2016 Refining Capital Projects Out Look

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2016 Refining Capital Projects

Outlook and Strategies
Market analysis of U.S. refining and chemical capital investment and a sampling of
project strategies refiners in the U.S. are using amid low oil prices and volatile market
conditions.
http://petchem-update.com/refining/

Featuring insights from:
James Kleiss
Director of U.S. Gulf Coast Supply Chain Optimization
Valero Energy Corporation
Brian Coffman
Senior Vice President of Refining
Tesoro Corporation
Antonio Romero Monteiro
Deputy Site Manager
Jacobs Engineering
Per Magnus Nysveen
Head of Analysis
Rystad Energy
Dale Adcox
Application Engineer and Senior Construction Consultant
Bentley Systems
Chris Paschall
Vice President of Global Research for the Petroleum Refining Industry
Industrial Info Resources
Andras Marton
Manager of Hydrocarbon Processing and Transportation
Independent Project Analysis
Refining Engineering
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November 14-15, Houston, Texas
http://petchem-update.com/
refining/

INTRODUCTION
With budgets in the billions, timelines spanning years, and the world energy market
at its most volatile in the last decade, refining capital projects and maintenance
activity present enormous management and budgeting challenges for U.S. energy
companies.
While many upstream projects are getting cancelled and some refining projects are
getting delayed, U.S. refining capital project spending is still expected to remain in
the billion-dollar range for the next few years, according to market research firm
Industrial Info Resources (IIR).
U.S. and Canada refinery capital spending is expected to hit $6 billion for those
projects beginning construction in 2016, with another $14.49 billion planned for
construction kick-off in 2017 and $17.32 billion planned for 2018, according to IIRs
database.
Future spending in the U.S. will be mostly driven by smaller, quick-return
optimization and reliability projects, facility upgrades to address octane loss issues,
as well as gasoline production increases as domestic refiners take advantage of
cheap domestic feedstock, comply with environmental regulations and export more
petroleum products to meet rising global demand.
While North Americas capital project spending is big, the problems confronting the
industry are daunting as well from fluctuating world crude prices to shrinking
margins, from increased retail gasoline demand to changing exports and emerging
markets, from the desire for feedstock flexibility to the need to update old refineries,
from increasing regulation to growing environmental concerns.
In this market environment, refining capital project teams need to make the right
investments at the right time to move forward while safeguarding their business
against future uncertainty.
The volatile conditions call for new strategies and extra due diligence to handle the
new challenges and opportunities whether it is choosing to delay or shelve a
planned project, or deciding between a large new capital investment and a smaller
budget maintenance activity.
To help project owners and contractors in the refining sector navigate the current
marketplace and improve their project execution strategies, this whitepaper
provides:
Market analysis of U.S. rening capital investment amid low and volatile oil prices
Look into how spreads, margins and volatile pricing play into the decision-making
process
Update on projects taking priority and projects most likely to be cancelled or
deferred
Sampling of planning strategies reners are using to determine which capital
projects make the cut
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2016 REFINING CAPITAL SPENDING

Many of the capital projects that were announced when oil prices averaged close to
$100/per barrel (b) have been delayed, while other projects are taking priority,
leading engineering and construction teams to shift their focus on how things are
done during volatile market conditions.
As of March, the global oil industry has deferred or cancelled $270 billion in projects
since crude prices began plunging nearly two years ago, according to estimates
from Norway-based consultancy Rystad Energy.
This estimate comprises integrated projects for liqueed natural gas (LNG) and oil
sands and does not include the substantial drop in North American shale drilling
totalling between $300-400 billion over the next five years, Per Magnus Nysveen,
head of analysis at Rystad Energy, told Petrochemical Update.
According to him, the trends in refining capacity, from an upstream point of view,
are gradual adjustments by Gulf Coast refiners to lighter feedstock in the coming
rebound, and still strong growth of supply from Canadian heavy crudes due to new
projects under construction with more in-situ extraction and thus a shrinking share
of upgraded bitumen. More Canadian heavy oil seeks overseas harbor, and the
heavy residuals cracking capacity outside North America seems insufficient going
forward."
In U.S. refinery projects, spending is down more than 50% in 2016 from what was
initially planned, according to IIR.
Figure 1.
Source: Industrial Info Resources.

ExxonMobil has put on hold a possible project to double the size of its 344,500
barrel per day (b/d) Beaumont, Texas, refinery because of low oil prices and a
reduction in capital spending.
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The energy companys capital and exploration expenditures in the first quarter of
2016 were $5.1 billion, down 33% from the first quarter of 2015. The corporation
anticipates an investment level of $23.2 billion in 2016, and that the 2017 capital
budget will fall further.
In May, Shell also said it would cut its 2016 capital spending budget by another 10%
- to $30 billion from the target it set in February, after announcing its first-quarter
profits were down 83% overall year on year. Refining and trading earnings were
$662 million in Q1 2016 compared to $1.26 billion for the same period last year. First
quarter 2016 earnings were impacted by lower realized refining margins, reflecting
the weaker global refining industry conditions due to oversupply and high inventory
levels, and operating performance.

