December 2018

Special Focus: Plant Design, Engineering and Construction

Eight strategies to minimize capital expenditures for a better bottom line

The following are eight strategies to help reduce engineering, procurement and construction (EPC) project costs, along with tips to maximize the value of both existing assets and new investments for refiners and producers.

Adib, M., SNC-Lavalin Inc.

The following are eight strategies to help reduce engineering, procurement and construction (EPC) project costs, along with tips to maximize the value of both existing assets and new investments for refiners and producers.

FIG. 1. Total CAPEX costs of EPC projects.
FIG. 1. Total CAPEX costs of EPC projects.

To reduce capital expenditures (CAPEX) in any project, you must know where the capital is being spent (FIG. 1). Of the top three cost expenditures in an EPC project, construction can account for approximately 30%–40% of a typical petrochemical project’s installed costs. On a multimillion-dollar project, modest savings in construction can reduce CAPEX by hundreds of thousands of dollars. Procurement costs—the largest expenditure—can account for 40%–50% of the total cost of the project. This means that a mere 1% savings in procurement costs can save thousands of dollars in CAPEX.

Often, overlooked finance-related costs are the third largest expenditure. For a private developer trying non-recourse or limited-recourse financing, costs can reach as high as 25%–30% of total project costs. While the “cost of money” is high, there are ways to lower it.

Think ahead

Most project cost overruns are due to changes that are made during the EPC phase. This is due to incomplete front-end engineering and design (FEED) or having no FEED at all. When the FEED package issued to the EPC contractor is incomplete and does not meet the ultimate operations objective, FEED work will take place during the EPC phase, where the cost of a change is much higher and has a cascading impact throughout the whole project. Cost-effective project development begins with the end in mind, with plant operation requirements driving the FEED.

While an engineer thinks in terms of engineering and construction requirements, the owner must “think ahead” to the requirements of plant operation, from the initial startup period when requirements are very different, to steady-state operations at optimum capacity.

Without this forward-thinking approach, minor issues overlooked in the FEED stage can arise as major problems at the operations stage, requiring new engineering solutions and causing delays, slowing time-to-market expectations or even preventing market access when timing is crucial. One way to avoid project risk and delays is to bring the commissioning and startup team on board early, and to have them involved during the FEED phase. By identifying and addressing small issues early to avoid big problems down the line, thinking ahead can be a very cost-effective way to reduce CAPEX.

Go digital

The petrochemical and refining sectors may lag in adopting the latest digital technologies, but the Internet of Things (IoT) is making it easier—and more cost effective—to use digital capabilities to gain efficiencies across the board.

Increasing digital operations in maintenance is one area that can significantly reduce costs. For example, the plant layout can be designed so that various units incorporate equipment sensors that continuously monitor the operational performance of individual parts. By tracking sensor data and automatically recording and analyzing that data, the IoT can detect and monitor equipment wear and predict the life expectancy of various parts associated with a specific unit. Instead of running a part until it breaks, which can cause shutdowns, delays and loss of production, continuous monitoring automatically tracks part wear and can even order the part in advance of failure. This benefit provides planned, scheduled maintenance that minimizes downtime and saves money.

Push performance limits. Digital technologies are also used in process optimization. Proven effective and readily implemented, advanced process control (APC) automatically monitors and controls processes to keep equipment working at top efficiency, thus delivering optimum performance that results in increased production and better yields.

In the past, gauging process efficiency depended on the knowledge and experience of the seasoned individual operator. However, operating conditions can change very quickly, and not even the seasoned veteran can keep up with all the complex process interactions that impact performance.

At present, APC—using sensitive and accurate sensors—gives every operator the know-how to keep a plant operating at peak efficiency. By continuously monitoring process data, APC can continuously program systems to remain within the narrow parameter limits that yield optimum performance, so systems are always maintained at maximum efficiency, even through multiple, rapid changes that can occur in certain conditions.

Simplify

As an owner, the goal is to get the product to market as fast as possible. However, the process of building a plant to generate product is a slow one. The start of a project can take as long as 18 mos while you pre-qualify bidders and obtain bids, and then evaluate, negotiate and award an EPC contract.

