- Email: [email protected]
Project management in the oil industry
Project management in the oil industry M J Lang
The main theme of this paper is to examine problems being experienced in the management of projects in the oil industry. Difficulties currently being encountered will be addressed and solutions to the problems will be proposed. Lessons to be learned for the future will be identified to avoid making the same mistakes again. Keywords: project management, ing, procurement, construction
oil industry, engineer-
Two contemporary subjects will be addressed. First, the difficulties experienced when oil companies award several separate contracts on an offshore project are examined and compared with the current increasing use of engineering, procurement and construction (EPC) contracts in this sector. It will be shown how EPC contracts can solve some of the difficulties which the oil companies encounter when they award separate contracts for engineering, procurement and construction. Second, the difficulties currently being encountered in resourcing projects and of addressing this problem are reviewed. There are some areas common to these two subjects which will be drawn together in conclusion.
EPC CONTRACTS EPC refers to a single contract for engineering, procurement and construction, usually for a fixed lump sum price. For the purposes of this paper, it is assumed that the C will include onshore fabrication, load-out, hook-up and commissioning. In the UK there are few single contractors that could take on a full EPC job. However, joint venture (JV) partnerships have recently been formed and are demonstrating an ability to combine their respective skills very successfully.
H&G Engineering, CR0 9XP, UK
Grosvenor
Vol 8 No 3 August
1990
House.
125 High
Street,
Croydon
0263-7863/90/030159-04
In the late 1960s and 1970s offshore engineering and construction in the UK was in its development stage. Work was often not well defined. It was therefore let on a reimbursable basis with separate contracts for engineering, procurement and construction. As the programme for offshore jobs usually has an unchangeable offshore installation date, these poorly defined job scopes led to delays and the need to overlap engineering and construction. The oil companies ended up paying ‘double’ at the interface. Construction often started before design was complete; installation sometimes started before construction was complete; fabricators always insist on re-drafting some of the engineers’ drawings to facilitate shop work - they make changes to the design at site. Huge cost overruns resulted from this inefficient way of working and the contractors made money at the oil companies’ expense. An increasing number of contractors joined the booming industry. This was an expensive learning process for the oil companies which they could not allow to continue. They started looking for ways of reducing their exposure. The first thing to improve was the scope of work definition. This was done and the project programme was better defined to control the overlap between design and construction. More time was spent at the start of the project preparing the work and the plan in detail, so that engineering proceeded within budget to plan to enable the expensive fabrication and offshore installation phases to commence on schedule. As the oil companies became more commercially demanding, they forced the engineering contractors into tough, competitive bidding. They increased their own resources to oversee the contractor’s performance and insisted on arduous conditions of contract. The engineering contractors had to improve their project management capability and develop tools for better project control. Some of the engineering contractors fell by the wayside because they failed to respond to the challenge of executing difficult contracts successfully at
@ 1990 Butterworth-Heinemann
Ltd
159
very low margins, or even no margin at all. The pendulum had swung the other way and in the late 1980s a position has been reached in which the oil companies are enjoying a very favourable economic situation, particularly with their offshore engineering contractors. This near loss-making situation for the engineering contractors cannot go on. They must get a fair share of profits out of these contracts, because nobody can continue in business on the back of constant underrecovery. In principle one solution lies in the engineering contractors and the offshore fabricators getting together as partners and taking responsibility for larger and completely fabricated portions of the work. This enables the oil companies, if the contractors convince them of their capability, to reduce their own costs. They no longer have to control the interfaces between engineering contractors. They no longer have to control the interfaces between engineering, procurement and construction. The oil company’s team is therefore reduced, saving costs, and the inevitable interparty claims between engineering contractors and fabricators are eliminated. The joint venturing EPC contractors must make some provision in the price to cover potential interface difficulties. It does not need to be as high a provision as the oil companies make, because the JV companies control the work directly. If the JV companies apply themselves properly they can plan the work so that interface difficulties are minimized. This is where the potential profit for the engineering company (and for the JV fabricator) might originate. It is not at the expense of the oil company - they get a better deal too. It is basically a logical step, putting all the work where it should be, in the hands of the contractors who, by working efficiently, achieve a benefit for everyone. Effective Quality Assurance from beginning of design to finish of construction is the keynote of success.
