ipa fel 2 _ pac introduction june 2011

Overview of FEL 2 Overview of FEL 2 and IPA Pacesetter and IPA Pacesetter

EvaluationEvaluation

Date

Presented to:

Saudi Aramco

Jorge Castaeda & Mark Etchells

21st June 2011

CONFIDENTIAL 2 INDEPENDENT PROJECT ANALYSIS

Confidentiality Statement

This document is the proprietary property of Independent ProjectAnalysis, Inc., which retains all copyright and other ownership rights

in its contents.

Information about the subject matter, content, and structure of this document is confidential and proprietary.

Neither this document nor any such information may be disclosed to any third party without the prior written consent of IPA and Saudi

Aramco except as expressly provided by the contract between IPA and Saudi Aramco.

This document is not to be copied or distributed without authorization.

Project File: SAR-1201-WKS


Outline

Introduction to IPA

Overview of Front-End Loading

IPAs Data Collection Process


What We Do

In a typical year, IPA evaluates about 900 major projects for companies around the world

We evaluate: The quality and completeness of the business case and

commercial arrangements

The competitiveness of the project at the end of scope development

The readiness of the project for sanction

The relative success of the project after startup

Occasionally, we look at projects mid-execution if they are off in difficulty


What We Do (contd.)

Over the past 20 years we have evaluated over 350 megaprojects and will evaluate over 40 this year alone

We develop a very complete technical and people history of each project from front-end through early operation

These histories become the data that we use to find what works and what doesnt in capital projects


IPA Works at Several Levels

Individual projects form the foundation of our work

Diagnosing (benchmarking) project systemsprovides companies with the basis for improvement

Benchmarking Conferences bring companies together to share practices and metrics

Research Studies help companies understand unique project characteristics

Training programs help individuals understand WHY specific practices are essential for success


IPA Corporate Background

Founded in 1987 to provide a unique project research capability for the chemical process, petroleum, and minerals industries

Work and development evolved from 25 years of development

Seven offices to globalize our database: U.S.A., United Kingdom, The Netherlands, Australia, China, Singapore, and Brazil

Devoted exclusively to the analysis of projects as a field of empirical research


Examples of Clients Represented in the IPA DatabasesABB Lummus Abbott LaboratoriesAbitibi-ConsolidatedADNOCAgip KCOAGRA SimonsAIOCAIR LiquideAir ProductsAKZO NobelAlcanAlcoaAllegheny IndustriesAlyeskaAnadarkoAnglo PlatinumArkemaArmy Corps of EngineersAstraZeneca Atlantic LNGAustralian PaperAVRAWEBasellBASFBayerBC HydroBechtelBE&KBGBHP BillitonBluescope SteelBluewaterBorealisBraskemBritish Nuclear Group

BPBristol-Myers SquibbCaltex Cargill Inc.ChevronChevron Phillips ChemicalChina Three Gorges Project

Development Corp.ChiyodaCITGOClark Refining & MarketingCNRLCodelcoColonial Pipeline CompanyComincoCondea VistaConocoPhillipsCopesulCRICSRCVRDCYTECDe BeersDegussaDepartment of Defense (US)DofascoDow Chemical CompanyDowCorningDSMDuPontEastman Chemical Co.Ecopetrol Edison CompanyEli Lilly & Co.EncanaEntergyExxonMobilFalconbridgeFlint HillsFlorida Power & Light

Malaysian Refining Co.Marathon PetroleumMarathon OilMeadWestvacoMerck & Company, Inc.MethanexMotivaMurphy OilNAOCNAVFACNederlandse Aardoilie Mj.Newmont MiningNorandaNorth Star SteelNova ChemicalsNovartisNycomed AmershamNumicoOricaOrigin EnergyOwens CorningPacific Energy PartnersPDVSA PEMEXPEQUIVENPetrobrasPetrochinaPetro-CanadaPetroleum Development OmanPfizer (formerly Pharmacia)PillsburyPioneerPortland PipelinePotlatchPraxairProcter & Gamble Co.Qatar Petroleum Co.Quimica FluorRepsol YPFRhodia

