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Management of Medium-Size /

Revamping Projects
Oil & Gas Downstream Projects
2. Preliminary Studies

RC - PR GES - 08169_A_A - Rev.1 - 18/07/2013


Foreword
The management of projects is not an exact science.
The elements of the process are not complex. However :

• The management of projects is based on multiple human contacts.


Inside and outside the project, conflicts and contradictions may arise

• There are many interfaces to manage. The most delicate technology


issues are often dealt by people coming from different cultures

• Management of Projects keeps changing… but basic principles remain,


and must be rigorously applied for projects to be successful

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RC - PR GES - 08169_A_A - Rev.1 - 18/07/2013
Management of Medium-Size /
Revamping Projects: course content
I. Introduction
II. Preliminary Studies
III. Basic Engineering (or FEED)
IV. EPC Contracting
V. EPC Organisation, Engineering Management
VI. Procurement Management
VII. HSE, Quality and Risk Management
VIII. Project Control (cost/schedule)

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IX. Construction and Fabrication Management
X. Completion / Commissioning / Startup / Closure

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Module 2 Contents
1. Scope and Objectives 04 - 07
2. Technical studies 08 - 19
3. Project Team Organization 20 - 22
4. Deliverables 23 - 26
5. Preliminary Project Planning 27 - 49

ATTACHMENTS (slides 50 to 66)

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I. Economic justification
II. Progress control

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Scope and Objectives

 Scope:
• Confirmation of technical feasibility
• Project justification (economic and HSE)
• Technical schemes or concepts
• Execution Plan principles

 Objectives:
• Select the overall technical solution
• Evaluate Project cost and schedule
• Appraise uncertainty and risks
• Prepare approval dossier to move to next step (Basic Engineering)

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RC - PR GES - 08169_A_A - Rev.1 - 18/07/2013
Scope and Objectives
Key elements

Technical studies Risk reduction

Phases definition
Appraisal
Development Schemes & concept
Budget and Schedule
Execution Principles

Dossier for Project Decision to move to FEED

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RC - PR GES - 08169_A_A - Rev.1 - 18/07/2013
Scope and Objectives
Key elements

1. Select the “best” technical scheme for the Project (based on


technical, cost, risks & economical criteria) in coordination with,
and input from, Company concerned parties

2. Evaluate Project risks, starting with HSE, and manage them

3. Study how the project will be performed (Project Plan) with


recommendations for next Project stages

4. Document the technical studies, Project Risks, Project Definition


(“SOW”: Scope Of Work) and Project planning

5. Obtain Owner and Project Stakeholders Approvals

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RC - PR GES - 08169_A_A - Rev.1 - 18/07/2013
Technical studies
Disciplines

 Process basis
• Base Case Process study for facilities to be built
• Plant performance tests (revamping/debottleneck)
• Utilities additional requirements, available resources

 Physical configuration
• Plot Plan & Lay-out studies (particularly for Revamping)
• Structural & foundations outlines for revamping

 Project philosophy
• List of possible alternates to evaluate
• Electrical & Controls impacts, philosophy

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• Modularisation concept if applicable

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Technical studies
First reviews

 Project Reviews
• Conceptual design review
• Value Engineering / Cold Eye Review
• Safety review
• Constructability review
• Coordination review
• Economical and procurement reviews

 HSE & Risk Reviews


• Depending on Project size/impact: HAZID, HAZOP, QRA, other
• Preparation of Project Risks register
• First draft of Environmental Impact Statement

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Technical studies
First reviews
 Workshop or series of meetings with Project Team participants
• Should include site Operations and Technology people
• Engineering Contractor participation may be useful
 Discuss project basis, expectations, execution constraints
• Focus on consistency with site infrastructure and operations
− Reliability performance, shutdown constraints and schedule
− Available space, utilities and infrastructure resources
− Competence and professionalism of Owner and Operator
• Consider resources aspects (quantity/quality) for future operation
 Brainstorm on possible alternates
• Selecting a limited number of realistic cases
• Preferring existing know-how to innovation

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• Define further analysis to be performed

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Technical studies
Sample Review checklist

