Aschman Breakbulk Europe

Standardization Key For Project Industry

By Gary Burrows

While the project industry is facing a severe downturn in available work, cargo owners and engineering, procurement and construction companies further impact their bottom line by failing to standardize their operations, according to a keynote presentation at Breakbulk Europe.

The project business has “fallen off the cliff,” not only in projects in the works, but in willingness to invest and industry demographics, said Allison J Aschman, corporate director, IPA Capital Solutions.

Beyond the continual fallout from the financial crisis, a range of political and trade issues have buffeted the project owners and EPC companies.

“Companies have cut back drastically on capital spend from 2013 onwards,” Aschman said.

Only 195 projects of more than US$10 million were completed in 2016, the lowest volume since the 1990s, according to IPA, a research and benchmarking consultant focusing on capital project systems, has 16,000 projects in its database. This is compared to 250 in 2015. Normally there are about 200 to 300 large projects completed in any year.

One reason for the slippage is that many large-scale projects have been delayed, and so they are excluded from IPA’s completed project database, she said.

The investment landscape has changed among petroleum projects, Aschman added. The number of multibillion-dollar megaprojects sanctioned since 2008 is a fraction of numbers from prior years. Investors are not in a risk-taking mood, so there are fewer speculative investments, and they focus on U.S. and parts of Europe and Middle East, and avoid emerging economies.

Of large-scale onshore projects authorized in 2016, the U.S. led with 44 percent of projects, worth US$18.5 billion. Europe and CIS countries housed 17 percent of projects, but only US$2.4 billion in value. The Middle East accounted for 12 percent of projects, worth US$15.2 billion. Asia was next at 10 percent (US$6.7 billion), as its transition from exports and through lower GDP growth. Next is Canada at 7 percent (US$14.4 billion), followed by South America at 6 percent (US$4 billion), Africa at 3 percent (US$1.2 billion), and Australia, 1 percent (US$3.9 billion).

Businesses are not gaining the value they expect from projects, due to schedule slippage, asset problems, cost overruns and that sales of product degrade from the time the projects are sanctioned through the first few years after startup, Aschman said.

With the downturn, companies have been forced to cut back. Already faced with a demographic shift, as older stalwarts are retiring, leaving a “dearth of mid-career professionals,” further staff cuts, reorganizations, less training spend and forced supply chain cost reductions have become the problem rather than a lean-and-mean solution. Worse, engineers and contractors are taking on work “below their fully burdened cost; this is obviously not sustainable,” she said.

Owners and EPCs may know the right processes and practices, but the skill and experience to make them effective is gone or marginalized, Aschman explained. To compensate, they’ve turned more to the contractors, but the long-term solution is to maintain that expertise in-house, she said.

The industry pins its hopes on firming of oil prices over the next 18 months, but it will be merely a shadow of its glory days. Still, at US$55 per gallon, oil prices will move some companies to begin investment anew.

Aschman said exploration and production has become a low-margin industry, and it’s time to start acting like it. This includes longer, steadier production with lower capital cost of production; focusing on cost of goods sold in design of facilities; and scaling projects so they are simple and effective rather than building the biggest and best possible, only to have less-than-optimal production averages due to lower demand.

“Think truly about standardization,” Aschman said. “Really think about how to plan, execute and fund projects differently than in the past. Look at those that are effective and learn from them.”

Photo: Allison J Aschman, corporate director, IPA Capital Solutions, gives keynote address at Breakbulk Europe 2017.

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