

19 19 Typical External Project Risk Factors Water access Competing land use Artisanal mining rights Water quality Community relocation Loss of natural environment Non-local workforce Transportation bottlenecks Ref: Ernst & Young (2013)

20 20 Need to Develop Shared value approach Social license to operate Many standards and guidelines Equator Principles IFC Social & Environmental Performance Standards ISO14001 SA8000 SA800 Global Reporting Initiative (GRI)

21 21 McNulty Conclusions (2014) Causes of failure well known New technology not necessarily a concern If managed very carefully Experienced owner leadership Best qualified EPCM contractor Robust process development program

22 22 Project success is not easy. It takes effort and money. Thank you For more information, please visit