UAE. In the coming decade, the energy industry in the Middle East and North Africa (MENA) will see a wave of major capital projects—more than US$1.1 trillion in projected spending, approximately one-fourth of the industry’s total global investment through 2020.
This is a significant capital outlay that needs to be carefully managed. However, the region’s track record is mixed when it comes to executing large capital projects. Management consulting experts from Booz & Company have identified the root causes the root causes of inefficient development, management, and execution of capital projects that may impede taking full advantage of the anticipated capital outlay, and examined ways in which they can be overcome.
A TRILLION-DOLLAR CHALLENGE
MENA’s oil-exporting countries have made impressive strides in consolidating their position in oil markets (e.g. Saudi Arabia’s national oil company (NOC), Saudi Aramco, built infrastructure facilities in 2009 to increase its oil production capacity to 12.5 million barrels per day (bpd), including the development of the massive 1.2 million bpd Khurais field, at a cost of US$10 billion) and crafting a leadership position in new adjacent industries, such as bulk petrochemicals, natural gas, liquefied natural gas (LNG), steel, and aluminium.
The industry has achieved this diversification by executing a number of ground-breaking new megaprojects across the Middle East.
For instance, Saudi Arabia has become one of the largest players in the bulk petrochemicals market, with its flagship company, SABIC, among the top five producers worldwide. This has been achieved by establishing massive industrial sites with world-scale petrochemicals complexes in Jubail and Yanbu.
Qatar has become the largest LNG exporter in the world during the past decade, by setting up 14 LNG mega trains through its two flagship companies: Qatargas and RasGas. In addition, Qatar also built the largest gas-to-liquids project in the world (in collaboration with Shell).
Also, the United Arab Emirates has been an early pioneer in developing LNG from the Middle East and is building highly complex sour-gas fields, along with a planned increase in oil production capacity.
During the coming decade, the MENA energy industry is expected to continue this massive investment program by executing projects worth approximately US$1.1 trillion across the energy value chain. According to the International Energy Agency, the MENA region is expected to represent about 25% of global energy investments. Predictably, large resource holders such as Saudi Arabia, the UAE, Iraq, and Iran are expected to lead the way in spending.
“However, the next wave of capital projects will be larger and more complex, and will represent a significant capital outlay that needs to be carefully managed. History suggests that the region’s companies have a mixed record of executing large capital projects. Cost overruns, schedule slippages, and inconsistent quality have become recurring concerns for senior management. Some of these problems come from market-related issues, such as a surge in commodity prices in the middle of the last decade”, said Raed Kombargi, partner with Booz & Company.
He added, “Many of these problems, however, arise from within the industry itself. In our experience, the root causes include inadequate engineering and project management (E&PM) strategies, a lack of clear governance, inadequate checks and balances, insufficient standardization, and a shortage of local capabilities.”
THE SEVEN HABTS OF SUCCESSFUL PROJECT DELIVERY
Today, MENA energy companies have a rare opportunity to fundamentally review the way they develop, manage, and execute capital projects. Specifically, the industry will need to master seven key habits to build world-class project delivery capabilities. These are:
1. Develop a Clear E&PM Strategy
“MENA companies should develop a clear E&PM strategy to ensure that they are well-equipped to manage and execute their capital projects. This strategy will define which projects and activities will be performed by the company itself and which will be outsourced,” said Alain Masuy, principal with Booz & Company.
“To develop this strategy, companies should create a rigorous and transparent project classification framework. Projects are typically classified by risk, size, complexity, and nature.”
The process of project classification will help derive a tailored execution strategy for each project. Overall, three main types of strategies are available for a company:
• Manage and execute the project in-house
• Manage the project in-house and outsource project execution
• Outsource both project management and project execution
2. Develop and Implement a Governance Model with Clear Accountabilities and Responsibilities
A well-developed governance model will clearly define accountabilities and establish the roles of the various entities in the project setup. “Generally, direct management responsibility for the project varies depending on where it is in its life cycle. The business owner will be more heavily involved during the initial two phases (identify and assess, and select), while E&PM will manage the next two phases (define and execute). Finally, once construction is complete, the project will revert back to the control of the business owner for operation,” said Asheesh Sastry, principal with Booz & Company.
