Capital Project management : Top Ten Learnings

Creating & Preserving Value in Capital Projects

By Tariq Siddiqui: Upstream EP Advisors LLC (Executive Management Consultant)

Capital projects when managed well, create tremendous value and provide long-term cashflow to the investors and the companies. Here are my top 10 learnings as Front-End -Development Manager (FEDM) in managing onshore and offshore capital projects in Upstream E&P in last 20 years with Royal/Dutch

        

1. Frame Project/Opportunity

Framing provides early integration and alignment of objectives. It helps in understanding; value drivers, critical success factors (CSF), definition of success, risks, stakeholder engagement plans, action plans and long-term road maps.

2. Understand Subsurface Complexity

Early appreciation of subsurface complexity and uncertainty, helps in designing an effective appraisal campaign.

3. Front-End-Load Project

Front-End Loading or FEL is level of early data collection to manage subsurface uncertainty & complexity during the appraisal. The level of FEL depends on reservoir complexity. The ultimate success of the project depends on levels of Reservoir FEL, Wells FEL and Facilities FEL, which can be correlated to various project measures.

4. Use Multiple Scenarios Modeling

The discrete combination of a subsurface realization and a development option is called a scenario. Multiple scenarios are modeled to manage uncertainty in early project phases. Geoscientist and reservoir engineers develop range of geological realizations to cover range of uncertainty, and engineers develop range of development options to manage development decisions.

5. Stage-Gated Process:

All companies use decision driven, stage-gated process to manage capital projects. This helps the decision makers in making focused decisions, maintaining corporate line-of-sight and effective value assurance. There are total six project stages; Identify, Assess, Select, Define, Execute & Operate. The first four phases before Final Investment decision (FID), are referred to as Front-End, and are managed by Front-End Development Managers (FEDM). Project Execution Managers, manages the post-FID, execution phase and Asset Managers manage the operate phase after start-up.

6. Project/Opportunity Manager (FEDM)

A comprehensive training program is needed to train the FEDM’s.

Geoscientists manage the Identify phase of the project in exploration, where opportunities are matured from lead, play, prospect to discovery.
Subsurface disciplines (Petroleum Engineers & Wells engineers) usually manage the Assess and Select phases during development; where opportunity is appraised, feasibility of scenarios is evaluated and one concept, that is commercially viable is selected and matured in detail.
Finally, the surface engineering disciplines manage the Define phase in the development, where most of the Front-End-Engineering Design (FEED) is done before FID.

7. Appropriately Scope Project

The development concept must be competitive and affordable. The volatility in oil prices have significantly impacted the cashflow and constrained the capital availability to fund the capital projects. In the downturns, affordability takes precedence over maximizing the Net Present Value (NPV).

8. Use Industry Benchmarking

Industry benchmarks provides a reality check on key project performance metrics (capital & operating costs, schedule and production promise etc.). They provide two broad performance measures; compare pre and post FID performance of the project and performance comparison with the industry peers.

9. Apply Value Improvement Practices (VIP)

Value Improvement practices (VIP’s) and process, especially in define phase, provides one last opportunity to create value, without making any major change in the project scope. All disciplines (technology, C&P, engineering, costing, execution), have a repository of practices worth replicating (PWR) that can improve value by 10-15 %.

10. Operated-By-Others (OBO) Project

The OBO project are important elements of corporate strategy and can; create significant value for the companies , provide opportunity to learn from partner’s expertise and reduce portfolio risk. The OBO project team can preserve their share of value in the project by Identifying Key Focus Areas (KFA), understand influencing environment and develop an engagement plan and strategy to engage the operating partner. A separate blog on his later.

Benchmarking: Does Your Project Measures Up?

By: Tariq Siddiqui

Mega industrial projects (> $1.0 Billion) are serious undertaking. Only 20 % of E&P mega project succeed as compared to 50% other industrial mega project.  Will your project be successful or a Failure?? I strongly suggest you read ‘Industrial Mega Projects’by Edward Merrow. According to Ed, ‘In 300 global megaprojects, 65% failed to meet the business objectives and most of them were unprofitable. 

Here we will look at how Front-End Loading(FEL) and project measureshelp benchmarkUpstream capital projects and improve their profitability.

Must Know: Downturn Portfolio Strategies

By: Tariq Siddiqui

Recession and business downturns, can cause major financial distress to the companies. The companies that come out least scathed during downturn are the ones that are agile, swift to respond and have the most flexible portfolios. 

Here we will look at portfolio strategies that helped upstream oil & gas companies in recent downturn

Capital Project Management in Oil & Gas:

By: Tariq K. Siddiqui
A 3-Minute Summary of how capital projects are managed, from Identification of opportunity to Development and production

Climate Change History: A 3-Minute Story

By Tariq Siddiqui
How climate change is disrupting fossil fuel industry

Pakistan Energy Security - Strategic Imperative

By: Tariq Siddiqui

Summary (please watch the whole video)

Energy challenge is one of the most important security paradigms in the Asia-Pacific region due to growing energy dependency, fueled by high economic growth. Pakistan population is expected to grow, It will become 20th largest economy by 2030 and 16 by 2050, based on existing GDP growth of +5.0 %. Pakistan GDP has potential to grow in double digits (see video), the only limiting factor is the supply-side bottleneck and poor governance. For Pakistan, assuring sufficient oil supplies, is a national imperative and crucial to Islamabad’s vision of energy security – guaranteeing that shortage of energy does not constrain the economic growth that is required to reduce poverty and tamp down the social and political turbulence that could be exploited by external interests

Pakistan needs rapid transformation to integrate with the world economy. To compete in the international markets, it will have to benchmark against world economies. The state-owned National Oil Companies (NOC’s) need to be privatized and made competitive; meeting the listing requirement for an IPO on international stock-exchanges. OGDC and other NOC’s needs to fulfill this role and become International National Oil Companies (or INOC's).

