Rock, Paper, Scissors
A Case Study on complementing cost-savings with strong governance and capital discipline
A recent survey* of 9 FPSO projects identified a combined 38% cost overrun totaling $2.5bn in wasted capital. One of the identified causal factors behind this dead-weight additional capital was “a lack of clarity regarding contract responsibilities”.
8over8 presented a case study where efficiency gains were generated in the world’s first FLNG project by implementing a proven system of strong governance and commercial discipline. The result was connected decision making and reduced incidence of conflict and claims amongst stakeholders in the world’s first FLNG project.
*Source: Douglas Westwood“ FPSO Industry at a Crossroads”- An Industry Whitepaper
To request a free audit visit http://info.8over8.com/contact-us/capital-savings-review/
For more information, visit http://www.8over8.com/procon-overview/
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AVEVA ProCon FPSO Europe Congress 2016
1. FPSO Congress
ROCK, PAPER, SCISSORS
A Case Study on complementing cost-savings
with strong governance and capital discipline.
February 2016
2. Introduction to 8over8
FPSO 2nd Annual Congress | 2016
• Founded in 2000
• Acquired by Aveva AVV (LON) in Jan 2015)
• Combined Revenue of £345m (FY 2014)
• Software author of ProCon delivering a Complete Contract Control solution
to complex projects in:
• Oil & Gas (upstream, midstream & downstream)
• EPC
• Petrochemicals, Chemicals
• Mining & Minerals
• Utilities
• Complex Infrastructure ( Rail, Airports, Smart Cities, Construction)
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250 Capital projects, $500bn of managed assets => up to 5% saving on project costs
3. Context: The Cost /Price Gap facing the industry
FPSO 2nd Annual Congress | 2016 3
Re-base the cost and price index at 100 in 2004
Price Index now below 100
But Cost Index now above 170!
4. Context
FPSO 2nd Annual Congress | 2016 4
A B C
A Group
• Projects sanctioned in an
inflationary world of both
price and cost
B Group
• At Risk- High cost base
projects sanctioned in the
expectation of higher
prices
C Group
• Many cancelled projects
FEED stage projects
seeking to re negotiate
cost to completion
5. Context
FPSO 2nd Annual Congress | 2016 5
Price per barrel
in 2004 was $45
Project execution needs to capture efficiency gains
from governance and capital discipline
How to close
this gap?
Price per barrel
now BELOW $40
6. Context: linked to Case study
FPSO 2nd Annual Congress | 2016
• At below $40 oil, labour and materials need a drop of 40% to 50% to breakeven.
• These comprise 75% of projects costs - a downward shift in cost of this quantum
will not happen.
• Essential that the industry finds efficiencies elsewhere outside of supply chain.
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Enhanced Capital discipline & Strong governance
are an essential part of the solution
7. Context
FPSO 2nd Annual Congress | 2016 7
Outside our Control
• Capital discipline and strong
governance
• Defined Business Processes
for all contractor/operator
interactions.
• Structured Communications
via a single channel.
• Advance Warning Indicators.
• Collaborative Change Control
Management.
• Audit Trail.
Inside our Control
8. Case study 8over8 & Prelude
FPSO 2nd Annual Congress | 2016
• March 2010 - Shell awards EPCI for its first FLNG platform to Technip Samsung
consortium.
• Pioneering project - essential to look at innovative ideas to mitigate against cost
overruns and delays, protect against claims, provide leading indicators and manage all
change order requests.
• 8over8’s Procon selected at Shell’s corporate contractual risk management solution.
• Contract execution best practice business processes embedded in Shell’s corporate
ProCon platform and available to the global Prelude Team.
• 1300 ProCon Users across Shell globally at present.
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9. Case study Prelude
FPSO 2nd Annual Congress | 2016 9
Global supply Chain
• South Korea - Hull and
Topsides
• Dubai - Turret Mooring System
(SBM)
• Malaysia - subsea Christmas
trees, manifolds, and control
equipment.
