Copyright of SEPL CONFIDENTIAL

PROJECT RISKS (OIL & GAS DOWNSTREAM) A CLIENT’S PERSPECTIVE

Tan, Hooi-Hong - Project Manager

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SHELL AT A GLANCE

Producing 2% of the world’s oil….

And 3% of the world’s gas

3.3 million barrels oil equivalent

produced daily

…around 48% of which is natural

gas

$20.5 billion income $30 billion Capex

Employing 93,000 people

Operating in 90+ countries

In 2010

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CONFIDENTIAL

WHAT KEEPS US AWAKE AT NIGHT ?

1. HSE incidence

Process Safety - Lost of Primary Containment

Construction Safety - Fatality or Lost Time Incidence. Damage to Assets.

2. Quality issues from Vendors and EPC Contractor leading to ...

Process Safety incidents during and/or after start up.

Operability problems - not meeting investment premise on plant capacity

and/or availability after start up.

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CONFIDENTIAL

HSSE: PROCESS SAFETY

Definition of Process Safety:

Shell Group Definition: Asset Integrity – Process Safety Management Standard (AI-PSM)

Process Safety: The management of hazards that can give rise to major accidents

involving the release of potentially dangerous materials, release of energy (such as

fire or explosion) or both. (Definition taken from the Baker Report)

Asset integrity: The ability of an asset to perform it’s intended function effectively

while safeguarding life and environment

GOAL: Keep the hydrocarbons in the pipeline!

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CONFIDENTIAL

LEARNING FROM INCIDENTS IN THE INDUSTRY: YTD 2011

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• Mont Belvieu, USA – explosion and fire at Enterprise Products petroleum plant due to pipeline failure.

• Fushun, China – more than 30 people were hurt in an explosion at a PetroChina Co.’s refinery complex.

• Pembroke, UK – four people were killed in an explosion and fire at Chevron oil refinery.

• Nairobi, Kenya – third party fatality and multiple injuries occurred as a result of explosion at Shell Kirinyaga Road Service Station, which is Shell NOV (non-operated venture).

• Gibraltar, UK – explosion of oil and water tank due to welding injured 14 people.

• Mexico City, Mexico – two were people killed in an explosion and fire at Pemex oil refinery.

• Nairobi, Kenya – more than 100 people killed in an explosion of pipeline operated by Kenya Pipeline Company.

Included for awareness and learning

SAFETY & ENVIRONMENTAL PERFORMANCE

3rd Qtr. 2011

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Copyright of SEPL CONFIDENTIAL

SAFETY PERFORMANCE: YTD 2011

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Long-term trend data illustrates improvements in safety performance. However, performance is showing signs of leveling-off in 2011, with LTIF and TRCF deteriorating slightly compared to 2010

TRCF LTIF FAR

TRCF and LTIF per million working hours; FAR per 100 million working hours

0

1

2

3

4

'02 '03 '04 '05 '06 '07 '08 '09 '10 '110

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TRC

F/LT

IF

FAR

1.06 FAR (YTD 2011)

1.23 TRCF (Jan-Aug 2011)

0.35 LTIF (Jan-Aug 2011)

(Shell Operated Ventures, includes cases confirmed and under review)

CONFIDENTIAL

PROJECT RISKS (OIL & GAS DOWNSTREAM) – A CLIENT’S PERSPECTIVE

For this ECRI conference, I would like to focus on three aspects

that impact Project HSE and Quality risks.

1. Vendors’ Quality

2. EPC Contractor Factor

3. Contracting Models

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CONFIDENTIAL

PROJECT RISKS – VENDORS’ QUALITY

Risks to Quality arising from :

Business model (not transparent to EPC and Client) for Engineering,

Procurement and Fabrication. Especially after mergers and acquisitions.

Complicated supply chain interfaces arising from using many sub-vendors and

Affiliates.

QA/QC gaps between engineering and fabrication (incl. sub-vendors)

Extensive out-sourcing and use of Low cost centers for engineering and

fabrication.

Issues

QA/QC and fabrication processes that are not aligned.

Underestimation of effort to manage interfaces and supply chain resulting in delivery

schedule and quality risks not recognised and/or appropriately assessed and mitigated.

Lack of awareness/concern wrt impact of poor quality on Process Safety and schedule.

