In a recent Oil & Gas Journal article, dated July 13, 2011, the International Energy Agency (IEA) stated that after a slow down of refining project investments in 2011, it expects to see an increase in projects completed in 2012, thereby adding 2.4 million bpd in global refining capacity.

The following is a list of projected to complete major projects by end of 2012:

· Motiva’s 325,000 bpd expansion in Port Arthur, Texas

· Mexico’s Minatitlan’s 150,000 bpd expansion

· India’s Bharat Oman’s Bina 120,000 bpd refinery

· India’s HPCL-Mittal Energy Ltd.’s 180,000 bpd refinery

· India’s Essar’s Vadinar 80,000 b/d expansion

It is expected that despite an increase in refining capacity that global demands will reduce surplus capacity thereby improving refining margins. In contrast, Oil & Gas Journal reported in June 2011 to  expect continued weak refining margins for certain products and markets.

The response by API regarding the Huffington Post article, which alleges that Big Oil tried to stop the U.S. Minerals Management Service from promulgating the new offshore safety rules before the Deepwater Horizon drilling rig accident, is only the next controversy regarding the usefulness of formal management systems in business.

Management systems allow companies to take a proactive role in understanding their business enabling increased profitability, stability and reputation. SEMS, Sarbanes Oxley and ISO are official implementations evaluating business performance. Taking a head-in-the-sand management approach and not initiating internal tracking for important aspects of their business can lead to crisis or disaster. Believing the company is doing well without applying the Deming improvement cycle or something similar often leads a viable company into trouble.

SEMS and other auditable management systems might be imposing to companies as they consider their implementation. However, by taking a proactive approach to committing to formal systems will enable important measurements of business, operational, organizational, health, safety, and environmental performance. Painful at inception – yes. Is the view worth the climb? Certainly. Why would you not want to know how your business really functions? Why would you not want to know the pitfalls in your operations? Why would Big Oil not want to know operational issues that could recreate the Macondo disaster?

In light of the recent spikes in the fuel prices, are we yet at the tipping point of paying for the true cost of energy? True cost – it goes beyond the cost to explore, produce, refine and transport. True cost includes the price to the environment short-term and long-term.

In a recent article from the Executive Director of the American Security Project (ASP), a nonprofit, bipartisan national security think tank in Washington D.C., James Ludes discussed the costs of inaction.

“We’re going to pay a price for climate change, whether we try to slow it or not. The data tells us that the cost of doing nothing will far out-weigh the cost of action.”

The article is worth the read as it attempts to quantify the future environmental impacts of climate change – droughts, severe storm damage, flooding, coastal erosion, and drinking water supply to the US economy. The answer it presents is investing in green technology, which would also bolster economic growth.

According to this week’s Houston Business Journal, companies are wanting the latest and safest offshore rigs in part due to last year’s oil spill in the Gulf and also due to the demand for greater flexibility and redundancy with high-spec equipment. Thus we are to expect a surge in two things: dismantlement of older rigs and significant capital spend for the newest rigs. Two Houston-based drillers, Nobel Corp. and Transocean, Ltd., both have rigs currently under construction despite having a quite a number of rigs sitting idle.

What do you think - good bet or bad on the future of offshore drilling? (We think good bet, but we are biased.)

Today we listened to Clay Vaugh, Vice President of Deepwater Projects from ExxonMobil Development Company, present the 2010 The Outlook for Energy: A View to 2030. To summarize the report, the world’s energy demand for consumption is expected to grow 35% from 2005 to 2030. (Without discounting for future energy efficiencies, the global energy demand would essentially double.)

So the question is where can we expect the increase in energy supply – alternative energy, coal, oil, etc.? As shown in the following table from Exxon’s report, the majority of the fuel is expected to be provided by natural gas – at an estimated 2% increase per year over the next 25 years cumulating at 25% of global energy supply.

The rise in natural gas is expected to be a result of increased power generation needs and reduction of carbon emissions. While this may not be exactly considered newsworthy, what is interesting is where the additional natural gas is expected to be supplied. The largest percentage growth sector is anticipated to be domestic unconventional natural gas deposits, such as shale gas, and then imports.

So what does this mean for the future? Additional exploration and production in the United States for shale gas will allow us to meet demand. Secondly, national oil companies will continue to play a major economic and political role in the global economy.

Also of significance, the chart shows that while wind, solar and biofuels will contribute a smaller percentage of future energy source, the expected growth is the highest percentage at almost 10% per year. That annual growth rate will need to be funded by considerable capital investments and project experience. (More on that discussion at a later date.)