Fluor DanielFMC CorporationFoster WheelerGaz De FranceGenentechGeneral ElectricGeorgia PacificGlaxoSmithKlineHess CorporationHoffmann-La RocheHoneywellHusky OilHydro ICIIMC GlobalIncitecInland Paperboard & PackagingInternational PaperInvistaIscorJacobsJGCJohnson & JohnsonKellogg Brown & RootKimberly-ClarkKinder MorganKoch IndustriesKodakKraftKvaernerKumba Iron OreKuwait Natl PetroleumLG CaltexLasmoLTV SteelLukoilLundin MalaysiaLyondell CitgoLyondell Equistar

Rohm & HaasSABICSanofi PasteurSantosSAPPISasolSaudi AramcoSchering-PloughSECCOShell SolutiaSolvaySouthern CompanySouthern Natural GasStatoilStepanStone & WebsterSuncor EnergySunocoSuzano PetroquimicaSyncrudeTengiz ChevroilTesoro TotalUnion Carbide Corp.UnocalUS GypsumUS SteelValeroVotorantim MetaisWackerWellmanWeyerhaeuserWoodsideWyethXstrata


Business

Planning

FEL 1

Business &

ProjectTeam

Interface

Project

Definition

FEL 3

FRONT END LOADING

Execution

Phase Start-up

Scope

Development

FEL 2

When does IPA get involved?

Gate Gate Gate HandoverInitiation

ERA

Project Proposal

DBSPBusiness Study

Pacesetter project evaluation to set targets, identify Best Practices, and quantify cost/schedule risks early

Authorization project evaluation when estimating data are available Closeout after startup, but prior to team being reassigned Operability after first year of operation

Business Front End Loading

Pacesetter Project Evaluation

Prospective Project Evaluation

Closeout Project Evaluation

FEL Workshop (s)


Outline

Introduction to IPA




Agenda

Front End Loading (FEL) FEL 1

FEL 2

FEL 3


What Is Front-End Loading?

This early planning work, or definition, is called Front-End Loading (FEL)

FEL is the process by which a company develops detailed definition of a capital project to meet business objectives

During FEL these questions are answered:


Basic Premise

Early in the project, you can influence the final outcome of a project at a relatively low cost

Select the best projects

Eliminate the wrong projects

Select the best technology

Select the most appropriate scope of work

The work you do at the start of a project has a direct effect on how well the project turns out

Better planning drives better outcomes

Best Practices help to drive down costs, improve schedule, and improve predictability


HIGH

LOW

100%

0%

START COMPLETETIME

Cumulative

Cost of the

Project

COST INFLUENCE

COST COST INFLUENCEINFLUENCE

STARTUP AND OPERATIONS

PROCUREMENT

COST OF THE PROJECT

COMMITTED

COST OF THE COST OF THE PROJECT PROJECT

COMMITTEDCOMMITTED

CONSTRUCTION

DETAILED DESIGN

PROJECT DEVELOPMENT & FRONT-END LOADING

Cost Influence CurveMost Influential Project Decisions Are Made Early

Relative

Level of

Influence


FEL 1BusinessPlanning

Technology

&

Business

Ideas

Front-End Development Must Progressively Narrow

Phase ReviewGo / No Go

FEL 0Concept

EvaluationPhase 4Execute

FEL 2Scope

Development

FEL 3Refine Scope & Plan Execution

TIME

SanctionGo / No Go

Phase ReviewGo / No GoPhase

ReviewGo / No Go

Business Decision


Agenda

Front End Loading (FEL)

FEL 1 Business Planning FEL 2

FEL 3


Business Planning PhaseFEL 1

Proceed to Facility Planning Phase

Recycle for More Definition

Cancel or Shelve

Objective: Validate the business opportunity and select the alternatives that will be analyzed in the next phase.

Leadership: Business function is responsible for evaluating the potential project. However, active involvement by technical group and facility operations is critical.

