How co-creation can improve the value delivered by capital projects

Sometimes, even those that use sophisticated risk analysis and modelling techniques only achieve partial success, and some become regret investments. Do you ever find that initiatives such as a revamp or the installation of a new process unit fall short of delivering the promised targets? For instance, do they fail to deliver the full yield or margin uplift that was indicated in the project valuation and feasibility studies? 

This is an area in which Shell Global Solutions’ leadership team is acutely interested. For some time now, we have been scrutinising capital projects around the globe and have identified a series of key risks that the top performers successfully mitigate on their way to achieving project excellence.

Mitigating the risks is another matter, as, in our view, it requires the refiner to work with its strategic suppliers in a fundamentally different way with new levels of openness. A new paradigm is emerging.

The conventional paradigm saw refiners issuing invitations to bid to prospective suppliers after defining the business case and locking in the technical specification themselves. Then they would go out to bidders and compare their proposals on the basis of price. The problems are, however, that refinery projects are complex and valuable investments, and that much of the overall value a project can deliver is built in at the start. The assumptions behind the business case and the decisions made during front-end development can make or break a project’s effectiveness.

In contrast, the emerging paradigm sees the refiner including its technology suppliers as an integral part of the project team. The refiner shares its business drivers and assumptions with the suppliers so that, together, they can develop a cost-optimised specification. They can jointly explore technical options and bring to bear experience and expertise from all parties to arrive at robust technical solutions.

Shell Global Solutions' value creation architecture provides the platform for this way of working, which we call co-creation. Experience shows that it can create a coherent and compelling exchange of value, and it works because it has two inherent philosophies.

First, the refiner recognises that, even though it has a clear idea of where it wants to get to, it may achieve a better outcome by bringing in technical experience from outside. Working in tandem with an organisation that has probably seen and dealt with similar technical challenges and complex operating situations at other facilities can bring a different level of understanding to the problem, and multiple different or novel technical solutions can often be devised.

Second, the supplier appreciates that the refiner has a vitally important perspective of its marketplace, business objectives, technology and processes. 

So, over time, we at Shell Global Solutions have changed the way we work with our customers. Although the business acumen and technical expertise of our consultants and technical teams remain important, we recognise that their quality of interaction when trying to understand customers’ wide-ranging business challenges as they deliver that expertise is equally important. This is how we make sure we consider our customers’ underlying business objectives when devising technical solutions.

This approach of technical collaboration works particularly well for innovative, entrepreneurial, high-performing enterprises: businesses that like to challenge the conventional wisdom and seek to identify and evaluate the widest possible set of options. Because they embrace openness and accept the market’s volatility, they leverage existing experience and knowledge, and best practices and techniques that are successful in other facilities. Crucially, as this approach hard-wires the customer’s business objectives into the decision-making process, it can help to make sure a project successfully achieves its objectives.                           

Why projects often fail: Four key risks

Key risk No. 1: Will the high volatility of the current fast-moving markets prevent my project from delivering the promised value?

A project may not deliver the promised value if an initiative is defined on a narrow premise that underestimates the potential market changes. The risk can be avoided by embracing the volatility. For example, some refiners responded to the downturn by reducing investment levels, cutting costs and waiting until normality returned.

Others, however, recognised that the long-term oil and gas fundamentals remained positive and sought out opportunities to exploit them. For example, a refinery in Asia incorporated a winter diesel capability: by investing a relatively small amount of capital, the refinery was able to create additional margin, which helped to make it a more robust business.

Progressive companies recognise that where there are challenges there are often opportunities. These, however, will be specific to individual businesses. Unearthing them will involve a thorough examination of the model on which the business is run, along with a reassessment of its emphasis and direction.

Key risk No. 2: Will delays and cost overruns derail my project?

Sums of up to $1 million a day in lost revenue can occur when start-up is delayed on large projects, and the broader impacts of delays on a project’s net present value are rarely fully factored into the financial risk analysis. A three-month delay in start-up can turn a business-critical project into a regret investment, so it is imperative that project teams take steps to guard against plant underperformance during commissioning and start-up.

In addition, there are many examples of projects whose costs have spiralled out of control owing to external variables such as the price of steel, labour or financing. However, experience shows that the effects of external events can sometimes be mitigated without affecting a project’s overall value. For example, the global economic crisis challenged many refiners’ plans for capital projects but these companies were able to proceed by reacting quickly to the changing marketplace. Retaining a high level of flexibility after the final investment decision is a key attribute.

For example, when the project economics of a Chinese refiner’s in-development hydrocracker began to look less favourable, management was quick to take action to bring the costs down. The refiner brought together experts from its business with representatives of Shell Global Solutions to discuss how the project could be configured differently. It was through this technical collaboration that the refiner identified that it was possible to achieve the same capacity from two trains instead of three without affecting the unit’s output.

Key risk No. 3: Will the high capital cost make my project unviable?

In today’s financial markets, there is always the risk that you will be unable to secure investment for your business-critical project, at least on favourable terms. However, there are usually many alternatives that could meet the needs of the market.

When a business seeks the perspective of an experienced consultant to help it challenge conventional wisdom, working together in this way often co-creates innovative, highly effective technical solutions that neither would have identified on their own – providing there is high-quality interaction.

Take, for instance, a European customer that wanted to build a mild hydrocracker complex to process a mix of medium and heavy vacuum gas oil (VGO), and also to hydrotreat the gas oil from a crude distiller. Many refineries achieve this through two separate standard designs. However, because capital was a major issue for this refiner, it was keen to investigate novel solutions.

As a result, a combined team of the client’s senior personnel and staff from Shell Global Solutions devised an innovative solution: an integrated reactor section that would squeeze down the capital cost. The hydrodesulphurisation (HDS) reactor and the hydrocracking reactor were combined with a common separation, compression and fractionation section. Because the customer only needed one unit instead of two, the capital cost was significantly lower.

Key risk No. 4: Will my new assets operate reliably enough to generate sufficient cash to cover the financing costs?

Even with extensive process modelling, you cannot be completely sure that your new technology will deliver what it was designed to do. Will it hit its targets in terms of cycle length and yield profile? What impact will it have on your environmental performance? Are you confident that it will not trigger any unanticipated effects in the units up- or downstream?

That was the issue encountered by a US refinery. It had a long track record of processing difficult, discounted crude oils to return an impressive product slate of clean fuels. However, a move to import more opportunity crudes severely curtailed the cycle length in a kerosene hydrotreater. The refiner had to increase the operating temperature in a kerosene hydrotreater by 8–11°C to meet the ultra-low-sulphur-diesel (ULSD) specification, and the catalyst deactivation rate tripled.

A team of hydroprocessing specialists from the refinery and Criterion examined the composition and properties of the feed and formulated the best operating strategy for the hydrotreating unit and the upstream crude distillation unit. As a result of the changes that they made, which included installing a new catalyst as well as process changes, the cycle length was doubled.

Graham Wood
Solutions Development & Marketing Manager, Shell Global Solutions International BV