• France - Loading Arms ( FMC)
• Spain - Anchors ( Mooring
Chains)
10. Case study Prelude
FPSO 2nd Annual Congress | 2016 10
• March 2010-EPCI awarded to
Technip Samsung – construction
/installation
• EPCI plus all sub-sea contracts
(FMC,SBM..) awarded by Shell
managed in ProCon
• December 2012- 8over8’s ProCon
implemented
• 14,000 + contractual
communications managed in
Procon
11. Case study Prelude
Example Communication Templates
FPSO 2nd Annual Congress | 2016 11
• Consistent terminology
across all contracts
• Consistent templates
and formats across all contracts
• Consistent reporting
across all contracts
• Reduced administration
for both parties
• Increased clarity
about outstanding issues
and risks between parties
14. FPSO 2nd Annual Congress | 2016 14
Enhanced
Capital
Discipline
Manage
Risk
Connect
Decision
makers
Establish
Contractual
Liability
Complete Contract Control
Case study Prelude
Outcome
15. FPSO 2nd Annual Congress | 2016
• Enforced Discipline and Transparency
– All contractually significant communications
received, recorded, reviewed, issued via ProCon
– Repeated reminders to respond to outstanding
communication
– All Operator to Contractor communications
approved by single authority (Company
Representative)
– All parties share same database of
communication registers and final decisions
made - single source of truth
• Claims Defence Readiness
– No claims….yet, but
– Complete audit trail of key decisions made
throughout project is available
• Streamlined & Connected Decision Making
– ProCon available and used by all functions for
contractually significant communications:
• CP
• Finance
• Project Services
• Engineering
• Legal
• Stakeholders
• In first 2 years…
– 14,000+ contractual communications
– Approximately 60 Variations managed
15
Case study Prelude
Outcomes
16. 16
ProCon preserves the “red
thread” of personal and
corporate responsibility
through the chain of
communications linked to
contract obligations.
Owner
Operator
ProConOperatorPortal
ProConContractorPortal
$
Contractor
DISCIPLINE
• Risks
• Reviews
• Schedule
Impact
• Who?
• Responsible
• Accountable
• Consulted
• Informed
• Instructed
• When?
• Compliance
• Supporting
Documents
• Decisions
• Obligations
Independent source of
truth acts to minimize
and defend against
claims
Claims defense – “building a better bundle”
Traceability of every decision, linked to supporting evidence, in context,
and time lined.
Case study Prelude
Outcomes
17. View from the Industry
FPSO 2nd Annual Congress | 2016 17
“The Prelude deployment of ProCon has been a pathfinder for Shell and is the benchmark for other Shell
projects to work against.“
Contracting & Procurement Manager Prelude FLNG
“If communications problems are at the heart of the problems with a project, companies should improve the
governance structure to increase oversight of the construction process.”
PWC (2013) “Correcting the course of capital projects”
“From this categorization, it was noticed that communication ,design, and planning represent the highest
percentage in delay factors.”
Research Paper Adel Al Subaih,( 2015) Senior Project Engineer in ADNOC
“A recent survey of 9 FPSO projects identified a combined 38% cost overrun totalling $2.5bn in wasted capital.
One of the identified causal factors was a "a lack of clarity regarding contract responsibilities."
Douglas Westwood “ FPSO Industry at a Crossroads”
“Samsung has revealed it is expected to make a near $1 billion loss on the Roy Hill project” Various- 2015
18. Summary
FPSO 2nd Annual Congress | 2016
• Large complex capital projects in this low oil price climate require proactive
contract risk management. Improve what is within your control.
• Enhanced governance and strong capital discipline are value adding levers
within your control.
• Standardise on business processes to govern all interactions with contractors.
• Manage all contractual obligations within a common shared platform
with your contractor.
• Establish contractual liability for each change order request AT INCEPTION
of the request.
• Mandate a single communication channel.
• Use Early Warning Indicators to mitigate against risk.
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19. Thank You! Questions?
FPSO 2nd Annual Congress | 2016 19
Clare Colhoun
CEO 8over8 Ltd. | An Aveva Group Company
M: +44(0) 7748 634748
This animation shows the interaction between a contractor and his client using ProCon. In this example the contractor (on the right) submits a communication to the owner operator on the left, who then reviews the communication and responds. This triggers a chain of communications that result in the contractor submitting a claim, which may be 5 years later towards the end of the project. The animation shows that the owner operators can defend against the claim because they have a full, independent audit trail of all communications throughout the contract history, even if key project team members and previous decision makers have already been demobilised from the project.