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The Business Case for OR&A™

Introduction
Over the last two decades, Project Performance Analysis has been used to monitor the performance of large Oil & Gas (Mega) Projects and to evaluate their success against the basic criteria put forward by Edward Merrow of IPA Inc.:

- Will the Project be completed without harm to anyone involved?

- Will the total cost be within 25% of the approved budget?

- Will the Project be completed on schedule?

- Will the completed asset deliver what was promised at FID?

Data from a large number of mega projects showed that more than 65% of them were judged as having failed on one or more of the criteria used and many exhibited continuing operational problems into the 2nd and 3rd years after start-up.
Essentially, stakeholders in such projects cannot wait until a project is declared as complete and handover to the operations team is imminent, to discover that something has been omitted or overlooked which would subsequently prevent or restrict operation of the asset to the design intent.

The solution to this problem is to ensure the requirements of the Owner/Operator are addressed during the conceptual, design and construction processes to ensure the Operability and Maintainability (and therefore the viability) of the asset is achieved. This is done using a robust Operations Readiness & Assurance process.

Until the creation of the OR&A™ Solution, there were two main obstacles to Companies wishing to use OR&A™ on their projects, these were cost and availability. A further complication was the lack of the ability to explain how using OR&A™ would benefit the Project (and subsequently the Asset) and how this could ever be cost effective (or reduce costs).
All of these obstacles have been overcome by the OR&A™ Solution which offers a robust and instantly deployable solution to OR&A™ available in any location and accessible from multiple locations simultaneously

Business Case
Without a compelling Business Case for deploying OR&A™, making a convincing argument for investing in OR&A is difficult when the Corporate Management Team of a Company who recommend such investments to the Board of Directors are focused on the ‘bottom line’.

However, the framework below outlines such a Business Case which illustrates how losses from failing to deploy OR&A could amount to some 9% of Asset Value over the first 5 years of operation.

Furthermore, the example below also illustrates how deploying OR&A™ can provide a return of 15:1 on the original investment over those same 5 years.

The calculations used here are extrapolated from a paper entitled 'Justification for Maintenance & Reliability Readiness' by Murray Macza of MRG Reliability Consulting, who made a number of basic assumptions using typical industry specific benchmark data and baseline information on operability, maintainability and availability to develop the figures shown below.

Calculation of Benefits from using OR&A™

Reduced Maintenance Costs
Calculated as a percentage of the Project CAPEX, the benefits are derived from:

- Reductions in the need for re-work during the EXECUTE phase;

- Operations contributions to the design process (operability);

- Reduction in Spare Parts requirements (improved maintainability);

- Reductions in Project manpower costs due to embedding Operations personnel in Project.

Typically, savings of between 2.5% and 4% (approximately $20m per year) can be realized.

Reduced Spare Parts Costs
Calculated as a percentage of the Project CAPEX, the benefits are derived from:

- Rationalisation of the spare parts inventory for the first 2yrs operation;

- Commensurate reduction in Supply Chain costs for replacements;

- Commensurate reduction in logistics (warehousing/labour) costs;

Typically, initial savings of between 0.5% and 1.5% (approximately $10m) on CAPEX and a reduction in OPEX of $2.5m per year can be realized.

Improved Production Performance
Recent industry studies have determined that about 60% of lost production in the ramp-up phase is due to reliability related problems such as equipment failures.

It is not unreasonable to assume then, that implementing OR&A would improve operability (production output) by some 5% in the first year of production and that this would typically equate to approximately $3.5m, calculated as follows:

100,000 barrels/day x 347** days x 5% x $40 = $69.4m

(**365 days x 95% plant availability = 347 days)

Assuming production is deferred rather than lost, at an interest rate of 5%, such an improvement would save some $3.5m per year in interest payments alone.

Further benefits

- Reduced Energy Consumption from better maintained equipment (typically 3% - 14% lower);

- Reduced downtime for scheduled, unscheduled and breakdown maintenance (typically 30% to 60% lower);

- Reduced waste through improved quality of product (typically 5% - 15%);

However, because these costs vary from business to business, these savings cannot be quantified and are therefore not included in the calculations.

Conclusion:
The calculations show that for every $1 invested in OR&A a company will typically realize a return of almost $19, or expressed as a ratio of return, 19:1 on the original investment in deploying OR&A on their project.

If the NPV calculated above were taken to be losses (due to a failure to deploy OR&A) this equates to almost 10% of lost value over the first 5 years (2% per year).

Another way of looking at the cost of OR&A is to consider the actual cost in terms of lost production revenue:

Total Estimated Cost of doing OR&A (typical) = $5.5m ...... or just 32 hours lost Production Revenue

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