Infrastructure
Execution
Process Environment
1. Capacity (flow rate) 1. Layout & constraints
2. Technology selection 2. Electrical Distribution & Power Management System
3. Treatment of feed 3. Control Systems
4. Fractionation 4. Buildings
5. Power Generation & Heat Integration 5. Construction & constructability
6. Utilities, catalysts, chemicals 6. Modularisation
7. Effluents, flare 7. Civil Works
8. Water Treatment & Disposal 8. Air Emissions
9. Product storage 9. Effluent Water Treatment & Disposal
10. Offsite storage, transfer, loading 10. Environmental Impact Assessment
11. Interfaces

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11. Interconnecting with pipe networks
12. Authority Approval, permits and authorizations
13. Local Content
14. Project Execution Strategy
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Technical studies
Sample Review checklist (Power Plant)

 Process units energy requirements


• Type of energy required, steam vs power selection
• Turbine overhaul frequency, duration, backup supply
• Load flexibility, steam shedding / power shedding constraints

 Energy Cost Effectiveness:


• Most energy-effective cycle (open, combined, cogeneration)
• Heat integration limits, energy value assumptions
• CO2 penalties and other environmental taxes
• Regulatory reporting requirements, metering

 Technology questions:
• Best gas turbine type with regard to equipment reliability/cost

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• Environmental protection parameters (low NOx, flue gas temp)
• Equipment metallurgy (resistance, cost, corrosion)

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Technical studies
Comparison of alternates

 Alternates comparison: key aspects


• HSE advantages & drawbacks
• Technical advantages & drawbacks
• Compatibility with existing facilities, future expansions
• Operability, maintenability, future flexibility
• Economic justification (cost difference vs benefits)
• Compatibility with expected budgets (CAPEX/OPEX)
• Project risks (proven process vs technical innovation)
• Execution risks (schedule, cost, field construction)

 The sooner alternates and considered/evaluated, the better

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 Alternates considered too late cost more than they save

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Technical studies
Capex commitments

Investment
100%
Major commitment Construction
generated by early Basic or FEED On-site
technical decisions engineering operations

Conceptual (Pre-FEED)
Preliminary studies
50%
studies
Actual commitments
towards suppliers

0%
Time
PRODUCTION

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START-UP

RC - PR GES - 08169_A_A - Rev.1 - 18/07/2013


Technical studies
Capex commitments

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RC - PR GES - 08169_A_A - Rev.1 - 18/07/2013
Technical studies
Value engineering / Cold eye review

 How can we select the best project design ?


 If project “deserves” it (medium-size, or complex), perform:
• « Value Engineering » Review:
− once the base concept is established
− includes the Project Team members and Site representatives
− added value in having an external Consultant as Chairman
− the team questions each functionality using a formal procedure
• « Cold Eye Review »:
− similar process to the Value Engineering Review
− includes « Peer » representatives not being project team members
 There are always several possible answers to a technical problem

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 Be prepared to accept constructive critique and modify your view

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Technical studies
Value engineering / Cold eye review process

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RC - PR GES - 08169_A_A - Rev.1 - 18/07/2013
Technical studies
Sample Cold eye review report

N° Description of proposals issued in March, 2012 Leader Target date

Evaluate one-stage reactor at high pressure, instead of HP+LP


1 Technology June, 2012
(simpler and lower CAPEX, but energy cost increase)

2 Once-through water cooling for compressor (vs air cooler) Engineering April, 2012

3 Conceptual cost / reliability benefits of spare compressor Production May, 2012

4 Standardization of exchangers (vs « optimized design » for each) Engineering April, 2012

5 Pump standardization: same pump casing for various impellers Engineering May, 2012

Full automation of demin water resins regeneration system,


6 Production May, 2012
including PLC, ROV and manpower impact

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7 Pre-investment on oil tank size for future capacity debottleneck Marketing June, 2012

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Project Team organization
Highlights

 Owner may perform or partly contract preliminary studies, depending on:


• His knowledge of related processes
• His technical resources available
• The feasibility studies required
• The use of proprietary processes or technology (licensors)
 Risks are more important in existing facilities (Debottlenecking, Revamping)
 Owner experience and site knowledge is very useful at early stages
 Various organizations, more or less strong, can be built (see next pages)
 Even when preliminary studies are contracted out, Owner remains the leader
 The Owner Project Team has to manage, coordinate and take decisions

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RC - PR GES - 08169_A_A - Rev.1 - 18/07/2013
Project Team organization
Multidisciplinary team coordination
HSE & Sustainable
Development