Most vendors are not set up to manage integration complexities esp. package units

Examples : CV, Package units (compressor etc….) 9

Platform's DG trips

Vibration issues - rotating

GRVE, GRP

Pinhole Leaks

Vibration issues - static

Specialised contractor services

GTG's

Valves leaks

Cleaning (eng, plan/prep)

Seals failures

Simops/ PTW/MOC

Instrument functions

Rotating Equipments

Tightness

Preservation/Maintanence & Cleanliness

PAS, Process Cntrl

Operations line-up

Unexpected trips

Mechanical integrity

Engineering, Design

Safeguarding related

Vendor (package, equipment)

0 20 40 60 80 100 120 140 160 180comm. start-up

Vendor Quality Trends Overview from a Mega Project.(Jan 2010 – August 2011)

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Total number of incidents per vendor

Vendor Quality Trends Overview from a Mega Project - Vendor flaws during CSU

CONFIDENTIAL

PROJECT RISKS – EPC CONTRACTOR FACTOR

HSE management - No noticeable step change in performance.

Bias towards Construction HSE and light on Process Safety

Emphasis on “hard” HSE aspect (physical barriers - PPE, Procedures etc), and less on “soft”

aspect (communication, behaviour based approach skills to effect work culture change) in

HSE management

Its like starting all over again from project to project even with same EPC contractor.

Resource Skillpool management

Where do the HSE and QA/QC stand in relation to other “Core” EPC skillpool (e.g.

Construction Management , Engineering) in the EPC organisation?

Competency and Experience of HSE, E,P,C, Projects Control and Commissioning & SU staff :

Is there a structured Training scheme for EPC staff ?

Is there a structured competency assessment for EPC staff ?.

EPC staff competency assessment & screening process

Client’s process vs EPC contractor’s. Note : EPC contractor is an extension of Client.

Many risks are introduced with poor and/or unqualified staffing esp. in critical positions.

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CONFIDENTIAL

PROJECT RISKS – EPC CONTRACTOR FACTOR

Project Team set up and Leadership.

Leadership

Are the PM, SM equipped/competent to manage soft issues ?

Cost and Schedule driven Mindset still persist ?

Roles and Responsibilities for EPC Team.

Are R&R made for all team members.? Maybe only for senior team members. ?

Are the R&R formalised. ?

Team dynamics

Are there due considerations given for culture, diversity etc.?

Poorly assembled team becomes ineffective/dysfuntional

Are there meaningful team building ? Or is it just “going through the motion” attitude ?.

Weak Leadership and ineffective/dysfunctional Team increases risks to HSE, Cost,

Schedule and Quality dramatically.

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CONFIDENTIAL

COMPONENTS FOR TEAM DEVELOPMENT

Project Objective & Vision : • Project objectives developed

• Objectives clearly communicated to and understood by team members

Team Composition : • All functions that can influence project outcomes adequately represented on team

• Challenges of diversity and experience

Roles and Responsibilities : • Roles, responsibilities, and expectations clearly defined, agreed and aligned

Implementation Processes and Governance • Work process and governance in place for developing and executing projects

• Process understood by project team

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CONFIDENTIAL

PROJECT RISKS – EPC CONTRACTOR FACTOR IMPACT ON OPERABILITY

Risk Management approach – LS sub-contracting mind set prevalent.

Risks are often transferred, instead of managed (assessed and mitigated).

Business model – To lower fixed cost

Preference for No Risk or very low risk contracts compromises accountability

mindset.

High Agency staff to Permanent staff ratio

Outsourcing /High dependence on Low cost centers for engineering.

Over simplistic approach toward oversight needed to secure quality in engineering and

adherence to schedule. Over promise (Cost benefit) and under deliver in quality and

schedule. More support needed than assumed.

Impact of poor engineering on Total installed cost - feed back loop ?

Reward is skewed to Cost and Schedule (incentives). Quality is compromised.

HSE and Operability risks increased arising from “workarounds” during construction to

secure schedule.

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CONFIDENTIAL

PROJECT RISKS – EPC FACTOR IMPACT ON OPERABILITY

Retention of Lessons learned - Similar risks appearing again and again.

EPC contractors are not around to experience poor operability performance

and hence unlikely to have the feedback loop on LL.

What is the process to instill corporate memory for LL. ?

LL process too cumbersome and not always conducive to effect structural

changes ?

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CONFIDENTIAL

ADJUSTED OPERABILITY

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Pro

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(Per

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amep

late

Cap

acit

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Better

Worse

Company

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A B C D E F G H I J K L M N P Q R

Production Rates Adjusted for Non-Technical Losses

Adjusted Production

Mining

Chemicals

Refining

CONFIDENTIAL

PROJECT RISKS – CONTRACTING MODELS

Contracting Models influence and impact project outcomes in

HSE, Cost, Schedule and Quality (Operability).

1. Poorly designed Contracts, (with or without incentive scheme) drives

wrong behaviour. Example : Reward for achievement of Mechanical

Completion milestones without linkage to quality etc. Separate

incentives for senior managers ?

