2. EMERGING TRENDS IN PROJECT
MANAGEMENT FOR COMPETITIVE
ADVANTAGE IN OIL AND GAS SECTOR
PROJECTS
Balasubramanian R - General Manager, Engineering, Saipem India Projects Limited
Sivakumar V - Manager, Engineering Management, Saipem India Projects Ltd
4. 1. Abstract
Despite economic downturn, the steady price of oil above US $ 100 / bbl and surging demand for
energy has ensured mega investments in Oil and Gas sector. However the sector is witnessing larger
projects and program in terms of capacities, capital investment and technical complexity. Oil
companies have moved away from reimbursable contracts to Lump Sum EPC and Lump Sum
Turnkey projects for execution of these mega Projects with intent to reduce cost, project schedule and
to minimize their risk exposure. This has thrown a lot of challenges and has changed the way the
projects are executed. This paper analyses the impact, challenges and how the industry has
responded to retain their competitive advantage through the life cycle of project execution. The trends
in India and opportunities for India are also discussed.
2. Introduction
Industry Trends: Despite the economic downturn towards the middle of the last decade, investments
have continued in the Oil and Gas sector. This is the attributed to steady oil price above US $100 and
a growing energy demand. Demand for Liquefied Natural Gas (LNG) has grown since unfortunate
accident and natural disaster in Japan.
In recent years the size of the projects in this sector has increased many folds, with associated capital
investment. Today in this sector the projects are running into billions of dollars. About a Trillion US $
worth investments are planned in the next 10 years, as per Industry reports. Major investments are
planned in Middle East, particularly in Saudi Arabia, Iraq and Kuwait. Oil exploration, processing in
upstream and downstream sector is emerging with larger projects and program in terms of capacities,
capital investment and technical complexity. For example Sadara Petrochemicals (Earlier called Ras
Tanura Petro Chemicals) in Saudi Arabia, is planned with an investment of US $ 25 billion. In
upstream, Shah Gas development in Abudhabi is planned with an investment of US $ 10 Billion.
Australia is investing more than US S 200 billion in Upstream LNG projects. Total and INPEX
announced the $34 billion dollar Ichthys liquefied natural gasproject in Australia in January 2012.In
India Reliance Industries is expanding Jamnagar facilities in a big way and investing heavily in
upstream offshore. Indian Oil is building a mega refinery project at Paradip. Many LNG Regasification
Terminal projects have been announced, each of them with an investment of about Rs 4000 crores.
But thanks to economic downturn the way of doing business has changed completely.
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5. In the past, the projects in this sector were reimbursable with the few sections of the plant executed
as EPC/ LSTK by specialist contractors. Owners have started to look for reduced completion time,
with maximum risk shifted to contractors.
Recently large, complex, high value projects in these sectors have started to emerge as Lump Sum
EPC (Engineering, Procurement and Construction) and Lump sum turnkey (LSTK) Projects.
Certain downstream programs in this sector are also emerging as Build Own, Operate Projects. South
Koreas and Japanese companies have been more successful in the emerging scenario and have
cornered a large proportion of the EPC / LSTK contracts.
3. Challenges:
As the projects are getting larger and complex, it is inevitable that there will be challenging schedule,
increased risks and opportunities for both the operating companies and contractors.
In order to be successful in the emerging EPC/ LSTK execution mode of the projects both contractor
and the Owners (operating oil companies) will be required to reengineer the way the projects are
executed.
Through the life cycle of projects, how this has impacted the project execution is analyzed in this
presentation. How companies have managed to retain their competitive advantages is narrated.
4. Project Conceptualization
Project conceptualization is done by the operating oil companies , subsequently the FEED (Front End
Engineering Design) is prepared by a design engineering contractor and the detailed designing is
done as a part of Lump Sum EPC contract.
A good FEED with sufficient definitions of the facility, with scope clarity and expectations of the stake
holders is of paramount importance.