Construction Economics

Procurement Operations

Engineering Coordination Commissioning Operations

Infrastructures Completion &


Design & Layout Start-up

New
Process Design Technology

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Cost Estimate/Schedule
Engineering Research &
Development

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Project Team organization
Example of Integrated Team

Owner Contractor (on-site) Contractor (off-site)

Rotating
Site Manager
specialists
Project
Computer
Manager
Production resources
Legal
Drafting offices experts
Maintenance
(piping, E/I, civil)

etc.
Process Purchasing

Construction
Support Sces supervision

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Equipment suppliers
QA/QC Field subcontractors

RPCI
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Deliverables
Preliminary studies (typical)
 Basis of design (and basic design data) specification, Scope Of Work
 Preliminary Study Technical Report, including documents:
• Process material balances
• Main utility requirements
• Process description, PFD, preliminary P&ID
• List of main equipment
• Preliminary plot plan
 Project Review Reports
 List of alternates considered, evaluation and proposed decision
 Design philosophy (modularization, standardization, process controls)
 Operating philosophy (principles, staffing, start-up)

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 Permanent buildings: type, approximate size, function

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Deliverables
Preliminary studies (specific to Revamping projects)
 Process description:
• Marked-up PFD / P&ID (installation & dismantling)
• Increase in utility requirements, by main utility (steam, power, N2)
• Known capacity limits, plant test results
 List of tie-ins and tie-in strategy
 Position of new equipment on existing Plot Plans:
• Main pressure vessels
• Pipe racks, underground networks
• Storage tanks, modification of product loading facilities
• Safety facilities (fire fighting, gas detection)
 Electrical and Process Control changes:
• Electrical substation and cable path drawings
• Controls Architecture Diagram

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 Existing buildings mark-up for modification

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Deliverables
Scope Of Work (SOW)

 Summarizes the Technical Plan for the Project facilities defined in


the preliminary study; it formalizes the “Scope Of Work”

 Ensure that approvers (Designer, Project Manager, Operator)


have understood and agreed the fundamental project choices

 Subsequent purposes: during project life


• It will allow Owner to check that the Project actually designed remains in
line with the approved initial requirements
• It will serve as a basis to evaluate and record main scope changes
proposed and agreed during the Project execution
• It will be used, after closure, to verify that the Project has actually reached
its business objectives, and if not, eventually improve it

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RC - PR GES - 08169_A_A - Rev.1 - 18/07/2013
Deliverables
Scope Of Work (SOW)

 The document will cover technical description:


• Process Units, heating & cooling media
• Power Generation & Utilities Units
• Offsite units, storage, transfer, loading, unloading
• Interconnections with existing facilities
• Upgrading / revamping requirements
 Key elements of the project scope will be addressed:
• Feedstocks, Technology/Process, Capacity of each process unit
• Utilities (air, water, chemicals, …)
• Storage, key equipment size & type, sparing philosophy, phasing

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RC - PR GES - 08169_A_A - Rev.1 - 18/07/2013
Preliminary Project Plan

 Justification (economic and/or HSE)

 Preliminary project schedule

 Conceptual CAPEX estimate

 Project Execution Plan

 Risks analysis & management

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RC - PR GES - 08169_A_A - Rev.1 - 18/07/2013
Preliminary Project Planning
Economic justification
Invest or not in a Project?
What is the preferred solution among alternatives?

 The justification is the first thing to validate before starting to work

 Value of the Project is best reflected by the Net Present Value (NPV)

 NPV is the Sum of Discounted Cash Flows generated by the Project

 NPV will depend on:


• Technical options
• Economic Assumptions
• Tax situation

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RC - PR GES - 08169_A_A - Rev.1 - 18/07/2013
Preliminary Project Planning
Economic justification
 CAPEX estimate Internal Rate of Return (I.R.R) is the
• Total Erected Cost of the project main economical item or way used
to decide a downstream investment
 OPEX estimate
• Raw materials cost
• Fuel and Utilities cost
• Operation cost, Maintenance cost

 Revenues estimate
• Estimated products prices

 Above elements are used to determine Project NPV and profitability


 They are also used to compare alternates profitability (« Delta NPV » can

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be calculated, integrating only CAPEX & OPEX differences between
alternates)

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Preliminary Project Planning
Justification

 On Medium-Size projects, there may be other more important factors:


• Pay-Back Time (when short-term profits are critical)
• Profitability Index (when financial resource is a constraint)

 HSE justification (semi-quantitative) is also very important


• Matrix used to evaluate project HSE justification
• Project should allow to move from high-risk to lower
• Matrix can also be used to evaluate project changes

 Economic and HSE justifications may be combined

 If justification borderline, this may be the key to obtain approval

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RC - PR GES - 08169_A_A - Rev.1 - 18/07/2013
Preliminary Project Planning
EHS Justification

Never heard of Has already Occurred once Several times Occurs often of
LEVEL Safety Envirt any occurrence occurrred in in company, but per year in the permanently in
in the world Petrochemicals not here company our plant

No significant No impact on
I personnel environment
injury
Low Risk
Minor injury, Slight impact,
II no long-term hard to
impact perceive

Major injury Significant


III with long- impact, local Medium Risk
term impact perception

Fatality Major impact


IV on area,
national
perception
High Risk

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Several Massive
V fatalities impact,
worldwide
perception

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Preliminary project schedule
 At Conceptual Stage, a Project Schedule will be prepared using a simple
software such as Microsoft Project to show the Project Phases to Completion:
• Basic or FEED
• Contracting for EPC
• Time for Approvals by Company
• Foreseen Long Lead Items (LLI)
• EPC phase
• Planned shutdown duration (if known) for revamping projects
 Plant shut-down times & durations is a key issue.
• A first approach of required Plant S/Ds & their duration will be made. A
preliminary S/D schedule (PERT Chart) will preferably be prepared to identify the
critical path.
• A critical activity such as column retraying, compressor replacement, furnace
revamp… may set the shut-down duration while other activities can be performed

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in parallel.

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Conceptual CAPEX estimate
Highlights
 CAPEX estimate accuracy desired at this stage: +/- 30 %
 Accuracy may be hard to reach on Medium-Size projects, depending on:
• Project complexity and location
• Onshore with offshore extension projects
• Concerned facilities
• More difficult for projects with modifications to existing facilities
 The CAPEX estimating method will depend on:
• Cost database completeness and adequacy at that specific location, recent
local experience from Engineering Contractor, prices volatility
• Facilities involved by the project (onshore, new or revamped units,
utilities, interconnections with brown field)
• Experience of the company, quality of the available data

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 At this stage, assumptions/uncertainties/risks are critical to document
 See AACE methodology and Nelson Farrar indexes.

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Conceptual CAPEX estimate
By courtesy of Exxon and Shell Structure
Main Equipment
Bulk Direct Costs
Fabrication/Construction(onshore/offshore)
+
Transportation
Temporary Facilities Indirect Costs
Construction camps
+
Engineering Services General Expenses
Management & Supervision
Surveys +
Associated
Insurance Expenses
Commissioning +
Contingencies
=
Direct Costs + Indirect Costs = Technical Costs Facilities Cost Estimate

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Fabrication / Construction cost are the highest costs and the most difficult to estimate, in particular for
works in revamped process units and brown field; they are very site dependent (productivity)

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Conceptual CAPEX estimate
Methodology

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Conceptual CAPEX estimate
Methodology

 Estimating methods are global or by factorisation as long as project


details such as P&IDs are not prepared; the estimating methodology
will combine available cost data base and toolbox tools

 Estimate cost data breakdowns, unit costs etc. from similar recent
project units at the location, or a similar (in terms of cost) location with
corrections, escalation, and other foreseen different project conditions.
Often the estimators will use units information from several projects.

 Estimate must includes complexity and local coefficients.

 Estimate have to include spare parts (2 years operation), material take-


off extra and surplus.

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RC - PR GES - 08169_A_A - Rev.1 - 18/07/2013
Conceptual CAPEX estimate
Methodology

 Many « factors » are used for « factored estimates », mainly:


• Correction using a scaling factor vs. unit or equipment capacity:
P1 / Po = (C1 / Co)0.65
• For sized equipment, a “factored” estimate from equipment cost:
P installed= K x P equipment
• K: 1.5 to 6, depending on equipment type & construction location.
• For revamped areas another K1 factor is to be applied on top. The use of
this method will depend on Owner (or assisting Contractor) practice (data
base for applicable factors for equipment at the facilities).
• A global factor can be used on top of Direct Costs for Projects at the
facilities: Project total cost = K x Project Direct Cost

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RC - PR GES - 08169_A_A - Rev.1 - 18/07/2013
Conceptual CAPEX estimate
Methodology

 Cost information is gathered from all possible sources at the time, e.g.:
• Major equipment prices and special equipment or packages, towers,
reactors, heat exchangers, water treatment, utilities and power
equipments, etc.) from « budget » quotes from Vendors.
• Budget quotations from specialized parties (consultants, contractors..)
for infrastructure works (buildings, roads, …) or for other specific
packages (atmospheric tank storage, LPG storages, chemicals).