drop in 1982 and continued downwards for an extended period of four years. After this there was a period of instability before the price became more settled in 1988. The falling oil price resulted in reduced investment in oilfield development and consequently less work for contractors to design and build offshore platforms. The low oil price did not, unfortunately, have the compensatingeffect where low feedstock prices might encourage process plant operators to manufacture more oil-based products. This can be attributed to built-in overcapacity during the 1970s. It needed time for the demand for petroleum and petrochemical products to catch up with the overcapacity. These two factors - an extended period with a falling oil price and overcapacity of production ~ caused the recession in the requirement for engineering design staff both in the contractors and oil companies during the first half of the 1980s. Extensive redundancies and staff reductions followed. driven by the need to economize. A significant number of businesses, formed in the boom years, disappeared. Figure 2 shows the alarming fall-off of employees in the production and construction industries from 1980 to 1988*. In our area, coal, oil and gas, the number employed has fallen over 50% in the period. Another important related problem is now with us. The number of school leavers wishing to pursue engineering as a career, whether to work for an oil company or contractor, is falling. Figure 3 demonstrates the situation, by showing the decline in demand for UK university courses in engineering over the last five years”.
FS800 ;j:RESOURCING
~~~
DIFFICULTIES
Figure 1 shows how crude oil prices varied between 1973 and 1987l. In the period up to 1980 they were climbing rapidly, the oil companies invested in oilfield development and there was a lot of work available. A large pool of engineering labour was available to draw from, and it was a relatively prosperous period for engineers and engineering contractors. The oil prices levelled off from 1980. They started to
g
6000
/ I 1980 1981
I
I
,
1982
1983
1984
Figure 2. Employees industries
40,
I
35302520-
/
-‘. 2000-
Year
Figure I. Crude oil prices from 1973 to I987
160
,
1750 1984
‘\
I’
I
6
I
1987
=
198:
and construction
\,Electramc ‘\ \
s B, -z 8 2500% 2 -----__ E is
071973 ’ 1976 ’1977 ’ 1978 ’ 1979 ’1980 ’1981 ’ 1982 ’ 1983 ’ 1984 ’1985 L1986 I1987 I’
/
I
1986
in production
/”
3000-
I
1985
- _ . _c’L”‘i .
$yral
-r---
--
._ --J~k__
I
I
1985
1986
Figure 3. Demand for courses in engineering
._
._
.
-_ A
1987
UK university undergraduate
Project
Management
A major consequence of these two developments, the loss of people from the business, and the shortage of people entering the industry from universities and colleges, is that there is a reduced engineering resource and an ageing one. Apart from the difficulty of finding enough people, projects are being manned by older people. The previously established balanced team of young and old has been lost. This is a relevant and significant consequence of the shortage of people situation found today. The risk is being run of de-motivating some of the good people who have remained in the industry. It is not possible to extend business to win new contracts in which they would have a senior role because they are needed to make up the numbers on the jobs already underway. This situation exists at a time when oil prices have been relatively stable for over a year and oil companies have become more confident and are proceeding again with field developments to increase oil production. Furthermore, the chemical manufacturers are again showing signs of investing, to replace the worn out and less efficient plants built in the 1960s and 1970s. Further, demand also now seems to have caught up with available capacity. So that is the problem. There are reduced numbers in the industry, fewer engineers joining an ageing population and an expanding market. How is this solved? What lessons have been learnt for the future? The immediate problems have been addressed. More attention is being paid to working conditions, salaries and other benefits. Some of the people who left the industry during the slump are being attracted back. Incentive bonuses have been used together with other financial ways of motivating people in order to improve efficiency and productivity. It is a very unstable situation containing risks for the contractors, and rising costs to be passed on to the oil companies. These financial solutions to the problem are short term. The longer term has to be addressed. A longer term solution is to attact more people from schools and universities into the industry. Figure 4 shows the prediction of numbers of school leavers over the next five years4. It indicates a fall, which started in 1980 and which will continue to 1992. After that the number turns up due to the children whose parents