4.1 Emerging Trends
Owner operating companies are facing a challenge to reduce the cycle time between the investment
decision and the award of EPC contract as a part of overall compressed implementation schedule of
the projects.
As a result of this, not fully developed FEED is tendered, and responsibility for providing a safe,
operable facility meeting the performance requirement and the associated risks is shifted downstream
to EPC contractors
The bid preparation time for a large complex facility has drastically reduced and typically it is
anywhere between three to four month from the time of tender out to bid submission.
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6. 4.2 Challenges
The emerging trend relies upon contractor’s expertise, and ability to develop a preliminary design in a
short time frame to provide a competitive lump sum bid.
The challenge faced by the contractor is
To carry out preliminary design and come up with quantities for pricing
Mobilize adequate resource for carrying out the pre bid engineering and bid estimation in a short
duration
Increased bid preparation cost
These challenges are being met by
strength of the technical expertise in a particular area like off shore, deep water, refining etc., of
the contractor
Prior experience on the owners expectations, procedures
Constant bench marking of the particular type of project
Alignment among contractors by way of joint ventures to synergize the expertise
Diversify into related areas for wider spectrum of opportunities
4.3 Future Trends
The contractors will have to gear up for development and standardization by way of a generic design
of the facility and a wider data base which will be tailored to suit the requirement of each bid.
Alignment and long term relation with other Contractors and Owners for synergy
As the FEED design, and endorsement is shifting to the EPC contractors, owners will be willing to pay
for the FEED endorsement to EPC contractors
5. Tendering
In the past most of the projects were reimbursable and managed by the operating companies wherein
E&C portion was performed by specialist contractors and entire procurement by the operating
companies.
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7. 5.1 Emerging Trends
In the emerging scenario tenders are lump sum and re-measurable or reimbursable portion of the
entire value is very limited.
Risk -The emerging EPC/LSTK projects, the entire risk is shifted to the contractor in terms of
design, procurement, construction and project management.
Financial capability - As the projects have gone up in size the financial ability of the contractor will
have a major role in prequalifying the contractors
Vendor selection The operating companies are forced to a careful selection of EPC contractors as
the success of the project depends on the financial, technical and management ability of the
contractor.
Interface management - Owner operators are shifting to multiple EPC/ LSTK package mode by
splitting the project into number of EPC/ LSTK packages. This mode of project management has
created a complex interface management and a position of Interface Manager is emerging to manage
the complex interface.
5.2 Challenges
In the emerging scenario the Owner companies challenge is to award to a financially sound
Contractor with technical expertise. This will shift the current position to sellers’ market and attract
only fewer bidders.
These challenges are being met by
Alignment by way of Joint Ventures, Partnerships of contractors to capitalize, compliment strengths
and expertise.
Project Managers are trained to adapt to different company cultures, methods of working, different
geographical locations, of JV partners and deliver the project.
Mitigation is by encouraging financial stake for the contractor in the project. This is emerging
especially in remote, hard geographical area projects where fewer contractors have the capability to
deliver the project.
5.3 Future Trends
Trend will be to shift towards risk sharing approach. EPC contracts will shift towards target price with
risk and reward scheme where over runs and under runs are shared rather than the entire risk carried
by contractor and eventually projects will be delivered with optimum cost.
Project Management professional will be required to be mobile, work in multi-cultural team and adapt
to changing way the projects are awarded and will be executed.
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8. 6. Bid Estimation and Bid Management
6.1 Emerging Trends
As the projects are larger and complex, in order to be competitive, bid estimation and tendering
involves substantial cost spent on preparing the bid.
The difference between competitors in EPC bid is emerging to be very narrow
The margins are getting smaller.
A very careful due diligence are being done to arrive at bid or no bid decision.
This process is emerging to be more stringent in Oil and Gas sector as the order book position is
no more an indicator of the health of the company.