Given recent events in Japan, global nuclear investments may differ from what is currently projected at an annual growth rate of 2.1%.

What do you see as a major issue(s) to meeting these projected energy demands?

According to a recent article from the Houston Business Journal “Energy industry considers offshore-drilling safety institute,” on March 18^th, energy leaders will decide upon forming an industry run offshore-drilling safety institute in response to the Deepwater Horizon spill.

Reilly — who sits on the board of directors at Houston-based ConocoPhillips — called for a framework of continual learning among companies operating in the Gulf of Mexico. An industry organization should conduct routine safety audits of its members and “discipline or reject” companies that do not comply, he said. The government should support the organization and make its membership a prerequisite for operating in the Gulf, he said.

Here is some food for thought:

• So is this a redundancy to the federal law recently passed – Workplace Safety Rule?
• Will the costs of joining and complying with a offshore-drilling safety institute be too high for smaller or even large operators?
• Will the standardization of “best practices” ultimately improve company margins while reducing health, safety, environmental and operational risks?

Earned Value is essentially an integrated schedule progress and cost measurement.

The Earned Value System closely correlates with a projects’ measurement of “percent complete” with project spend. It provides a quantifiable evaluation to the likely cost of the project before it concludes - an Estimate at Completion (EAC).

The EAC is a value of great interest in all projects, since it is an indication of over or under budget, a critical project success factor.

A secondary use for the EAC is to define some joint project control opportunities, leverage or incentives with contractors responsible for project implementation.

Once a system is developed for one project, linking of other like data for multiple projects provides the project-based business more accuracy in determining point-in-time cash flow requirements. On a longer time frame, better point-in-time estimates allow the business manager to free up the project retained cash assets for other projects or revenue generating activities.

Recall that the cost performance of the project directly influences the cash flow of the business. A business that uses the cash flow process to its maximum can turn it into a profit center. Accurate cash flow forecasting provides cash capability in the business enabling liquidity and leverage, and precludes inadvertent over investment within the project system.

However, other plausible reasons include: 1) work actually completed is less than planned, 2) the original project estimate was based on incomplete data, 3) the original budget remained unchanged after project authorization, and, 4) the initial project conditions do not represent the current conditions.

Cash flow in project-based businesses is very dependent on how individual projects are managed. Cost growth, schedule slippage and technical performance each influence the business’ cash flow requirements and provide gained or lost opportunities to the business. Accuracy in budget forecasting, completing work within a scheduled period, and attaining technical competency during project implementation controls the available funds. Diligently managing these key performance measures on individual projects free “extra” funds enabling the business manager more flexibility in operating decisions regarding the best use of that available cash.

The next few blog series will discuss the issue of identifying where “extra” funds might be within the project system using earned value analysis. Successful management of three key project performance measures provides opportunity to maximize cash flow within the project system. Inadequate project control creates risk to the projects, and jeopardizes the business cash flow.

Earned Value Measurement

Capital projects involve an intricate coordination of interdependent activities, resources, and stakeholders to fulfill three (3) primary project expectations: scope, cost, and schedule. When one of these three outputs changes, which inevitably occurs, the other two factors likely increase. This creates havoc to internal budgets, financial metrics, and internal support (a.k.a. – politics.)

Bad news: Projects fail more times than not. Industry surveys covering over 1000 major companies show an average project failure rate of 55% (range from 40 % to 70% failure). The top-noted failure criteria include: 1) finish on-time and in-budget, 2) Exceed budgets, 3) Blown schedules, and 4) Failure to meet requirements. Common reasons offered for these failures include: 1) insufficient up-front planning, 2) incomplete estimates, 3) ignoring requirements, 4) underestimating productivity, 5) poorly defined performance indicators.

Good news: Industry surveys of over 60 companies show that when Project Management Best Practices are applied, projects are highly successful, beat industry averages (Figure 1), and provide distinctive competitive advantages. Keys to this success includes: 1) careful and complete up-front planning, 2) strongly implemented organization and execution methodologies, 3) complete pre-project risk evaluation, 4) full knowledge of contract provisions, 5) relentless tracking of cost and schedule changes, and 6) transparent communication to all stakeholders, 7) immediate problem resolution.

Successful projects require constant and active participation by all stakeholders to avoid pitfalls and identify opportunities for success. Focusing on the goal of beating the average requires attentiveness to the above key success factors that will drive project success.