were from the post-war baby boom, so for the next few years this factor has to be contended with. Two courses of action are open to us. Firstly, the engineering and the oil industries must be marketed. Engineering must be given a high status. Secondly, that half of the population who have never properly been encouraged into engineering - women - must be addressed. Figure 5 shows the percentage of women recruited by Shell in recent years. The author is assuming that this is typical of companies in the oil industry. In 1980 the percentage was only 8%. It has risen, but only to 18%. This is an area of enormous potential and possibly the only way the industry resource requirements can be achieved. Whose responsibility is it to get the message across to the school leavers and students and especially women? It is the responsibility of all of us: the government, teachers, lecturers, engineeringiinstitutions, producers of oil, chemicals, petrochemicals, pharmaceuticals, etc., engineering and construction contractors and equipment manufacturers. The Institution of Chemical Engineers has just produced a short video which would be appropriate to show at schools/colleges - particularly for women, who feature in the video. The oil companies are addressing the subjects. The author’s firm has increased graduate training intake; will step up its profile at universities to select the intake; will improve the interview team to include young engineers (including female engineers) to sell the company and its graduate training scheme to potential joiners. This direct approach will help encourage and welcome engineering graduates into our industry rather than seeing them tempted away into the field of business and finance, where so many go. There is also a commitment to increasing the proportion of women on the staff. Those people who remain in the industry must be kept. Because they are in short supply they must be looked after better than in the past. The human aspects of management are most important. More attention has to be paid to regular appraisals, people must see their career path, and more training must be provided. The human aspects have been neglected in the past and this must be corrected to hold on to the good people. The ageing problem must be addressed. On any big job there will be many engineers and designers doing things they did years ago, because the younger ones are not there. How do you motivate people who do not appear to be progressing careerwise?
, c. 20 ..
I
. .._
, /’
1’
---__
/
I
Non-technlcol _*c-----’ **
.-
--__,I
IO-
1111111,,,1 sept 75 Sept 80
I,,,
Sept. 85
I,,,,
Sept. 90
Figure 4. Pupils leaving school in England
Vol 8 No 3 August
1990
11 Sept 95
0’
I
I
1
I
I
1980 1981 1982 1983 1984
I
1985
I
1986
I
198:7
Figure 5. Percentage of female staff recruited by Shell
161
One cannot rely on people’s flexibility too long. Perhaps one needs to think about new organization structures. Instead of the conventional pyramid structure perhaps one should consider more decentralized structures where relevant. For example, the very big jobs could be split up by area with responsible managers in charge of each area. This cannot be achieved without a central coordinating management team and this means more people, so it may not be a solution. On the other hand, it has been observed how much more motivated people are on smaller jobs. They are also more efficient. It is this improved efficiency and motivation which might offset the need for more people and let us use decentralized organizations on big jobs, to help the resource problem. CONCLUSION An attempt has been made here to review what must be one of the biggest current problems and introduce some ideas which might be useful in solving it. The resourcing problem is very serious and there is a need for everyone to address it. The first problem related to offshore jobs where each phase of engineering, procurement and construction was let separately by the oil companies. This led to the need for a larger oil company project team to manage the interfaces and the inevitable additional costs at overlap between each phase. The solution here was to let EPC contracts. Recent experience of lump sum work and EPC work is that engineering people are much more easily motivated on these jobs. As lump sum jobs have, by definition, a clear scope of work, fewer changes can be expected. This maintains the interest and dedication of good engineers. It assures a good quality job and it helps keep good engineers in the industry.
162
From experience it has been found that the oil companies use considerably fewer people to oversee an EPC contractor than a reimbursable one. An increased tendency towards EPC will therefore release oil company engineers for employment by the contractors and this will also help the resource problem. Two problems have been addressed which are seen as significant to oil industry project management. The oil companies and the contractors need one another to continue in business and should work together to solve any problems which jeopardize the oil industry.
REFERENCES 1 European Communities Oil and Gas Technological Development Projects, Third Status Report, Graham & Trotman 2 Monthly digest of statistics (February, 1989) 3 Recchioli, F Manpower requirements to the year 2000 4 ZLEA Central Registry (Nationwide statistics)
Mike Lang graduated as a chemical engineer at the University of Cape Town, South Africa. After graduate training at Sasol, he joined H&G as a commissioning engineer where he worked in a number of locations in the UK and Europe. He then moved to the process department at H&G where he worked on various petrochemical and offshore projects. This led him into project engineering and subsequently project management. Two years ago, after managing a number of onshore and offshore projects, he was appointed to the position of Director of Projects at H&G.