6.2 Challenges
The emerging trends are:
Shorter bid preparation time
High risks
Increased bid preparation cost,
Tighter margins for the contractors
Lengthy pre bid clarifications (typically 2000 question answers)
Very challenging exercise to align the bids, for the owner
These challenges are being met by:
The challenge of bid preparation time is managed by standardized design, maintaining a up to
date technical data base
Risk management by past experience and awareness of the geographical area, and owners
expectations
Mobilizing pre bid engineering resource from India and other countries
Alignment with suppliers and construction subcontractors. This is emerging to be very critical as
without this support estimation and providing optimum competitive cost would be very challenging.
Pre agreement with equipment suppliers are emerging to be a must for EPC contractor, otherwise
vendors/contractors are reluctant to support the bid process.
Fit for purpose design is emerging as the difference between winning and losing the bid
Induction of Project Manager during the bidding phase to maintain continuity during execution.
Hence Project Manager role is getting wider and complex and demanding to be involved in
strategies right from bid stage.
By adopting a transparent fair bid management and change management practices the owner
operators are willing to accept fit for purpose design, accept competitive sources for procurement
from Asian countries
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9. 7. Engineering Management
In oil and gas sector the overall cost of engineering is a very small portion of the project cost, but
management of engineering is a very crucial aspect.
Engineering management has undergone tremendous change in the recent years
7.1 Emerging Trends
Engineering software has made the design faster and accurate and provides capability to analyze and
optimize the design. This has resulted in reduction of design safety factors which were added due to
uncertainties and produce an economical design and gain competitive advantage.
With the available engineering tools, it is possible to share the work across multiple engineering
centres across the world. This helps to reduce overall engineering schedule as engineers are working
round the clock.
Another emerging trend in engineering is that, engineering centers are being operated as production
centres, similar to a manufacturing unit, between 60 and 80% of detail engineering stage where
engineering is accelerated to produce most of the documents. During this phase multi shift working is
emerging to utilize the infrastructure in terms of software licenses, IT optimally.
7.2 Challenges
The engineering resource in oil and gas sector is emerging to be a challenge globally
The team composition of finding a right mix of experienced senior level personnel and junior,
middle level team members
These Challenges are met by
As the projects have gone up in size and complexity, the availability of skilled engineering resource
is emerging as a constraint. India is now identified as one of the strong source of skilled
engineering resource for oil & gas industry. Almost all leading global companies in oil & gas
business will have an engineering office in India.
Multi location engineering teams will be the order of the day and this is due to the development of
Information technology.
The emerging trend in engineering especially at junior level is to depend more on software and
apply less and less engineering judgment. This has resulted in demand of highly experienced and
senior most engineers. Engineering companies are realizing this gap and utilizing experienced
engineers for mentoring the juniors. This trend will open up more close interaction of oil and gas
industry with universities to bridge the gap.
As this demand has increased the cost of engineering has considerably raised in the EPC and
more and more of outsourcing, use of contract staff has also increased.
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10. All of the above has resulted in requirement of highly experienced Project Engineering Managers,
who are able to operate min multi-centre, multicultural work environment who are in short supply.
8. Procurement
As increased amount of risk is shifted to the contractor and the major cost of EPC is in procurement,
performance and management of vendors is very important.
8.1 Challenges
Assured timely supply at best price
Getting timely engineering inputs to progress engineering
These challenges are met by:
Major oil producing companies and contractors continuously evaluate and qualify the vendors. Very
clear fair, transparent rules and policies are emerging to get win-win for all the stake holders.
Pre agreement between equipment suppliers and EPC contractors is the emerging trend even
during the bidding phase to get the optimized cost.
Rate contracts are emerging to reduce effort and assured supply.
Standardization of certain bulk items is the emerging norms to minimize spare, reliability.
Frame agreements are entered by the oil producing companies for supply of instruments, piping
bulks etc., This is to get a competitive price and those frame agreement rates are passed on to the
contractors.
Emerging trend is to buy the material especially (Steel for example) at a favorable cost and the
engineering is developed around the available material
8.2 Future Trends
Global procurement has become the trend and for procurement management (especially post order
activity) India is emerging as a centre. Most of the global players will have office in India procurement
team in their engineering centre.