To ensure seamless accountability and responsibility during these transitions, projects typically employ a single ‘project steering committee’ that remains the same throughout the entire process. This committee will make strategic decisions regarding marketing agreements, financing, technology, and other issues that might significantly affect the business case.
3. Establish Best-Practice Processes Including Appropriate Checks and Balances
MENA companies should also establish best-in-class processes to master project development and execution. These processes can be split into three areas: core delivery, support, and checks and balances.
To assess the readiness of the project to move to the next phase in the stage-gate process, top-performing companies have developed and implemented appropriate checks and balances to ensure that safety, quality, and performance standards are met and that the project business case is still valid at each gate. These processes will also ensure that the company captures any potential synergies from concurrent projects and that it incorporates lessons learned and applicable designs from past projects.
Alain Masuy added, “Additionally, some of these companies have adopted peer reviews at different gates to augment the project governance structure and act as an independent auditor for the project team. Best-practice companies can generally differentiate the required checks and balances and deliverables based on the project class to establish the right equilibrium between flexibility and control. Finally— and critically—the gates must be closely linked to the company’s key performance indicators (KPIs).”
4. Develop In-House Centers of Excellence in Key E&PM Areas
Successful companies also need to establish an engineering and technology center of excellence (COE) to improve their performance. COEs can typically cover as many as five main mandates:
• Achieve functional excellence by standardizing processes, and capturing and disseminating best practices
• Provide expert and technical services to project teams as required
• Identify, analyze, and disseminate new technologies
• Manage talent development for technical staff
• Manage relationships with technical/technological suppliers and, in some cases, coordinate research activities with academic and international institutions
The type and number of mandates covered by the COE depends on the size and diversity of the company’s operations and the geographies it covers. Additionally, COEs are organized according to different models depending on their degree of evolution.
Nascent organizations typically establish a small and centralized COE that exchanges information with project teams. More evolved COEs at more advanced companies provide dedicated resources to project teams on a temporary basis, in order to share knowledge and bring lessons learned back to the COE.
5. Develop Strategic Alliances to Address Local Capability Gaps
Although some engineering companies can be reluctant to share their know-how, recent success stories show that with the right incentives, major international engineering firms have willingly agreed to set up mutually beneficial strategic alliances with NOCs, IOCs, and regional companies.
“Structured correctly, such an alliance can bring mutual profits to both partners, and speed up the development of the energy company’s own capabilities,” said Asheesh Sastry. “A good initial step is to develop a pilot project, which offers a training ground to assess how well the two companies work together and whether they are willing to share common benefits. The terms of the contract become relevant in this approach.”
6. Establish Dedicated Project and Commercial Academies to Improve Learning and Development
Like other regions in the world, MENA countries suffer from a scarcity of engineering resources. Over the past several decades, younger generations have drifted away from careers in oil and gas, in part because they find the job to be strenuous and unrewarding.
Instead, new graduates are seeking out other sectors, such as banking, communication and media, real estate, and IT, which are seen to offer more attractive career paths and better salaries. To remedy this shortage in human resources, some energy companies are now creating dedicated project and commercial academies, which aim to bridge the gap between the industry and the students, as well as enhancing existing capabilities in the company.
7. Increase Standardization Levels Across All Areas
A key factor for successful project delivery is to establish internal engineering standards and increase standardization levels. These standards are an important asset for the company and will bring many benefits:
• Increased business efficiency and overall cost reduction by simplifying design, controlling design options, and favoring interchangeability of equipment
• Enhanced technical integrity
• Increased health, safety, and environmental performance
• Improved technical knowledge through technology transfer and best-practice sharing within the company as well as with other international companies
“As a new wave of mega investments kicks in, now is the right time for MENA companies to fundamentally review the way they develop, manage, and execute their capital projects. They should master the seven key habits identified by Booz & Company to build world-class project delivery capabilities. In addition, through these major capital project programs, MENA companies have a unique opportunity to build and incubate the local private sector and play an essential national role in contributing to GDP and the economy as a whole.
Perhaps most important, they can help build homegrown capabilities and reduce their dependence on outsiders,” concluded Raed Kombargi.
More Energy, Chemicals and Utilities reports and whitepapers are available on the Booz & Company website.
Photo: Alain Masuy, principal with Booz & Company.
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