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Special Focus Plant Design, Engineering and Construction

J. P. CHEVRIERRE, Transmar Consult Inc., Houston, Texas;

and A. DAILY, Daily Thermetrics, Houston, Texas

Surviving turbulent times requires

deep management changes
The Stone Age did not end due to a stone shortage. The Con- New management strategies for the E&C industry. Why
ventional Oil Age was not eclipsed by vanishing traditional oil and have managements at global E&C companies not addressed
gas resources. The Shale Revolution unleashed an era of abun- the problem of insufficient reserves? The main reasons are per-
dant, new unconventional oil and gas supplies. It caused pricing verse incentives. Management bonuses and stock options are
volatility and numerous other changes that are transforming the based on the absolute size of company profits. Setting aside
hydrocarbon industry. As with any major tectonic shift, the turbu- greater fund reserves to support higher risks would signifi-
lence accompanying the shale revolution is irregular, erratic and cantly lower the net income and, consequently, harm executive
nonlinear. Consequently, senior management must apply new bonuses and stock options.
business models to address the unprecedented market challenges
within the energy and hydrocarbon processing industries. Available solutions. Company executives have four resources
that can be used to increase productivity and raise real profits.
Leadership through tough times. If a company has no clear These include:
end goals firmly in place, then no amount of time or resources 1. Capital (money)
will successfully achieve those targets. Unfortunately, many en- 2. Physical assets (buildings, equipment)
gineering and construction (E&C) contractors operate without 3. Knowledge (intellectual capital)
firm direction. These companies are not developing the appro- 4. Time.
priate strategies and structures to meet the new market condi- To manage marketplace turmoil, senior executives of E&C
tions initiated by the shale revolution. companies are aggressively reallocating the listed resources.
Better leadership is needed within the E&C industry. For ex- Such plans begin with a thorough understanding of where capi-
ample, more than 50% of the major E&C contractors replaced tal funds are tied up in each specific resource and effectively re-
their CEOs over the past three years. Yet, many E&C contrac- distributing money to net maximum efficiency. Every E&C con-
tors are still losing money, seeking mergers or facing potential tractor allocates investment monies differently. Upstream E&C
bankruptcy. The question baffling E&C management is: What companies have most of their capital in floating rigs. Other E&C
actions are needed to reverse the damaging situation and ensure companies may have the bulk of their funds in physical build-
long-term survival and prosperity? ings or proprietary technologies. Senior leadership must un-
Due to turbulent and transformative times, E&C contractors derstand where the investment monies (capital) reside to best
are working under higher risk levels. The higher risks require manage such resources and increase companywide productivity.
that contractors earn greater remuneration levels for their efforts.
However, present accounting figures do not correctly inform se- Trimming the “fat” is painful. The next question is: what
nior management of what remuneration and earnings are really investment capital is no longer productive? Within the organi-
needed. In some cases, the figures are overestimates of the com- zation, management must decipher what is no longer muscle
pany’s true profitability. E&C industry accounting can be mis- and is only fat (waste of resources). Often, this means going on
leading; consequently, these financials lack quality information a corporate “diet” and reallocating capital to more productive
to support good decision-making. areas. Under this era of great transformation, E&C contractors
make changes not due to pride, internal politics, incapacity or
Seed funds for E&C companies. In the agriculture industry, arrogance. Unfortunately, the “fat” resources are no longer pro-
there is the concept of “seed corn,” which is a portion of a harvest ductive and cannot remain part of the organization.
that is reserved for future planting. It is not part of the harvesting E&C contractors must retire old products and services that
profit and is a cost to stay in business. Similarly, for E&C com- once contributed to corporate performance but now are finan-
panies, part of what is supposedly profits are really costs (reserve cial drags. This includes past acquisitions or JVs that no longer
funds) that are required to just “stay in business.” Due to the add value to company strategies or performance.
present market turbulence, the need for higher levels of “seed
funds” by E&C contractors is obvious and acute. Unfortunately, It is a matter of survival. Contractors are like ships trav-
E&C contractors are not earning (saving) enough seed funds. elling in the ocean for many months; they inevitably pick up
Hydrocarbon Processing | DECEMBER 2019 29
Plant Design, Engineering and Construction