Key Elements:

This phase is often funded separately

Duration of the phase varies greatly

Minimal level of expenditure (0.5% TIC)

Ends with a formal gate review

Many ideas fade during this phase

Gate-1 Review Opportunity Validation


Business Planning Phase -- FEL 1

A business need or opportunity is A business need or opportunity is developed into a business casedeveloped into a business case

If a formal process is followed, a set of If a formal process is followed, a set of business deliverables is developedbusiness deliverables is developed

The quality of this work is the most The quality of this work is the most important single predictor of eventual important single predictor of eventual business success of the projectbusiness success of the project

DELIVERABLES Market forecasts

Sales/capacity reconciliation

Product market life

Cost of Goods Sold (COGS) requirements

Comparative cost estimates

Legal/environmental/OH&S

Competitive studies

New technology content

FRONT- END LOADING

Business Planning

Scope Development

Startup & Operation

Project Definition

Execution

BUSINESS &PROJECT

TEAM

INTERFACE


Business and Project Team Interface

BUSINESS DELIVERABLES Market forecasts

Sales/capacity reconciliation

Product market life

Cost of Goods Sold (COGS) requirements

Comparative cost estimates

Legal/environmental/OH&S

Competitive studies

New technology content

BUSINESS OBJECTIVES BUSINESS OBJECTIVES STATEMENT STATEMENT

TO THE TO THE PROJECT TEAMPROJECT TEAM

FRONT- END LOADING

Business Planning

Scope Development

Startup & Operation

Project Definition

Execution

BUSINESS &PROJECT

TEAM

INTERFACE


Managing the Business/Engineering Interface

Fully share the business case

Consider develop-to-cost.

Allow and encourage an extensive Q&A between the business lead and the engineering core team

The successful management of the business/ engineering interface is an important predictor of project business success


Consequences of Incomplete FEL 1 Deliverables

Ill-Defined Business Case

Multiple Alternatives Evaluated

Unable to Reach Closure by FEL 2 Gate

Do Not Complete FEL 3

WorkReduced

Competitiveness


Clear Business Opportunity Statement

The objective of FEL 2 is to find the best scope of work for a given business opportunity

Task is easier if the business opportunity is defined

A clear business opportunity statement at end of FEL 1 has three main elements:

1. A definition of what the business is trying to accomplish with the project and why

2. Business objectives quantified in terms of targets for production capability, cost of goods sold, capital cost and schedule

3. A listing of constraints, risks, and the factors that make the project more or less valuable

Each element is necessary to guide engineering decision making on scope development


Completeness of FEL 1 Deliverables Drives FEL 2 Quality

0%

10%

20%

30%

40%

50%

60%

70%

Status of FEL 1 Deliverables at Start of FEL 2

Pr < 0.011

Complete

Perc

enta

ge o

f Pro

ject

s C

ompl

etin

g FE

L 2

Wor

seB

ette

r

In Development Little Work Done


Agenda


FEL 1

FEL 2 Scope Development FEL 3


Scope Development PhaseFEL 2

Proceed to Project Planning Phase


Cancel or Shelve

Objective: To study identified options and narrow the project to one option, refine premises, update project economics, and begin project definition.

Leadership: The project manager and project team begin to take the lead during this phase. However, business involvement is active.

Key Elements:

Project manager is named at the start of the phase and project team is formed

Costs are typically capitalized

Moderate level of expenditure (1.5% TIC)

Ends with single option and formal gate review that represents business approval

Gate-2 Review Selected Alternative

Validation


Scope Development -- FEL 2

DELIVERABLES

Economic evaluation of alternative scopes/technologies

Site selection

Budget-type estimates

Process hazards review

Conceptual engineering

Identification of auxiliary needs

Flow sheets

FEL 2 starts with and must be guided FEL 2 starts with and must be guided by the Business Objectives Statementby the Business Objectives Statement

The core team with continued The core team with continued business involvement fashions a business involvement fashions a scope that meets or exceeds the scope that meets or exceeds the business needbusiness need

Business objectives are translated Business objectives are translated into project objectives that are then into project objectives that are then ratified by the businessratified by the business

FRONT- END LOADING

Business Planning

Scope Development

Startup & Operation

Project Definition

Execution

BUSINESS &PROJECT

TEAM

INTERFACE


Scope Development FEL 2

PROJECT OBJECTIVES

Economic evaluation of alternative scopes

Site selection

Budget-type estimates

Process hazards review

Conceptual engineering

Identification of auxiliary needs

Flow sheets

PROJECT OBJECTIVES PROJECT OBJECTIVES STATEMENT STATEMENT

TO THE TO THE BUSINESSBUSINESS

FRONT- END LOADING

Scope Development

Startup & Operation

Project Definition

Execution

BUSINESS &PROJECT

TEAM

INTERFACE

Business Planning


Three Key Practices Facilitate Reaching FEL 2 Goals

Clearly defined business objectives and project objectives

Reaching closure on project scope at the end of FEL 2

Project teams with adequate representation from key stakeholders, especially business (integrated team)

KEY FEL 2 PRACTICESKEY FEL 2 PRACTICES


-20%-10%

0%10%20%30%40%50%60%70%

Completeness of PFDs DrivesEstimate Growth

+1 Std.Mean

-1 Std.