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RC - PR GES - 08169_A_A - Rev.1 - 18/07/2013
Conceptual CAPEX estimate
Methodology

 Cost information is gathered from all possible sources at the time, e.g.:
• Interconnecting preliminary quantities estimated by engineering from
preliminary MTOs & unit costs used from previous project at the facilities
for bulks procurement cost & for construction cost; quotations from
vendors for large pipe / piperacks
• For modules and skids fabrication, construction mhrs by ratios (volume
or weight if estimated) and mhr cost from zones used (particularly if
Company (site) has particular relationships established with given zones).
• For specific equipments like air and water treatment: budget quotes from
specialized contractors or vendors.
• Engineering, construction supervision manhours may be estimated by
ratios.

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• Contingencies or Profit&Loss factor, if estimate by a Contractor, added
on top of the cost estimate

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Project Execution Plan (PEP)
Highlights

 Purpose: define project objectives and strategy to reach them

 Key aspects:
• Organisation
• Execution strategy
• HSE, risks/uncertainties

 Preliminary version prepared at this stage, then communicated


and revised during Basic Engineering, then normally frozen

 Discussed with all Project Stakeholders, needs formal approval by


Owner Management at the right level

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Project Execution Plan (PEP)
Detailed content

 Executive Summary, Project Summary description


 Summary of Preliminary Study report; main items to solve later
 HSE aspects and risk analysis
 Organisation/roles (Owner, Project Team, Operations) during execution
 Authority Approvals & Regulatory administrative steps required
 Global Project schedule, constraints related to shutdown and other Projects
 Plan for Basic Engineering (or FEED if applicable)
 Key aspects of Detail Engineering, Procurement, Fabrication, Construction, S/U
 Proposed Contracting strategy

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 Key concerns and constraints, with proposed action plan to resolve them

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Project Execution Plan (PEP)
Contracting strategy ... page 1
Preliminary Project Contracting Strategy is prepared, focusing on:

 Project execution quality, cost, schedule and phasing

 Project resources requirements analysis versus expected availability for


the project and in the country, and resulting contracting plan / constraints
in particular for:
• Engineering Contractors
• Transportation & Installation
• Construction
• Local content resources
• Pre-qualification required from large and critical equipment Vendors

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Project Execution Plan (PEP)
Contracting strategy ... page 2

Preliminary Project Contracting Strategy is prepared, focusing on:

 Local Content requirements

 Contract(s) type for Basic or FEED, if required

 Preliminary strategy for contract(s) for EPC phase is prepared


considering work packages suited to project specifics and pre-
qualification, discussions (as the case) with Vendors & Contractors.

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Project Execution Plan (PEP)
Risk analysis

 At this stage, a first risk analysis is performed


 The method used is simple (check-list based, HAZID)
 More detailed methods will be used later, but are not yet
applicable, mainly by lack of appropriate information
 First draft of Project Risk Register prepared listing identified risks
and planned mitigation measures
 Revamping/Debottleneck of existing facilities
• Importance to check data on the field (don’t trust controlled documents)
• Validate raw materials and products properties (use lab data)
• Precautions to preserve Safety and Reliability: consider impact on Project

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Execution (cost, schedule, even sometimes alternates feasibility)

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Project Execution Plan (PEP)
Risk categories

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Preliminary studies

Key points to keep in mind

 Evaluate the economic potential added value of the project


 Building early a multidisciplinary team is critical to success
 Technical alternates should be listed and evaluated at that stage
 Economic evaluation should include CAPEX and OPEX
 SHE justification may help project approval by Owner
 A preliminary Execution Plan should be prepared at that stage
 Revamping projects need good knowledge of actual plant
 Safety and Reliability constraints should be clearly addressed

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RC - PR GES - 08169_A_A - Rev.1 - 18/07/2013
ATTACHMENTS
I. Economic Justification

II. Progress Control

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RC - PR GES - 08169_A_A - Rev.1 - 18/07/2013
ATTACHMENT I
Economic Justification

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Economic Justification
(Operating Period = N years)

Revenues

Capex Opex

Taxes

Cash Flow = Cash Inflow – Cash Outflow

Operating period

Present

years

Investment

It is not valid to compare funds received or spent at different periods.