barnacles that slow their speed, efficiency and maneuverability. Knowledge is capital and power. The modern E&C indus-
Just as ship operators remove the barnacles to improve perfor- try is increasingly populated by knowledge professionals. They
mance, contractors must clean out the old and have a policy of are specialists and self-motivated; more importantly, they do not
systematic divestment or abandonment. Hydrocarbon process- respond well to authoritarian-style management. Such profes-
ing operators developed and successfully use this action plan. sionals are experts in specialties including digitalization, shale
E&C contractors need to do the same. exploitation, marketing, logistics, modular construction, etc.
Intellectual capital must be better managed. Senior E&C Knowledge professionals are vital; they provide senior manage-
contractor managements need to boost the productivity of all ment with critical information to support good decision-mak-
four crucial resources. Each key resource must be managed sepa- ing. To keep knowledge workers highly productive, they must
rately, and all resources must increase their productivity. A key be treated as colleagues and given authority commensurate with
resource for E&C contractors is intellectual capital, which also their responsibilities. Senior management should treat knowl-
requires better management. This comprises proprietary knowl- edge professionals as peers. Unfortunately, this is not the normal
edge and, more importantly, professionals or subject matter ex- case, and change is needed (FIG. 2).
perts (SMEs). Manual or low-skilled workers can be substituted In addition, senior management must assign professionals and
with capital investments in automation. However, no such substi- knowledge workers to the right tasks to gain high productivity.
tution is possible for engineers and SMEs within the E&C indus- The assignment must fit the skills and experience of the knowl-
try (FIG. 1). Professional and knowledge workers must be prop- edge professional. The wrong assignment simply guarantees non-
erly supported to enhance motivation and productivity. This is a performance and poor productivity. Top management must put
key task for senior management, but it is often overlooked. knowledge workers where they can be the most productive.

Knowledge Time is money. The fourth key resource is time, which is es-
pecially significant during transformative periods. Top manage-
ments must balance the short run against the long run—the
present against the future. It makes no sense to purchase higher
Mentor Skills
profits today by making decisions that endanger the future
Human capital health of the enterprise. The present and future must be satisfied
by balanced decision-making.
Wisdom Education The time dimension is even more important today. In the
1970s, a new industrial plant was expected to pay for itself with-
in 3 yr. With current capital investment in developed countries,
Judgment Training labor costs are 25 times greater than in the 1970s. Present-day
return-on-investment (ROI) for capital projects can exceed
FIG. 1. Preserving human capital is critical for the survival of E&C
10 yr. Good and right decisions are critical. One reason for the
companies. popularity of shale development is the quick ROI, which aver-
ages 3 yr. In comparison, an offshore deepwater project may re-
quire 10 yr for full ROI.

Solutions to survive turbulent times. The future is un-

known, and it will be different than the past. Therefore, top
management must aggressively manage the time dimension and
other resources. E&C companies need to rethink their goals
and strategies to return to prosperity. At present, too many E&C
companies are failing. Better management of the four key fac-
tors—capital, physical assets, knowledge and time—will great-
ly help E&C contractors.
Brennan, J., “Measuring productivity for a change,” June 27, 2017, online: http://

J. P. CHEVRIERRE spent most of his career working in the international energy

arena. He held executive positions at ARCO and Honeywell UOP. He has also
authored many technical articles in all major hydrocarbon publications and
journals, and is a frequent speaker on diverse management and engineering
subjects. He holds a BS degree in engineering science with honors from Temple
University, an MS degree from the Massachusetts Institute of Technology and
a PhD from the Université de Paris. He is a member of numerous professional
organizations, including the American Institute of Chemical Engineers and the
Houston Philosophical Society.

ANABEL DAILY is President and CEO of Daily Thermetrics, a Houston-based heat

FIG. 2. Senior management often does not use knowledge workers
management manufacturing company serving the hydrocarbon and aerospace
to their fullest potential.1
industries. Dr. Daily holds a doctorate in medicine and an MBA from Rice University.

30 DECEMBER 2019 | HydrocarbonProcessing.com