From an owner’s point of view, choosing the lowest-cost bid for services may seem cost effective at first. Some cases, such as government projects, even require that the lowest bid be awarded the contract. But what is the true cost? When you consider the amount of time involved, the increased risk of managing multiple contracts, and the lost production caused by inevitable delays, how much did that lowest-bid service really cost?

This complicated contracting procedure is not mandatory. Instead, owners can skip the step-by-step procedure of awarding bids for each stage and phase of a project by partnering and sharing the risks and rewards with a pre-selected contractor that can provide the full scope of EPC services and manage the interfaces between the various elements. “Do-it-yourself” contracting by the owner may appear to save money at the outset, but the increased risk of delays and the substantial amount of time required to manage the process translates into higher costs in the long run. Conversely, a pre-selected contractor may initially cost more at the outset, but time savings alone will recoup the difference in the cost of doing it yourself.

Shop for financing

Cost expenditure for financing may comprise as much as one-third of the total investment cost in a project, most of which is paid directly to the lending institutions in application fees, consultant fees, legal advisor fees, insurance premiums, interest, equity collateral and other charges. Most of these fees are not well defined or fixed. That is just the beginning. Down the line, financial institutions may cite the owner’s poorly defined project risk and assessment as a contributing factor when raising the interest rates and adding financing costs, further increasing total finance expenditures.

Taking 18 mos–24 mos or more for this process is not unusual, but there is another option. Just like the contracting process, project financing can be simplified by using a pre-selected contractor that offers the full scope of services, including a dedicated finance group. Such a company can bring insight and expertise from engineering, construction and finance management together under one roof for a more informed and cost-effective approach to project development. The result can be better risk assessment, improved planning and sound management from a team of industry-savvy advisors.

Choosing this approach to financing can save enormous amounts of time and money compared to the commercial market. For owners seeking to reduce financing costs, using a pre-selected contracting partner merits consideration.

Try modular construction

Thanks to the progress in the offshore and US midstream industries, modularized designs for plant packages and units now offer a practical way to save time and reduce construction expenditures. Modular components are manufactured and assembled in controlled environments or fabrication shops, thus eliminating access limitations, along with safety- and weather-related construction delays. The pre-built and partially tested sections are then transported to the site, where they are put into place and connected, vastly reducing manpower requirements in the field.

Take a risk

Weighing risk vs. reward sometimes lands in favor of risk in some very specific areas. Keeping a huge spare parts inventory onsite reduces the risk of not having a given part on hand when needed. However, a warehouse full of unused parts is essentially frozen capital. Where is the reward?

Owners with any appetite for risk can reap the rewards of freeing up capital by arranging with suppliers for reliable “just-in-time” parts delivery. Even for insurance spares (those hard-to-get parts), the occasional higher cost of expediting delivery will be more than offset by savings realized when onsite inventory maintenance is eliminated.

In terms of reducing project costs, accepting the risk of just-in-time parts combined with the IoT and predictive maintenance programs is easily preferable to paying the high cost of maintaining a large inventory for a “just-in-case” reward.

Go pro with project management

Premature construction starts, late material deliveries, poor quality control, and inadequate health and safety controls are all factors contributing to increased project costs. With so many interfaces to define and manage, an EPC project is no place to economize on project management.

Whether part of a one-stop, full-service offering, or as separate consultant services, professional project management ensures that a project is well planned and coordinated for timely execution, with detailed attention to quality at every phase and a focus on safety throughout.

Essential project management capabilities also include risk evaluations that make risk assessment a definitive part of every element of a project, at every step of project development. A formalized risk evaluation process can mean the difference between a project’s success or failure.

With full-service, single-source companies that are willing to share risks and rewards with the owners, project management teams can access in-house resources for specific areas and levels of expertise to create a detailed and informed risk profile for each phase of a project. As the project progresses, these profiles are updated, and the risk evaluation process is repeated, generating a current accurate assessment.

Once again, as a cost-reduction strategy, paying the upfront cost of project management may seem counterintuitive at first glance; however, this initial investment is minor in comparison to the expense of shutdowns and delays.

Takeaway

Implemented alone or in combination, these cost-reducing strategies can help cut total expenditures in EPC projects by offering improved efficiencies across the board. While some strategies require a financial outlay, others require only a change in thinking. In any case, these strategies make it clear that the most effective way to reduce CAPEX is simply to act. HP

The Author

Related Articles

From the Archive

Comments