Inside Supply Management Magazine
Delivering Greater Oil and Gas Capital-Project ROI
By William Crane, CPSM
New, innovative approaches, tools and technology that are proven best practices in other industries can be challenging to leverage at oil and gas companies due to the industry’s massive capital-project delivery.
Well construction, for example, accounts for the highest percentage of capital spending, typically 60 percent but as high as 70 percent for U.S. onshore gas, according to New York-based management consulting firm McKinsey & Company. However, it represents the largest opportunity for oil and gas companies to optimize ROI for new capital projects.
Over the past decade, project-development and procurement (PD&P) teams have used such capital-project development methodologies as front-end loading (FEL) and front-end engineering and design (FEED), which clarify major project tasks by milestone gates, thus galvanizing teams to march toward common goals. While these methodologies have generated excellent results, several factors — including shifting technology, regulations and geopolitics — require PD&P teams to adjust their strategies to consistently deliver profitable capital projects.
These five best practices can help them do so:
Deploy collaborative project planning to accelerate execution. New cloud technology tools can empower teams to collaborate more efficiently. Teams are leveraging cloud software tools to enable real-time collaboration across functions and suppliers in different locations. These teams are utilizing agile supply chain processes to better manage their individual and team tasks. Better project planning and management is leading to the “right people resource” applied at the right time — resulting in faster execution. Additionally, project-task challenges are becoming visible earlier. This means that organizations can course correct and de-risk project timelines sooner.
Improve the upfront project definition to meet targets. “Proven approaches from high-volume manufacturing are being creatively applied to oil and gas to accelerate PD&P projects,” says Andrew N. Kiteley, principal of Houston-based oil and gas management consulting firm Forester & Ridge. For example, in the automotive industry, procurement best practices require that materials and services be competitively bid.
The complexity, infrequency and customization requirements of oil and gas projects have traditionally been core reasons for the lack of more formal supply quoting events. Recently, the shift from manual plan-for-every-part (PFEP) tools to PFEP software has reduced the time needed to establish supply targets for oil and gas companies. PD&P teams can now efficiently set project-cost targets, technical requirements and lead times. Better-defined projects are freeing up a team’s time to focus on driving its supply strategy and execute cost reductions — which wasn’t possible using manual tools.
Organize project data with software to better manage complexities. Oil and gas capital projects are complex — they contain thousands of purchased materials and services. New software technologies are allowing for faster and lower cost supply. Developing a digital PFEP to track each supply need status can improve both procurement planning and logistics execution. PFEP leverages best practices from high-volume manufacturing — it focuses on consistent fulfillment of standard materials based on contracts. The net result: Trucks and vessels show up on time and with the right equipment. Further, PD&P teams are better able to monitor suppliers to ensure that the right materials are delivered at the right time and quality, and that the price charged matches the contracted amount.
Partner with newer breeds of technology-enabled EPCs to lower costs. Historically, oil and gas companies partner with one or more engineering, procurement and construction (EPC) partners on a large capital project. The theory is that these firms are best suited to manage the day-to-day supply management — from supplier identification to payment processing to receipt of materials. Select oil and gas leaders are using software tools to better manage EPCs while partnering with a newer breed of technology-enabled EPCs to increase supply chain visibility. This newer breed of technology-enabled service EPCs combines traditional people-and-process expertise with software technologies to set up, launch and deliver lower cost capital projects in less time and risk.
Launch intelligent analytics to predict cost and service opportunities. Artificial intelligence (AI) software technologies are enabling earlier adopters to uncover hidden capital project cost reduction opportunities.
“Massive well optimization opportunities exist through automation and AI that increase production, lower operating costs and streamline operational efficiency,” says Alex Robart, CEO of Calgary, Canada-based Ambyint, an AI-powered, artificial lift-optimization solution provider.
Past project data can be utilized to train machine learning algorithms to pinpoint material cost reductions on current and future projects. For example, well preventative maintenance is now being deployed at scale with smart Internet of Things (IoT)-connected devices that monitor well activity and send signals to technicians when service is required, eliminating the costly need for physically checking each site.
A groundswell of new business models, processes and technologies is reshaping the way oil and gas leaders appraise future capital projects. These new ways of doing business are starting to influence how PD&P teams select EPC partners.
As capital projects advance through the FEL process, real-time software data is improving bid-package definition, product execution and close out. This transformation is further enabled by digital supply chain intelligence that empowers cross-functional and supplier teams to work more efficiently.
As more oil and gas leaders embrace new technologies, further lessons learned can be incorporated into future projects by unlocking insights from the data. By leveraging new digital technologies, oil and gas PD&P capital project teams are poised to drive more bottom-line supply chain results.
William Crane, CPSM, is founder and CEO of IndustryStar, an Ann Arbor, Michigan-based software and services firm specializing in partnering with supply chain professionals to bring new products to market.