Pr < 0.05Pr < 0.05

Bas

e C

ost G

row

th F

rom

FEL

2 to

FEL

3

Preliminary PFDs PFDs StartedComplete PFDs

Base Cost = cost estimate without contingency

Clear ObjectivesClear Objectives

Engineering Engineering DefinitionDefinition

Integrated TeamsIntegrated Teams

FEL 2 Best FEL 2 Best PracticesPractices


Site determined

Equipment block layout identified

Preliminary soils and hydrology data collected

Environmental permitting requirements and strategy identified

Health and safety requirements and strategy identified

SiteFactors

EngineeringDefinition

ProjectExecutionStrategy

PacesetterFEL

Execution strategies (not plans)DesignProcurementConstructionStartupContractingTeam participants and roles

Integrated CPM scheduleFEL 3EngineeringProcurementConstruction (project +

turnaround) FEL 3 plans (not strategies)

ContractingLong-lead procurementResource requirements

Clear project objectives

Basic process dataFeedstock/product

propertiesH&MBs

Engineering tasksWritten scopeSingle set of PFDsSized major eqp. ListUtility, infrastructure &

off-site requirementsAnalysis of existing eqp.Feasibility cost estimate

Clear business objectives Participation and buy-in of:

OperationsMaintenance /

turnaroundBusiness

FEL IndexComponents at Pacesetter (FEL 2)


FEL Index & Status at End of FEL 2

Screening StudyPoor

FEL 3 Index ScaleFEL 3 Index Scale

3 4 5 6 7 8 9 1110 12

Best Good Fair Fair Screening Study

Clear business and project objectives Integrated team Site conditions established HSE requirements incorporated in design FEL 2 engineering complete Preliminary project execution planning

Project objectives not established Team being formed Site conditions assumed HSE requirements assumed Multiple options being evaluated Target end date established

Screening StudyScope Development in Progress

Scope Development

Complete

127 8 119 10


The Criticality of FEL 2

Decisions driving cost and schedule competitiveness and predictability are made in FEL 2

Starting FEL 3 without completing FEL 2 is root cause of major problems: Delays, recycle, and cancellation during Define stage

due to underestimates at end of Select stage

Projects that do not meet the business need after they are put into operation

Projects that reach Best Practical FEL but do not have commensurate cost and schedule outcomes; these projects are at great risk of:

> Cost growth over Select stage estimate> Design changes


Goals for FEL 2

Closure at end of Select stage Clearly articulated and aligned business and project

objectives

Integrated project team

Pre-Feasibility engineering must be complete

Reliable cost estimate to judge business case robustness Set competitive cost and schedule targets

And, there must be a reliable gatekeeping process at end of Select, or system will not work


Only 25 Percent of Projects Use All Best Practices During FEL 2

0%

20%

40%

60%

80%

100%

Perc

enta

ge o

f Pro

ject

s

Clear Objectives

Complete PFDs

Integrated Team

Clear Objectives, Integrated Team, &

Complete PFDs


Agenda


FEL 1

FEL 2

FEL 3 Project Planning Phase


Project Planning PhaseFEL 3

Proceed to Project Execution Phase


Cancel or Shelve

Objective: Develop detailed scope, execution plan, and cost estimate for the alternative selected in the Facility Planning Phase

Leadership: The project team is the primary leader of this phase. Active operations input and business input also required.