Project
Management
The main theme of this paper is to examine problems being experienced in the management of projects in the oil industry. Difficulties currently being encountered will be addressed and solutions to the problems will be proposed. Lessons to be learned for the future will be identified to avoid making the same mistakes again. Keywords: project management, ing, procurement, construction
oil industry, engineer-
Two contemporary subjects will be addressed. First, the difficulties experienced when oil companies award several separate contracts on an offshore project are examined and compared with the current increasing use of engineering, procurement and construction (EPC) contracts in this sector. It will be shown how EPC contracts can solve some of the difficulties which the oil companies encounter when they award separate contracts for engineering, procurement and construction. Second, the difficulties currently being encountered in resourcing projects and of addressing this problem are reviewed. There are some areas common to these two subjects which will be drawn together in conclusion.
EPC CONTRACTS EPC refers to a single contract for engineering, procurement and construction, usually for a fixed lump sum price. For the purposes of this paper, it is assumed that the C will include onshore fabrication, load-out, hook-up and commissioning. In the UK there are few single contractors that could take on a full EPC job. However, joint venture (JV) partnerships have recently been formed and are demonstrating an ability to combine their respective skills very successfully.
H&G Engineering, CR0 9XP, UK
Grosvenor
Vol 8 No 3 August
1990
House.
125 High
Street,
Croydon
0263-7863/90/030159-04
In the late 1960s and 1970s offshore engineering and construction in the UK was in its development stage. Work was often not well defined. It was therefore let on a reimbursable basis with separate contracts for engineering, procurement and construction. As the programme for offshore jobs usually has an unchangeable offshore installation date, these poorly defined job scopes led to delays and the need to overlap engineering and construction. The oil companies ended up paying ‘double’ at the interface. Construction often started before design was complete; installation sometimes started before construction was complete; fabricators always insist on re-drafting some of the engineers’ drawings to facilitate shop work - they make changes to the design at site. Huge cost overruns resulted from this inefficient way of working and the contractors made money at the oil companies’ expense. An increasing number of contractors joined the booming industry. This was an expensive learning process for the oil companies which they could not allow to continue. They started looking for ways of reducing their exposure. The first thing to improve was the scope of work definition. This was done and the project programme was better defined to control the overlap between design and construction. More time was spent at the start of the project preparing the work and the plan in detail, so that engineering proceeded within budget to plan to enable the expensive fabrication and offshore installation phases to commence on schedule. As the oil companies became more commercially demanding, they forced the engineering contractors into tough, competitive bidding. They increased their own resources to oversee the contractor’s performance and insisted on arduous conditions of contract. The engineering contractors had to improve their project management capability and develop tools for better project control. Some of the engineering contractors fell by the wayside because they failed to respond to the challenge of executing difficult contracts successfully at
@ 1990 Butterworth-Heinemann
Ltd
159
very low margins, or even no margin at all. The pendulum had swung the other way and in the late 1980s a position has been reached in which the oil companies are enjoying a very favourable economic situation, particularly with their offshore engineering contractors. This near loss-making situation for the engineering contractors cannot go on. They must get a fair share of profits out of these contracts, because nobody can continue in business on the back of constant underrecovery. In principle one solution lies in the engineering contractors and the offshore fabricators getting together as partners and taking responsibility for larger and completely fabricated portions of the work. This enables the oil companies, if the contractors convince them of their capability, to reduce their own costs. They no longer have to control the interfaces between engineering contractors. They no longer have to control the interfaces between engineering, procurement and construction. The oil company’s team is therefore reduced, saving costs, and the inevitable interparty claims between engineering contractors and fabricators are eliminated. The joint venturing EPC contractors must make some provision in the price to cover potential interface difficulties. It does not need to be as high a provision as the oil companies make, because the JV companies control the work directly. If the JV companies apply themselves properly they can plan the work so that interface difficulties are minimized. This is where the potential profit for the engineering company (and for the JV fabricator) might originate. It is not at the expense of the oil company - they get a better deal too. It is basically a logical step, putting all the work where it should be, in the hands of the contractors who, by working efficiently, achieve a benefit for everyone. Effective Quality Assurance from beginning of design to finish of construction is the keynote of success.