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One must “bring” all cash flows from the future to the present time,
i.e.,
discount all the project’s cash flows.

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Economic Justification

Net Present Value (N.P.V)

Internal Rate of Return (I.R.R)

Pay-Out Time (P.O.T) / Exposure

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Economic Justification
Net Present Value

Net Present Value of a Cash Flow Profile

Year 0 1 … C … N
Discounting at a rate i 1 (1+i) (1+i)n (1+i)N
Cash Flows After-Tax CF0 CF1 … CFn … CFN
Discounted Cash Flows CF0 CF1/(1+i) … CFn/(1+i)n … CFN/(1+i)N
Net Present Value = Sum of Discounted Cash Flows

N
CFn
NPV  
n  0 (1  i )
n

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i = Discount Rate = Average Cost of Capital

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Economic Justification
Net Present Value

 If NPV > 0, the project revenues are sufficient to:


• pay all costs incurred by the project
• reimburse the capital invested
• remunerate it at rate equal to the discount rate
• in addition, create a profit for the company

NPV > 0 measures the value created by the project

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Economic Justification
Internal Rate of Return

Rate at which the project remunerates the capital invested

NPV
IRR

Discount Rate

Average Cost of Capital

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If Internal Rate of Return > company Discount Rate, then project NPV >0

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Economic Justification
Pay-Out Time / Exposure
Time needed for the project cash-flow to reimburse the capital invested

POT
M$

0 1 2 3 4 5 6 7 8 9 10 11 12

EXPOSURE Cash Flows Acc. Cash Flows

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Starting date to be defined:
• either 1st year of investment
• or start of unit operation

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Economic Justification
Pay-Out Time / Exposure

Net Cash Flows


cash flows Nets
- Discount rate 8% Accumulated
Cumul net cash Flows
des Cash flows
Discount rate 8%

M$ M$
300 400
200 200
100 0
0 -200
-100 -400
-200 -600
-300 -800
0 1 2 3 4 5 6 7 8 9 10 11 12 0 1 2 3 4 5 6 7 8 9 10 11 12
Année
years Année
years

What is the Pay-Out Time?

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What is the Financial exposure?

RC - PR GES - 08169_A_A - Rev.1 - 18/07/2013 58


ATTACHMENT II
Progress control

© 2011 - IFP Training


RC - PR GES - 08169_A_A - Rev.1 - 18/07/2013
Progress control

 A Concept study may require 2 to 6 months and few hundreds up to


10,000 Engineering manhours.

 Usual « Project Control » techniques will be used, with simple tools, to:
• Prepare the study budget (mobilisation bar charts on Excel to
estimate mhrs + estimates from different participants for their scope)
• Prepare the study schedule with planned progress curves (Excel or
Milestone Project), overall, management and disciplines
• Follow & control the study progress
− « Broken line » progress on the schedule
− Hourly progress: ratio of expended mhrs to planned mhrs
− Physical progress by assigning mhrs weights to the different disciplines /
deliverables-activities / milestones for deliverables-activities
− Forecast for completion

© 2011 - IFP Training


RC - PR GES - 08169_A_A - Rev.1 - 18/07/2013
Progress control

 A Concept study may require 2 to 6 months and few hundreds up to


10,000 Engineering manhours.
• Follow & control the study cost
− Costs are basically all-in mhrs cost x mhrs number
− Expended cost, planned cost, forecast cost to be established on
monthly basis
• Prepare a monthly progress report indicating key events, progress,
costs, areas of concern etc. and including above control elements (a
short weekly progress, or bi-weekly progress are advised, in
particular for subcontracted studies)

© 2011 - IFP Training


RC - PR GES - 08169_A_A - Rev.1 - 18/07/2013
Progress control
Progress control using BS 6079

Reference
BS 6079

© 2011 - IFP Training


RC - PR GES - 08169_A_A - Rev.1 - 18/07/2013