Emerging global procurement trend will open up avenue for Asian companies as increasingly Asian
suppliers are getting approved as a source of supply.
As the global procurement emerging the associated risk of foreign exchange rate variation brings a
risk and Project procurement Managers will have to gear up to meet this challenges
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11. 9. Construction
Very challenging construction environment is required to be competitive. Constructability study has
emerged as a mandatory requirement. Innovative construction methodologies are emerging like
modularization, dressing of equipment to optimize schedule.
9.1 Challenges
Vendors for modularization ; As the concept of modularization and pre assembly is emerging even
for on shore oil and gas facilities, developing good vendors has become a challenge, India will
emerge as one of the source for fabrication and modularization
Alignment with various EPC contractors has resulted in complex interface management and
planning.
HSES All the stake holders emphasize on Health, Safety, Security and Environment aspects and
safety is one of the key success factors.
Stakeholder management at site. Managing various stake holders like local Government,
regulatory authorities, community has always remained a complex and difficult issue
Challenges are met by:
HSES Management -The required policies are enforced by independent team who are not under
project management team.
Interface management challenges are met by creating a new functional Interface management is
being introduced in the project management organization
Stake holders are managed by proactive engagement.
The recent trend is to build welfare measures required for the work force specifying, accommodation,
transport, food, annul leave, recreation requirement etc. in the contract. Stake holder management
especially of the local community will need to be focused for successful completion of projects.
10. Stake holder commitment and cooperation
As the stakes have increased, owner operators are working as part of the team. The contracts have
become transparent; Change management has become fair and transparent. Owner operators use
his power and influence to support contractors in difficulties beyond contractor’s control .
11. Cost Control
Apart from regular well established cost control and project performance, target based incentive is the
emerging trend. The incentive is based on certain targets and resultant benefit quantified in terms of
money, to motivate the team and achieve.
The cost control is emerging to be from bottom to Top, from junior most designers to Project
Manager. Project control budget has become transparent and accountability has spread across the
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12. team. This trend has made the role of Project Manager more challenging in controlling the budget
without sacrificing the integrity
Most of the EPC companies started to operate a well-structured incentive schemes.
12. Future
The future of oil and gas projects will be very challenging, with tighter schedules, higher complexity,
multi centre executions with number of interfaces. This will give immense opportunity for India as one
of the sources for engineering talent and to meet the requirement of senior engineering management,
project management professionals.
Oil and gas sector will see lot of mergers, Joint ventures to bring synergy and competitive edge.
Contracting strategy will shift from buyers market to more transparent and optimum risk sharing
methodologies
13. Author’s Profile:
R Balasubramanian
A graduate Chemical Engineer, R. Balasubramanian has 33 years of experience in oil and
Gas industry. He has wide experience in project Management right from conceptualization
through commissioning of oil and gas facilities. He has held senior management positions in
international EPC contracting and operating oil companies in Middle East and India such as
Reliance Industries, SABIC, Lummus, Saudi Arabian Kentz, Foster Wheeler. He is presently
working as General Manager Saipem India Projects Ltd and involved in management of
mega projects and engineering development of high value bids
E-mail: balasubramanian.r@saipem-india.com
V. Sivakumar
A graduate mechanical engineer and a post graduate Industrial engineer, Sivakumar has 27
years of experience in oil and Gas Industry. He is currently a Project Manager and Head of
Project Engineering and Engineering Management Department for Foster Wheeler India
Private Limited. He has worked on mega projects for Saudi Aramco, Exxon Mobil and Indian
Oil in Foster Wheeler. Earlier he was employed with Petroleum Development Oman and
Hindustan Petroleum Corporation Limited. He has worked in engineering, construction,
contract management, Operations and maintenance functions. He is a Chartered
Mechanical Engineer with the Institution of Mechanical Engineers, UK and a PMP.
E-mail: Sivakumar_venkatasubramanian@fwuk.fwc.com
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