drop in 1982 and continued downwards for an extended period of four years. After this there was a period of instability before the price became more settled in 1988. The falling oil price resulted in reduced investment in oilfield development and consequently less work for contractors to design and build offshore platforms. The low oil price did not, unfortunately, have the compensatingeffect where low feedstock prices might encourage process plant operators to manufacture more oil-based products. This can be attributed to built-in overcapacity during the 1970s. It needed time for the demand for petroleum and petrochemical products to catch up with the overcapacity. These two factors - an extended period with a falling oil price and overcapacity of production ~ caused the recession in the requirement for engineering design staff both in the contractors and oil companies during the first half of the 1980s. Extensive redundancies and staff reductions followed. driven by the need to economize. A significant number of businesses, formed in the boom years, disappeared. Figure 2 shows the alarming fall-off of employees in the production and construction industries from 1980 to 1988*. In our area, coal, oil and gas, the number employed has fallen over 50% in the period. Another important related problem is now with us. The number of school leavers wishing to pursue engineering as a career, whether to work for an oil company or contractor, is falling. Figure 3 demonstrates the situation, by showing the decline in demand for UK university courses in engineering over the last five years”.
FS800 ;j:RESOURCING
~~~
DIFFICULTIES
Figure 1 shows how crude oil prices varied between 1973 and 1987l. In the period up to 1980 they were climbing rapidly, the oil companies invested in oilfield development and there was a lot of work available. A large pool of engineering labour was available to draw from, and it was a relatively prosperous period for engineers and engineering contractors. The oil prices levelled off from 1980. They started to
g
6000
/ I 1980 1981
I
I
,
1982
1983
1984
Figure 2. Employees industries
40,
I
35302520-
/
-‘. 2000-
Year
Figure I. Crude oil prices from 1973 to I987
160
,
1750 1984
‘\
I’
I
6
I
1987
=
198:
and construction
\,Electramc ‘\ \
s B, -z 8 2500% 2 -----__ E is
071973 ’ 1976 ’1977 ’ 1978 ’ 1979 ’1980 ’1981 ’ 1982 ’ 1983 ’ 1984 ’1985 L1986 I1987 I’
/
I
1986
in production
/”
3000-
I
1985
- _ . _c’L”‘i .
$yral
-r---
--
._ --J~k__
I
I
1985
1986
Figure 3. Demand for courses in engineering
._
._
.
-_ A
1987
UK university undergraduate
Project
Management
A major consequence of these two developments, the loss of people from the business, and the shortage of people entering the industry from universities and colleges, is that there is a reduced engineering resource and an ageing one. Apart from the difficulty of finding enough people, projects are being manned by older people. The previously established balanced team of young and old has been lost. This is a relevant and significant consequence of the shortage of people situation found today. The risk is being run of de-motivating some of the good people who have remained in the industry. It is not possible to extend business to win new contracts in which they would have a senior role because they are needed to make up the numbers on the jobs already underway. This situation exists at a time when oil prices have been relatively stable for over a year and oil companies have become more confident and are proceeding again with field developments to increase oil production. Furthermore, the chemical manufacturers are again showing signs of investing, to replace the worn out and less efficient plants built in the 1960s and 1970s. Further, demand also now seems to have caught up with available capacity. So that is the problem. There are reduced numbers in the industry, fewer engineers joining an ageing population and an expanding market. How is this solved? What lessons have been learnt for the future? The immediate problems have been addressed. More attention is being paid to working conditions, salaries and other benefits. Some of the people who left the industry during the slump are being attracted back. Incentive bonuses have been used together with other financial ways of motivating people in order to improve efficiency and productivity. It is a very unstable situation containing risks for the contractors, and rising costs to be passed on to the oil companies. These financial solutions to the problem are short term. The longer term has to be addressed. A longer term solution is to attact more people from schools and universities into the industry. Figure 4 shows the prediction of numbers of school leavers over the next five years4. It indicates a fall, which started in 1980 and which will continue to 1992. After that the number turns up due to the children whose parents