New Business Development – Negotiation Strategies

BY: Tariq Siddiqui (Oct 2018)

It was fall of 2016, It was the end of the day, and I was getting ready for the upcoming Thanksgiving break, when the phone rang.  It was a decision review board member on the line; “Did you see the new data in the virtual Data Room (VDR)? – half the volumes have vanished.” I was afraid of that, that’s why I had suggested making a non-binding bid, until we had a better view of the subsurface, when full data got released. As I hung up the phone, I braced myself for long and arduous negotiations that were up ahead.  Needless to mention that turkey was spared, and I spent most of my thanksgiving in the office.

 

Deal negotiation can be fun yet very arduous and at time frustrating, if required preparations are not done.  In the previous two blogs, I focused on new business development in oil and gas upstream business to achieve organic (exploration) and inorganic (M&A) growth. Here, I am focusing on those negotiation strategies that helped me in claiming and creating value during deal negotiations. It is recognized that there are more dimensions to the deal negotiations, then value claiming and value creation (ref1 and ref-2).

TOOLS & TAXONOMY

First, it’s important to know the taxonomy of the terms and the tool box and the steps

1. Due Diligence; detailed review of the data and information of buyer/seller
2. Estimate your BATNA (Best Alternative to Negotiated Agreement)
3. Estimate your Reservation Value (RV) - The minimum value you will accept
4. Estimate counter parties BATNA 
5. Estimate counter parties RV - The maximum value they will likely to pay
6. Estimate Zone of Possible Agreement (ZOPA) – the difference of the two RV’s. This is the value at the the table

VALUE CLAIMING 

Claiming value is negotiating a 'single issue' or interest (for example asset price). It is a zero-sum game, a value gained by one part is the value lost by the other party. It’s a divisive issue, that sees the deal as a fixed pie; a win-lose situation. If you have a value claiming situation use following strategies:

1. Ensure you have all the data/information and your BATNA is strong
2. Make 'aggressive first-offer' (> Counter parties RV) and establish an ‘anchor’ (an offer that gets counter parties attention). Power of anchor is substantial – It maximizes ZOPA
3. Always provide justifications of your aggressive offer (supporting material)
4.  Don't make first offer, if you lack data/information on the counter party and/or your BATNA is weak.  Let counter party make the first-offer.
5. In response to first offer, Ignore, counter parties anchor and/or don’t dwell on it.
6. Separate ‘influence’ from ‘information’ in responding to the counter party
7. Make your own aggressive counter offer, but propose to negotiate
8. Give time to the counter party to moderate their offer, without losing face 
9. Always consider the context of the relationship

Preparing and Executing Strategies

1. Dive deep during the 'due diligence,' collect all the data before negotiation
2. Identify your assumptions and challenge them before negotiation
3. Ask questions that challenge your assumptions during the negotiation
4. Ask ‘Indirect,’ 'open-ended' question; unravel counter parties BATNA/RV in negotiation.
5. Talk less and listen more; get maximum information during negotiations

Although, there may always be some elements of value claiming in negotiations; it is better to identify and introducing value accreting issues early in negotiations. 

VALUE CREATION

‘Value claiming’ is a negotiation of a single interest in the deal; a ‘fixed-pie’ mindset or       'win-lose' situation. ‘value creation,’ on the other hand involves bringing  multiple interests to the negotiation table; that creates higher total value or 'enlarge-pie’, a 'win-win' situation – most real-world problems have multiple interests. Following are strategies that help in value creation:

1. Add multiple issues that interest you and potentially the counter party 
2. Bring in a 3^rdparty; to help build trust and bridge the value gap
3. Negotiate contingency contracts for managing riskier and uncertain issues

Advantages of Value Creation in negotiation

1. Add flexibility in negotiations; avoids haggling or fixated to one divisive issue (Ex: price)
2. Allow ‘Trade-off’:  give-up less value in an issue in exchange for more value in other.
3. Allow for a “Package deal’, maximizing package value; and not ‘maximizing’ single interest.
4. ‘Pareto Improvement’; i.e. a value creating change to the deal, that makes one party better-off, without hurting the other, hence ‘no money is left on the table’

Preparation Strategies (before negotiations)

1. Identify your multiple interests.
2. Create a scoring system for the valuation of interests, then prioritize interests.
3. Calculate a total ‘Package Reservation Value’.
4. Identify counter parties potential interests.

Execution Strategies

1. Negotiate multiple interests simultaneously (allowing trade-offs)
2. Make ‘package offer’
3. ‘Leverage differences’ of all types to create value (use  trade-off and not compromise)

Post Negotiation Strategies

1. Always acknowledge great progress made in the negotiations.
2. Suggest, there are aspects that could be improved: acknowledge counter-party might feel the same.
3. Suggest you have already conceded everything, but willing to think ‘out-of-the box.’ 
4. Be clear, you are looking for an ‘improved-agreement’ but an ‘new-agreement’ for both.

References

1-Lax, David & Sebenius, James: "3d-Negotiation." Harvard Business Review Press, 2006
2-Malhotra, D. and Bazerman: "Negotiation Genius. Bantam Dell, 2007