Trends in Project Development:Where are they heading?

General

• Skills shortage likely to continue

• Less experienced Leaders and Decision-makers

• Cost of exploration lag pre–2004; growing impact

• Insurance & contractual issues becoming more onerous

• Growing “soft” issues

Skills Shortage – Lag Impact 1

• During the late 1990s there were significant decreases in mining professionals in the industry due to unfavourable market conditions

• Fewer graduates during the 1990s and early 2000s failed to compensate for numbers who left and retired from the industry resulting in today’s “brain-drain”

• The short term outlook indicates little positive change in overall numbers (technical, trades, operations etc) to meet demand; competing industries will make matters worse

• Fewer people and high demand = high personnel costs

Trend = Potentially higher technical risks, cost an d schedule over-runs

Inexperienced Leaders and Decision-makers – Lag Impact 2

• Function of skills shortage

• Individuals prematurely promoted to leadership and decision-making positions

• Greater requirement for training and mentoring needed in the future

• Outlook will result in higher potential risks to development projects

Trend = Potentially higher technical risks, cost an d schedule over-runs

Cost of Exploration - Lag Impact 3

• a

Source: Metals Economics Group

Cost of Exploration Lag

• While exploration expenditure has increased in the last 8 years, the percentage allocated to grassroots has steadily decreased from 49% (2003) to 39% (2006) Source: Metals Economics Group

• Fewer grassroots exploration dollars = fewer discoveries

• Time taken between significant exploration discovery to commissioning is approximately 10 to 20 years plus

• Majors have used acquisitions and mergers as a means of growth rather than exploration

• We have yet to experience the cost of pre-2004 exploration inactivity (fewer future developments)

Cost of Exploration Lag

Cost of Exploration Lag

Est. Global Exploration Expenditure

Cost of Exploration Lag

Impact of mergers & acquisitions and decrease in grassroots exploration

Trend = Move to more expansions than greenfield deve lopments

Insurance and Contractual Issues

• The cost of insurance has risen significantly in the last decade; few reasons exist to suggest that this trend may change sometime in the future

• Global issues of terrorism (9/11), nationalistic /socialistic tendencies (eg Zimbabwe, Bolivia and Venezuela) and conflict zones (DRC, Philippines, Indonesia and the Pacific Rim) have added to the global cost of developing projects

• Project owners are paying twice for insurance – their own and indirectly via service providers

Trend = Higher insurance costs for developers and s ervice providers

Insurance and Contractual Issues

• Lack of expertise is commonly cited as a key factor for:

- Poorly scoped projects

- Problems during project negotiations

- Contract management issues experienced during execution

Source: Blake Dawson Waldron, 2006A Survey of Pressure Points in Australian Construction and Infrastructure Projects

Trend = Further delivery delays, cost overruns and other development problems, and increased disputes, litig ation and future contractual delays ($$$$$)

Insurance and Contractual Issues

EPC-LS

EPCM

EPCM +CAPEX

SCHEDULE

PERFORMANCE

WARRANTIES

CURRENT

(DECREASING IN NUMBER)

OUTCOME

DISPUTES DUE TO INEXPERIENCED PERSONNEL INVOLVED

(FULLY REIMBURSIBLE)

Trend = High local risks are leading owners to corr ectly shift to reimbursable contracts with high owner involvement

Insurance and Contractual Issues

Source: Blake Dawson Waldron, 2006A Survey of Pressure Points in Australian Construction and Infrastructure Projects

“Soft” Issues

Interaction with governments, communities and NGO groups likely to increase development schedules (and potentially costs) as companies developing projects need to demonstrate:

• greater commitment to bio-diversity assessment and management – during development, operational and closure activities.

• Cultural integration and community involvement plans –employment, infrastructure development, education and health

• Open and transparent communication with all stakeholders

Trend = increased development times and potentially costs

Engineering

Key Trends =

• Bigger and More Complex Projects

• Environmental Considerations

• Costs

Photos taken at Nickel West's Ravensthorpe Nickel Operation. Nickel West is a member of the BHP Billiton Group.

Bigger and More Complex Projects

• Starter projects have increased 4-8 fold in the last 10 to 15 years

• Larger projects represent a larger risk

• Complex projects represent a larger technical risk to companies and higher safety risks to developers and operators (eg high pressure vessels, noxious gases, high temperature, highly acidic / alkaline environments and hazardous product handling)

• Systems capable of handling 2D and complex 3D requirements integrated within an overall global delivery system

Environmental Considerations

• Ensure energy efficiency and energy source substitution opportunities are integrated during the technical design stages of development

• Greater water management considerations – minimising initial water usage through the use of appropriate unit processes, maximising water recovery and re-use, and environmental discharge issues

Cost

• Developers are increasingly looking to low cost centres like India, Philippines, etc.

Procurement

Key Trends =

• Global Sourcing

• Automated and Integrated Systems

• Resource Constraints

Global Sourcing

• To deliver production capacity and cost effective solutions for major projects, equipment/materials must be sourced globally, including sub-sourcing of component parts; freight rates continue to worry due to supply / demand and energy costs

• Fewer barriers today for importing (structural steel etc)

• In addition to recognised First World Vendors key new supply sources include:

• China• South East Asia• Eastern Europe • Central Africa

Automated and Integrated Systems

• In order to manage material and equipment supply in a multi source global environment, with multi location management and delivery streams

COMPANIES MUST HAVE:

Automated and Integrated Delivery Systems

Resource Constraints

• A key factor in global project delivery is constrained resources

• This is evidenced by:• Forging Resources

– Mill supply was 40-60 weeks now 80-20 plus weeks

• Exotic Materials– Supply of titanium, unable to get firm pricing

extended delivery and abnormal price escalation • Construction Resources

– Early lock-in of resources required for access to quality contractors

Resource Constraints

Construction

Key Trends =

• Health & Safety Issues

• Location

• Pre-Assembly / Modularisation

• Cost Estimation

Health & Safety Considerations

Trend = Move to safer developments and operations

Health & Safety Considerations

• HIV / AIDS

• Malaria

• Workplace exposures

• Changing attitudes and cultures - duty of care

Trend = Move to remote / third world regions increa se health risks for employees and contractors = greater risk management implications for companies

Location

Trends =

Locations have and will continue to move to more:

• Remote locations with poor infrastructure –infrastructure specialists (port, road, rail, power, etc.) will be in higher demand

• Politically unstable environments – safety and bribery issues

• Environmentally sensitive areas

• Third world countries with significant health issues

• Areas requiring higher level and innovative logistics and expediting skills

• Challenging areas like the ocean floor

Preassembly / Modularisation

• Used for some time in Europe and the gulf coast in offshore drilling – used in Canada for plant construction since the early 1980s

• Can be positive in regards: schedule, safety, quality and cost control, CAPEX and to counteracting any negative site productivity issues (third world, altitude etc)

• Early commitment is a must (at FEED stage)

• Engineering is substantially more complex

Trend = As locations become more “challenging”, iss ues associated with environmental and regulatory requir ements together with site attributes / access and speciali sed lifting and haulage equipment availability will ultimately limi t its application.

Construction

Capital cost estimation will remain difficult while material/ equipment and labour inputs continue to escalate at unpredictable rates

Construction / Operations

Operating cost estimation will remain difficult while material / equipment and labour inputs continue to escalate at unpredictable rates

Thank you.