Technology and engineering are delivering strong asset performance
JIM NYQUIST, EMERSON AUTOMATION SOLUTIONS, AUSTIN, TEXAS
DURING THE OIL AND GAS BOOM years, capital construction was going full throttle. Getting to first oil or gas quickly was the priority, as market pricing was far more attractive than it is today. Decades of established work practices and project strategies etched in every organization resulted in little appetite to rethink standards or consider new approaches. New technology adoption was slow, as it caused concern of risk and process rework, especially for contractors.
As a consequence, many capital projects ultimately failed to reach their goals of schedule or budget because they missed the value of innovation. Start-up delays and budget overages negatively impacted ROI. But outdated processes also had another unintended consequence: They developed facilities that weren't set up for years of operational excellence.
PROJECT CERTAINTY
A sort of reckoning occurred in 2014. With oil prices collapsing and companies focused more on survival than opportunistic investment, capital project funding rapidly declined, idling on the collective runway while the industry struggled to adjust to its new "lower for longer" reality. Capital expenditures in global oil production, which had reached a record $520 billion by the first half of 2014, dropped 60% to an estimated $200 billion in 2016, according to McKinsey & Company's Energy Insights.
Oil and gas companies unquestionably felt the squeeze of the unknown as the phrase "new normal" permeated the industry vocabulary. As the energy landscape shifted unpredictably around the globe, a handful of high-performing companies took a hard look-not outward, at the energy trend forecasts, but inward, at something just as critical: capital project performance. With demand and activity low, the market drop has afforded some opportunistic reconsideration of project management processes and engineering standards.
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The savings are significant-and the potential losses even more so. According to industry analyst IPA (Independent Project Analysis), more than 65% of projects greater than $1 billion fail, with companies exceeding their budgets by more than 25% or missing schedules by more than 50%. In fact, for a "normalized" $1 billion hydrocarbon project investment, those in the top 25%, or top quartile, completed their projects in half the time and half the cost of their peers in the bottom quartile. Top quartile performers can effectively double the value of their investment from the date of start-up.
Eliminating project cost is really about engineering better value from every dollar spent. While every project is different, successful projects have some common features. They all eliminate redundant or unnecessary work, automate steps in the process to reduce engineering hours, and use standardized technologies to reduce customization, excess materials and manpower. New technologies now make all of this possible, and some companies are already seeing the results.
But to have any impact, reconsidering engineering practices and project strategies needs to be done quickly-before the next wave of investment kicks in. Several contractors and producing companies are doing just that now, and already seeing project savings on the order of 20%. It means organizational and even culture change. It also means resetting decades-old work practices so organizations can take advantage of new technologies and engineering practices.
And it's not only time for extracting more value from projects, but also a great time to fundamentally change the performance of existing assets.
OPERATIONAL CERTAINTY
A conservative estimate states that more than $1 trillion is lost annually across all industries due to poor operating performance. Oil and gas likely represents fully a third or more of that number each year. Once again, outdated technologies and work practices tend to be the culprit. Installations that were done years-even decades-ago fail to take advantage of the latest technologies. As a result, they lack the "predictive intelligence" that modern automation systems bring to the operation for improved asset availability, safety, energy and emissions reductions, and production optimization.
With billions of dollars up for grabs, companies have a big opportunity to develop a capital investment approach that will enable them to succeed, whether oil is $60-$70 per barrel or $40 per barrel. This is the perfect time to see how the industry can maximize profits in a lower price environment. In fact, we think companies can be profitable even in the current, more modest price environment if they adopt game-changing automation technologies and adjust their work processes.
Predictive intelligence, for instance, can be introduced throughout plants to help them operate smarter and make employees more effective. Automation typically accounts for about 4% of the project cost for new construction, yet these technologies serve as the central nervous system of the facility-providing insight and control of complex process for safe, profitable operations. Despite their critical role, automation is often not considered until very late in the project.
Making automation an afterthought is a costly mistake-and a significant missed opportunity for companies that want to improve both their capital project and operational performance. Production failures like unplanned downtimes cost industrial manufacturers an estimated $50 billion annually, but most companies address these issues as they happen rather than focusing on prevention in the planning stage. Average producers lose two weeks of production annually when compared to their top quartile peers-just due to equipment failures that could have likely been detected in advance and avoided.
Another costly area of operations concern is safety-incidents resulting in damage to equipment, environment and injury to people or worse. Thanks to the predictive insight of new automation technologies, producers in the top quartile see three times fewer safety incidents than just their average peers. By improving reliability through advanced automation, these companies are reducing risk not only to operating personnel, but also to shareholders and company reputation.
There is a lot of talk about the Industrial Internet of Things (IoT) and the promise of performance improvement. In fact, a recent Industry Week study of 500 executives found more than 75% felt that Industrial IoT investments were important for their business in the next two years, yet only 5% actually had a strategy. The reason most often cited is a lack of business case. Perhaps that's because little of the Industrial IoT discussion focuses on measurable business impact. We have found that most companies succeeding at this are looking for scalable ways to adopt these new technologies and expanding those investments based on the return they receive on investment-instead of approaching it as a large-scale, enterprise-wide technology deployment all at once.
These types of automation solutions have broad applications across the industry. Sensors are easy to install, affordable and can be used anywhere-even the unconventional facilities that are so familiar to the oil and gas industry. Pervasive sensing solutions make it possible to monitor operations remotely in "4D" environments: distant, dirty, dangerous, and dull. These sensors provide the insight into real-time conditions, which are fed into analytical software in which experts can quickly analyze conditions and make adjustments faster than ever before.
The reality is the Industrial IoT has been a work in progress for more than 25 years, and we've been at the center of it from the beginning. Admittedly, it's been deployed as more of an "intranet of things" in plants, but now enhanced security and new software tools are changing operations and organizations in profound ways.
Previously relegated to "inside the fence" of a plant, data is now liberated to reach experts anywhere in the world. This means teams can experience "extreme collaboration," pulling in not only internal experts but also supplier experts, such as Emerson's reliability consultants, in real-time, no matter where they are. It's also changing business models, where customers are outsourcing equipment monitoring to third parties like Emerson. We even have a customer who made a zero capital outlay for a comprehensive IoT solution and is investing in a subscription-based model, including monitoring services. They've seen a 7% reduction in their energy costs already.
We're seeing green shoots of growth across the energy landscape as the industry's long pause on capital expenditures is rapidly coming to an end. Experts are predicting that capital projects are about to rebound after a two-year hiatus. This interim period, before investments come back in full force, is the perfect opportunity for companies to revamp their processes to ensure more efficient use of their resources.
ABOUT THE AUTHOR
Jim Nyquist is Group President, Systems and Solutions for Emerson Automation Solutions, a business unit of Emerson. He is responsible for Process Systems and Solutions, Reliability Solutions, Power and Water Solutions, and Remote Automation Solutions businesses. He heads Emerson's Project Management Leadership Team and is driving the Project Certainty initiative, which is Emerson's approach for top quartile project performance. He is also responsible for Emerson's Project Management Office and global project consulting and engineering organization of over 5,000 project management and engineering professionals in over 50 countries. Nyquist is a member of Emerson's Process Executive Group, has represented Emerson Process Management on the Construction Industry Institute Board of Advisors and was a member of its Executive Committee. He holds a BS degree from Kansas State University.