2. Lump Sum, Reimbursable etc, - Does it determine, EPC resource

allocation and Leadership ?

3. Does it drive the right behaviour for risks management. LS vs

Reimbursable

4. Does it promote and secure HSE, and Quality?

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CONFIDENTIAL

MEGAPROJECT PERFORMANCE BY CONTRACT TYPES

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Perc

enta

ge o

f Pro

ject

s In

Gro

up

Contract Type

0%

20%

40%

60%

80%

100%

EPC-LS EPC/EPCm Reimbursable Alliances Mixed

Success

Failure

CONFIDENTIAL

PERFORMANCE BY CONTRACT TYPE

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-10%

10%

30%

50%

70%

EPC-LS EPC/EPCmReimbursable

Alliances Mixed

Cost Growth Schedule Slip Production Failures

Pe

rce

nta

ge

Contract Type

0%

CONFIDENTIAL

PROJECT RISKS – MITIGATIONS

Vendor Quality :

Broad base Enterprise Frame Agreements (EFA) for key Services, Bulks &

Equipment vendors based on risk assessment against quality, cost and schedule

performance ?

EFA with KPI for quality, cost and delivery. Benchmarking.

Utilise Client and EPC resources for inspection and expediting instead of 3rd

Parties .

EPC Contractor Factor :

Resource Skillpool management

Prescribe similar Client internal competency requirements for EPC resources. ?

Mandate HSE personnel for Project to be permanent staff instead of Agency staff.

Roles and Responsibilities and Alignment with Client

Mandate clear Roles and Responsibilities in EPC team as well as between Client and EPC

contractor.

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CONFIDENTIAL

PROJECT RISKS – MITIGATIONS

Leadership and Team Building

Invest in a structured Team building and alignment programme ?.

Emphasise leadership and ownership at all levels. HSE and Quality standards are set here !

Risk Management Approach

Risks must not be transferred to the least able Party (IC). EPC contractor must be willing and

to assist IC – leadership and ownership !

EPC Contractor Business model

Selling services as against selling labour hours to deliver Projects of highest HSE standard

that meets Quality specified, within Cost and Schedule.

Use of Low Cost Centers :

Minimise Home Office/Back Office (LCC) interfaces ?. Allocate defined scope (e.g. by

discipline) to strengthen ownership.?

Support the LCC with the right level of Home Office resources at the LCC, not remotely.

Flawless Start Up and Sustained Operation post SU.

Engineer and build facilities that will start up flawlessly. Avoid mechanical completion driven

mentality.

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CONFIDENTIAL

PROJECT RISKS – MITIGATIONS

Contracting Models.

Needs to promote the following :

1. Accountability for HSE, and Quality above Cost and Schedule.

Fees at risk for non performance of HSE and Quality. ?

Co-payment Incentive scheme for Quality. ?

2. Strive for collaborative working relationship between Client and EPC Contractor. Not always a given !

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INDUSTRY EXPERIENCE- DELIVERY OF MAJOR PROJECTS

Characteristics of Major Projects that “Fail”:

Early promises

Schedule driven

No independent assurance of cost & schedule

Poor Front End Loading – Meeting Decision Gates Deadlines

“Largest ever” (delivery, installation, ops problems)

Too many firsts (>5) – too complex to handle

Insufficiently resourced

Poor (team) integration

Wrong contracting strategy (EPC, one off alliances)

HOW TO BE SUCCESSFUL

Characteristics of Major Projects that “Succeed”:

1. Avoid “the illusion of optimization” in early Assess & Select

2. Drive clarity on targets – “Tell me what you really, really want”

3. Front End Loading in line with project phase and complexity

4. Stability in concept & scope

5. Avoid to be schedule driven (in the definition phase); “Schedule driven

Mega projects are bound to fail”

6. Break the project up into distinct scope elements (major projects in

themselves) managed by separate project managers & contractors

7. Strong Owners (& Contractors) Team - Good Relations & Integrated Team

8. Repeat and standardize

9. Do not underestimate (Non Technical) Risks

10.Avoid “over-promising” in early phase

CONFIDENTIAL

PROJECT RISKS

Is there a compelling case to differentiate

EPC services to deliver Top Quartile Projects

(Cost & Schedule) meeting the GOAL ZERO

for HSE for facilities that meet Client’s

Investment Premise for safe and sustained

operation consistently ?

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Now is NOT the time to be doing projects badly. Besides Luck and Devine interventions, the only factor between our performance now and Top Quartile project performance, is our collective Competence and Commitment to fundamentally change how we deliver Quality and HSE.

Project Risks – A Client’s Perspective.

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Q & A

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