The Opportunity for Improved Development of New Gas Projects

Issue 2 and Volume 121.

By James Cravens, Senior Executive Associate, Pathfinder

The power generation project development environment has drawn participants who do not routinely undertake new, large-scale capital projects. While many companies have mature processes for asset development, other smaller entities are allowing aging plants, evolving regulations, and the lure of historically low gas prices to lead them into the unfamiliar territory of new development.

The degree and formality of front-end planning associated with process industry projects is historically more complex than what’s typically used in the power industry. At the core of the discussion, this may be a legitimate issue-that there is an increased level of R&D-type activities associated with process facilities, resulting in increased pro forma analysis and technical validation. With that said, there is evidence improved front-end planning can enhance the opportunity for companies to develop new assets with reduced exposure to cost overruns, delays, and lost shareholder credibility.

It would be unfair to conclude power owner organizations are less conscientious with their capital expenditures than their colleagues in other business sectors. More likely, they are drawn to an industry-accepted culture that informally sets cost and schedule expectations unrealistically. Even seasoned power companies can learn there is no automatic guide for accurate estimating in the early phase of project development and unique project conditions can lay waste to estimates factored off of seemingly identical facilities.

Process industry owners seem better conditioned to accept that there is a level of project definition essential to accurately defining scope and understanding the resultant cost and schedule implications. While it is easier to predicate planning and analysis on extrapolation and factoring, project results have demonstrated there is substantial risk associated with over reliance on historical reference. A contributing factor is that project development teams naturally evolve when the bias of project advocates results in aggressive attempts to force-fit reference material to match current opportunities.

The differences in project development for each business sector is as much about expectations as it is real differences. As noted, front-end planning is a formal, owner-driven process that explicitly defines the level of anticipated scope, cost, and schedule accuracy associated with evolving project definition. Participants are expected to carry a project through a formal gated process with full acknowledgement that early cost estimates and schedule projections may be significantly different than the eventual estimate that will evolve with scope maturity. There can be an incorrect assumption that proposed projects have underlying commonality limiting cost and schedule variance. Projects receive an early estimate with undeserved credibility. This, in turn, generates lasting expectations. Projects move forward in both power and process business sectors in a similar manner with the difference being that the process industry withholds commitment and stakeholder exposure until scope advances. More importantly, formal business planning is tempered until legitimate analysis is possible. Many process projects are abandoned without ever reaching the public radar screen or becoming subject to critical assessment. The same projects in the power sector could easily advance to the point of requiring public “cancellation” or worse: Full execution with an ever present label of being over budget and behind schedule.

This does not imply that front-end planning can automatically translate to power projects. There are notable differences. Each attempt to apply principles of the planning process will require careful attention to identify elements that can be put to use. Even when technology and design configuration are seemingly stable, there is much to study and clarify before reliable financial analysis can be accomplished. The additional study and analysis will add time and cost to the project development process, but experience demonstrates it is money well spent.

The industry can improve both perceived and actual cost /schedule performance by taking a page from colleagues in other sectors. Attention to project definition is essential when setting baseline goals used to steer project decisions and to measure project performance. Being overly aggressive to save time and money during the early stages of project development can backfire, creating an environment in which successful project execution becomes nearly impossible. Careful evaluation of industry best practices associated with the owner’s role in front-end planning can lead to a thoughtful and comprehensive approach, which will more than pay for itself. The Construction Industry Institute’s “Front End Planning Toolkit 2014.1” is one example of easy to understand material that can be used to facilitate an orderly and effective process.