Key Elements:

Work is focused on single selected option

Long-lead equipment orders often placed with cancellation options

Early aspects of detailed design often started

Higher expenditure (3% to 5% TIC)

Ends with formal authorization at a final gate review

Gate-3 Review Execution

Authorization


Project Definition -- FEL 3

DELIVERABLES

P&IDs

Equipment specifications

Schedule analysis

Detailed scopes of work

Execution plan

Procurement plan

Preliminary arrangements

Entry into FEL 3 should mark the end Entry into FEL 3 should mark the end of alternativesof alternatives

No further scope changes should No further scope changes should occuroccur

Expenditure rises quickly nowExpenditure rises quickly now

Authorization grade estimate

FRONT- END LOADING

Scope Development

Startup & Operation

Execution

BUSINESS &PROJECT

TEAM

INTERFACE

Business Planning

Project Definition


FELIndex

FEL IndexComponents at Prospective (FEL 3)

= SiteFactors Plot plans Soils data Environmental

permitting Health & safety

requirements

EngineeringDefinition

Engineering tasksDetailed scopePFDs, H&MBs, P&IDsOne-line electrical diagrams

Equipment specs Cost estimate Sign-off from:

OperationsMaintenanceBusiness

ProjectExecution

Plan

Contracting strategy Team participants & roles Integrated schedule

DetailedCritical pathResource loading

PlansProcurementCommissioning/startupEtc.


Alignment of Functions

Use of Value Improving Practices

Front-End Loading

Elements of Capital Effectiveness

Leading Technology

Optimal Scope for Business

Needs

Executed With

Minimum Change

Timely Involvement of Contractors/Vendors

Fast Cycle Time

Low Cost

SAFETYSAFETY

BETTER BETTER IRRIRR

Key Leading IndicatorsKey Leading Indicators Key Performance IndicatorsKey Performance Indicators

Excelle

nt

Operab

ility

Business Strategy

Technology Strategy

Business Strategy

Discipline & Continuity


Team Development

Index (TDI)

How Do We Measure Team Development?

= Project Project ObjectivesObjectives Project

objectives: - Documented- Communicated- Agreed to

Trade-offs clear

Team Team CompositionComposition

Integrated team Key functions

represented:- Business- Ops/Maintenance - Engineering- Construction- Etc.

Roles &Roles &ResponsibilitiesResponsibilities

Team member roles & responsibilities:- Defined- Agreed to

Tasks identified Risks identified,

analyzed, & mitigated

ProjectProjectImplementationImplementation

ProcessProcess

Project implementation process in place

Applied consistently on all projects

Process understood & followed by team


How Do We Measure Project Controls?

Estimating and Scheduling Methodology

basis of estimate and contingency

level of cost detail for each activity

Integration of cost and schedule

Estimate Validation and Review estimate review and quantitative validation

owner cost knowledge brought to review and validation practices

Control During Execution

Measurement of Progress extent that physical progressing was performed

level of detail of measurements for each cost category

Reporting of Progress and Status

frequency of reportslevel of detail of progress reports for each asset and activity

Owner Participation in Project Control

=

PCIIndex

Estimating for Control


VIPs and Their TimingFEL 1

Business Planning/ Appraise

FEL 2Scope Development/

Select Alternative

FEL 3Project Planning/

DefineExecution Operation

Constructability Reviews

Customizing Standardsand Specifications

Reliability SimulationModeling

Value Engineering

PredictiveMaintenance

Classes of Facility Quality

Design-to-CapacityProcess

Simplification

Waste Minimization

EnergyOptimization

Technology Selection

Phase 1 Phase 2 Phase 3 Phase 4 Phase 5

3D CAD

Recommended Best Practical range is 40-60% use of applicable VIPs. Most benefit from VIP use is derived for Projects achieving Good or better FEL Index rating at authorization.

VIPs


0.8

0.9

1.0

1.1

1.2

3 4 5 6 7 8 9FEL Rating

Rel

ativ

e C

apita

l Cos

t(In

dust

ry A

vera

ge =

1.0

)

Industry Average Cost

FairBest Practical ScreeningGood Poor

Better Team Development, FEL, and VIPs Use Drive Cost Performance

Poor to Good TeamPerformance Range

FEL Improvement plus Good Team Development and VIPs Use

Poor

Good


0.85

0.90

0.95

1.00

1.05

1.10

1.15

3 3.5 4 4.5 5 5.5 6 6.5 7 7.5 8 8.5 9

0.85

0.90

0.95

1.00

1.05

1.10

1.15

3 3.5 4 4.5 5 5.5 6 6.5 7 7.5 8 8.5 9FEL Index

CostIndex

FEL Index

Execution Schedule

Index

SCREENINGPOORFAIRGOODBEST

FEL Drives Project Cost and Schedule Performance

SCREENINGPOORFAIRGOODBEST

GoodGood FairFair Screening Screening StudyStudyScope Scope Dev. in Dev. in

ProgressProgress

Scope Scope Dev. Dev.

