Mitigating the completion risk

So you have designed an economically robust capital project. The crude diet, location, refinery configuration, product portfolio, contractual strategy, logistics and hardware requirements have all been determined; future scenarios have been evaluated; and crude supply optimisation and product offtake deals are in place.

The scope is in tune with market trends and you are convinced that it will deliver its objectives – but making the case to investors and their banks is proving to be another matter. They are not so enthusiastic and that is being reflected in the terms that they are offering. In today’s markets, a project’s viability can rest on reassuring the financiers that the proposed project will achieve its forecast value.

“One of the key metrics here is the completion risk,” says Dave Clark, General Manager, Process Licensing, Shell Global Solutions. “This measures the probability of a project being compromised by cost overruns, start-up delays or abandonment.”

If the project is abandoned, the investors will not see a return on their capital. But the consequences of late start-up can also be severe. For instance, a month’s delay on a plant that is projected to have a cash flow of $1 million a day would cost some $30 million (the associated project management issues are addressed in Impact, 2, 2012, page 8).

Consequently, the terms for borrowing money may be substantially better when the factors that determine completion risk are addressed. There is a clear correlation, Clark says, between the level of completion risk and the terms that investors may offer.

Moreover, although the outlook for refiners varies greatly according to where they operate, today’s economic climate makes these issues highly relevant worldwide. European refiners are beset by the market’s overcapacity, which is leading to closures; at the same time, businesses in China and the Middle East continue to install new capacity while attracting major partners to invest with them, and companies in the USA are analysing the effects of the shale boom.

All companies, however, regardless of location, are likely to find the financing market exceptionally difficult, with capital short and expensive. So, once resources have been committed to a project, it is business critical that it generates the returns that were promised.

One way of mitigating the completion risk is to employ proven technology says Clark. “Putting new technology into a project or substantially scaling up a technology can make investors nervous. That is not to say that new technologies or large scale-ups should never be used, but they tend to heighten the completion risk and, therefore, the cost of finance.”

“Most of the technologies that Shell Global Solutions licenses are de-risked through their extensive use in Shell’s refineries,” he says. “This means that when we bring it to the market it is already proven and, therefore, inherently less risky. Some licensors do not have that luxury. In addition, as Shell is an operator, we have unique methodologies to de-risk new technologies to make sure that our assets should deliver the expected returns.”

Employing a strategic licensor that has itself operated large, complex industrial facilities can also help to address investors’ concerns. A successful project can be defined as one that starts up on time and on budget, goes up to capacity, and runs straight through its first cycle without problems. “The better you can demonstrate to investors that you have mitigated the potential risks through each phase, the lower your borrowing cost,” says Clark. “For instance, the terms on offer to one of our customers decreased by five base points once Shell Global Solutions was brought in.”

In financiers’ eyes, the presence of an experienced strategic licensor helps to mitigate the completion risks associated with complexity. Astounding levels of complexity can be encountered during the installation of new process units owing to the overwhelming number of interfaces with other parts of the plant, and this must be carefully managed.

As an example, the Pearl GTL development in Qatar involved 800 pipelines crossing between contracts, and there were over 2,600 cases where it was necessary to pass process data among contractors. There were more than 3,600 construction interface points, including those for the exchange of schedule information and overlapping responsibilities for cross-contract system hydrotesting. As a general rule of thumb, every interface increases project complexity by a square factor, so it is not unusual for a project’s complexity to increase dramatically.

At Qatar, the project schedule was maintained because the complexity was mitigated with tried-and-tested techniques. Seamless integration among contractors was achieved through sophisticated work processes that facilitated communication and data exchange, and by an interface database that consolidated all the interface points and issued weekly status reports.

On highly complex capital projects, the value of experience and best practices cannot be overstated. Clark adds that having an internationally recognised company involved in the project can also reduce the equity that the owner has to provide. “In today’s markets, the required equity levels can be extremely high and this is killing quite a few proposed projects,” he says. “It is not uncommon for a venture to have to find 40% equity levels, but 40% of, for example, a $10 billion project is sometimes out of reach.”

“Access to capital is about having a credible, economically worthy project and then demonstrating that you have taken steps to de-risk it,” Clark concludes. “If you can show those two things, they help to provide reassurance that the development will be delivered on schedule, within budget and to worldclass benchmarks. As a result, you are likely to secure more preferable terms for finance and insurance.”