were from the post-war baby boom, so for the next few years this factor has to be contended with. Two courses of action are open to us. Firstly, the engineering and the oil industries must be marketed. Engineering must be given a high status. Secondly, that half of the population who have never properly been encouraged into engineering - women - must be addressed. Figure 5 shows the percentage of women recruited by Shell in recent years. The author is assuming that this is typical of companies in the oil industry. In 1980 the percentage was only 8%. It has risen, but only to 18%. This is an area of enormous potential and possibly the only way the industry resource requirements can be achieved. Whose responsibility is it to get the message across to the school leavers and students and especially women? It is the responsibility of all of us: the government, teachers, lecturers, engineeringiinstitutions, producers of oil, chemicals, petrochemicals, pharmaceuticals, etc., engineering and construction contractors and equipment manufacturers. The Institution of Chemical Engineers has just produced a short video which would be appropriate to show at schools/colleges - particularly for women, who feature in the video. The oil companies are addressing the subjects. The author’s firm has increased graduate training intake; will step up its profile at universities to select the intake; will improve the interview team to include young engineers (including female engineers) to sell the company and its graduate training scheme to potential joiners. This direct approach will help encourage and welcome engineering graduates into our industry rather than seeing them tempted away into the field of business and finance, where so many go. There is also a commitment to increasing the proportion of women on the staff. Those people who remain in the industry must be kept. Because they are in short supply they must be looked after better than in the past. The human aspects of management are most important. More attention has to be paid to regular appraisals, people must see their career path, and more training must be provided. The human aspects have been neglected in the past and this must be corrected to hold on to the good people. The ageing problem must be addressed. On any big job there will be many engineers and designers doing things they did years ago, because the younger ones are not there. How do you motivate people who do not appear to be progressing careerwise?
, c. 20 ..
I
. .._
, /’
1’
---__
/
I
Non-technlcol _*c-----’ **
.-
--__,I
IO-
1111111,,,1 sept 75 Sept 80
I,,,
Sept. 85
I,,,,
Sept. 90
Figure 4. Pupils leaving school in England
Vol 8 No 3 August
1990
11 Sept 95
0’
I
I
1
I
I
1980 1981 1982 1983 1984
I
1985
I
1986
I
198:7
Figure 5. Percentage of female staff recruited by Shell
161
One cannot rely on people’s flexibility too long. Perhaps one needs to think about new organization structures. Instead of the conventional pyramid structure perhaps one should consider more decentralized structures where relevant. For example, the very big jobs could be split up by area with responsible managers in charge of each area. This cannot be achieved without a central coordinating management team and this means more people, so it may not be a solution. On the other hand, it has been observed how much more motivated people are on smaller jobs. They are also more efficient. It is this improved efficiency and motivation which might offset the need for more people and let us use decentralized organizations on big jobs, to help the resource problem. CONCLUSION An attempt has been made here to review what must be one of the biggest current problems and introduce some ideas which might be useful in solving it. The resourcing problem is very serious and there is a need for everyone to address it. The first problem related to offshore jobs where each phase of engineering, procurement and construction was let separately by the oil companies. This led to the need for a larger oil company project team to manage the interfaces and the inevitable additional costs at overlap between each phase. The solution here was to let EPC contracts. Recent experience of lump sum work and EPC work is that engineering people are much more easily motivated on these jobs. As lump sum jobs have, by definition, a clear scope of work, fewer changes can be expected. This maintains the interest and dedication of good engineers. It assures a good quality job and it helps keep good engineers in the industry.
162
From experience it has been found that the oil companies use considerably fewer people to oversee an EPC contractor than a reimbursable one. An increased tendency towards EPC will therefore release oil company engineers for employment by the contractors and this will also help the resource problem. Two problems have been addressed which are seen as significant to oil industry project management. The oil companies and the contractors need one another to continue in business and should work together to solve any problems which jeopardize the oil industry.
REFERENCES 1 European Communities Oil and Gas Technological Development Projects, Third Status Report, Graham & Trotman 2 Monthly digest of statistics (February, 1989) 3 Recchioli, F Manpower requirements to the year 2000 4 ZLEA Central Registry (Nationwide statistics)
Mike Lang graduated as a chemical engineer at the University of Cape Town, South Africa. After graduate training at Sasol, he joined H&G as a commissioning engineer where he worked in a number of locations in the UK and Europe. He then moved to the process department at H&G where he worked on various petrochemical and offshore projects. This led him into project engineering and subsequently project management. Two years ago, after managing a number of onshore and offshore projects, he was appointed to the position of Director of Projects at H&G.
Project
Management