CompleteCompleteBest

PracticalOver-

defined

GoodGood FairFair Screening Screening StudyStudyScope Scope Dev. in Dev. in

ProgressProgress

Scope Scope Dev. Dev.

CompleteCompleteBest

PracticalOver-

defined


Outline

Introduction to IPA




LEAD ENGINEERS

COST/ SCHEDULE ENGINEER

OPERATIONS

CONTRACTORSPROJECT MANAGER

MAINTENANCEWorksheet

General Information

Technical Characteristics

External Issues

Estimated & Actual Costs

and Schedule

Project Team Interview

This is a single, group interview.NOT a series of individual interviews.


Typical IPA Data Collection InterviewExample 1 Day Agenda for Downstream Projects*

Introductions Project Background, Drivers, Key Issues Project History and Schedule Technical Characteristics Project Management & Safety Issues Lunch Project Definition (FEL) Value Improving Practices Cost & Controls Information Other Action Items

* Exact agenda may vary depending on team availability, project type, size, complexity and other defining characteristics


When filling in the workbook

If a section takes longer than 1 hour - youre doing too much

The workbooks are generic - if a question doesnt apply, dont be afraid to put - not applicable

If you dont understand a question - talk to the IPA contact, your colleagues or leave it blank and it will be covered during the interview.

If you dont have a document that matches what has been suggested by IPA - bring what you have.

When filling out the workbooks Be honest and truthful Add explanation


Key Data Collection Items Required by IPA*

Workbook (completed by team) Project objectives letter /scope description Risk management plan Project organization chart Block flow diagram, plot plans, P&IDs and equipment specs Project execution plan (incl. native format project schedule files) Authorization/Gate package Authorization/Gate cost, schedule and operability estimates Change log Achieved cost, schedule and operability performance Safety performance Close out report / lessons learned workshop

* Other documents may be required. Additionally, some documents listed may not be applicable to certain types of projects and/or at certain stages. For example, closeout data, including lessons learned reports is only relevant for evaluations of completed projects


What to Expect & When

Initial Coordination with Client/Project Team Analyst Preparation Project Evaluation Interview On site, face-to-face meeting Preliminary Analysis Review Board Preliminary Verbal Feedback to Team All data received + 1 week Complete Analysis Prepare Deliverable (Report or Presentation) Edit/Review of Deliverable Issue Draft Deliverable All data received + 3-4 weeks Client Review & Comment Issue Final Within 2 weeks of team/IPA

review of draft document.

Cycle time to draft deliverable (Presentation or Report format) is approximately 3-4 weeks after all data is submitted.


Questions?

Please address any questions concerning the analysis to:

Switchboard +31 (0)70 335 07 07Fax +31 (0)70 335 06 42

E-mail [email protected]@ipaglobal.com

Independent Project Analysis, Inc.

Jorge Castaeda & Mark Etchells

Prinsenhof Building Prinses Margrietplantsoen 32 2595 BR The Hague The Netherlands


IPA Proprietary Databases

PROCESS PLANTS PES12,000 + projects350+ clientsDetailed histories of process plant projects >$6MM

PIPELINES800+ projectsPipelines, terminals, booster stations, etc.

INSTRUMENTATION & CONTROL120+ projectsAutomation, DCS, SCADA, etc.

HAZRISK400+ projectsEnvironmental assessments and cleanups

MEGAPROJECTS300+ projects$Billion class projects, all types

UPSTREAM PES1,100+ projectsPetroleum production platform worldwide

INFORMATION TECHNOLOGY300+ projects; including Applications Development, Telecommunication, etc.

POWER PLANTS150+ projectsSingle or combined cycle plants

PES SMALL PROJECTS5,000+ projectsProjects

ipa fel 2 _ pac introduction june 2011

Documents

project file

prior written consent

overview of fel

major projects

analysis of projects

years of development

levels individual projects

projects midexecution