Shells Chief Financial Officer Simon Henry said during an earnings call on May 4
that any large new investment whether oating LNG, deep water or elsewhere is
under very strict critical review for cost levels and return.
Meanwhile, ConocoPhillips also said in May it would reduce spending by a further
$700 million in 2016, drawing about half the savings from a decision to forgo
deep-water drilling in the Gulf of Mexico.
BP also raised the prospect that it could pull back spending further if the oil market
remains under pressure in 2017.
Crude prices averaged close to $100/b in 2014, when many of these capital project
announcements were made, and halved in 2015, averaging $50/b. For 2016, the
international benchmark Brent reached a high of $48.50/b in April.
Brent crude oil prices are projected to average $41/b in 2016 and $51/b in 2017,
according to the Short-Term Energy Outlook (STEO) released by the U.S. Energy
Information Administration (EIA) on May 10. This is $6/b and $10/b higher than
forecast in Aprils STEO, respectively (see Figure 3 and Figure 4).
The sharp declines and volatility have led many investors and strategic planners to
contemplate what price oil needs to land at for these types of investments to get
put back in the books.
Brian Gilvary, chief financial officer at BP, said in an earnings call in April that the
company would not be looking to significantly ramp up its overall spending activity
even if oil prices come back to $60/b and would instead look at what it can do
around the margins of the existing portfolio.
Crude oil price volatility

In the refining sector, it is not as much the price of oil as it is volatile market
conditions and margins that present the biggest challenge.
During the first three months of 2016, crude oil prices were more volatile than in
recent history (see Figure 2). This elevated volatility occurred when overall oil prices
were low, and volatility was driven by high uncertainty related to supply, demand
and inventories.
Volatility levels in March 2016 were the highest since early 2009, when crude oil
prices were falling in response to the financial crisis and when there was a drop in
demand for petroleum products, according to the EIA.
Figure 2.
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Source: U.S. Energy Information Administration.

According to the EIA, the top reasons for volatility in crude oil prices include
uncertainty about:
Future production levels in key oil-producing nations
Global economic growth, particularly in China and other emerging market
economies
Growth in U.S. gasoline demand following higher consumption levels in 2015
Crude oil inventories and storage capacity constraints
Crack spread critical in decision making process

Crack spreads, which reflect the difference between wholesale product prices and
crude oil prices, will largely influence which type of capital projects will move
forward and which will be delayed.
Gasoline crack spreads, for example, reached several-year highs in 2015 as a result
of low oil prices and long supply, but the refining earnings suffered in the first
quarter of 2016 as the spread between falling crude oil and refined products
dropped.
The U.S. refining industry now appears to be transitioning from a period of high
margins and record throughputs, though refining margins in 2016 are expected to
remain relatively good, albeit not as good as in 2015 (see Figure 3 and Figure 4).
Refining margins are driven as much by strong demand growth fundamentals as
from lower feedstock costs, and energy companies are seeing weaker refining
margins as a result of crack spreads falling from last years levels. The U.S. Gulf
Coast West Texas Intermediate (WTI) 3:2:1 crack spread fell from $19/b in the first
quarter of 2015 to $10/b in the first quarter of 2016.
While the lower oil prices have created uncertainty in refining capital investment, it
is not necessarily the flat price, but the crude differentials, that really impact
independent refining companies, according to Brian Coffman, senior vice president
of refining at Tesoro. The lower flat oil prices can have the effect of squeezing crude
differentials and margins and may cause refining entities to re-evaluate strategic
capital decisions in the near term.
Figure 3.
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Figure 4.

There are, however, signs for optimism from the first quarter earnings calls, as
record demand for gasoline in the U.S. is expected through the rest of 2016 as
motorists take advantage of increasing, but still low, gasoline prices at the pump.
First quarter earnings reflect seasonally weak industry refining margins, which were
40% down year on year, said HollyFrontier President and CEO George Damiris
during an earnings call in May. According to him, gasoline margins continue to
strengthen, up between 40% and 70% versus first-quarter levels. Damiris expects
gasoline margins to strengthen further and remain encouraged by the strong
vehicle miles travelled data.
During the 2016 summer driving season (April through September), motor gasoline
consumption is projected to average almost 9.5 million b/day, an increase of
120,000 b/day (1.3%) compared to summer 2015, according to the EIA.
The EIA expects that domestic refinery production, including gasoline-blend stock
output, will be about 70,000 b/day higher in summer 2016 than the same period in
2015. Fuel ethanol blending into gasoline is projected to increase by 20,000 b/day
from last summer's level to almost 950,000 b/day, which is 10% of total gasoline
consumption.
PROJECTS GETTING THE GREEN LIGHT
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The low oil price environment has different meanings for capital investment
depending on the energy company. The fully integrated refiners that depend on
their cash flow from upstream operations have more cash strain than those refiners
that are independent. Even so, with margins depressed, the business case for some
projects is getting less priority at independent refiners as well.
The most common challenge affecting project planning, in the current low-cost oil
environment, is cash flow, according to Antonio Romero Monteiro, deputy site
manager at Jacobs Engineering. Project schedules are being adapted to better suit
the clients restricted cash flow. Systems start-up sequences are being revisited to
accelerate any potential return on investment, even if it means operating part of the
capital investment while portions are still under construction.
www.petchem-update.com/shutdown-turnaround/

Instead, much of the refinery capital spending in North America currently is toward
upgrades, regulatory improvements and infrastructure.
In a low-oil price environment, refiners look for low-cost projects with high returns,
such as debottlenecking projects, infrastructure improvements and crude flexibility,
according to Andras Marton, manager of hydrocarbon processing and
transportation at Independent Project Analysis (IPA), a global consultancy providing
quantitative analysis of capital projects and project management systems.
Marton added that the drivers of refining capital projects in North America in 2016
are mainly regulatory work (Tier 3, new ozone standards, California greenhouse
control standards and MARPOL Annex VI) and projects aimed at renery reliability
work, and refinery flexibility in feedstock, product and unit utilization.
Similarly, according to the IIR, crude slate flexibility programs to process the
cheapest feedstock, upgraders, adding grassroots refineries closer to the shale
feedstock source, chemicals and feedstocks projects and the Tier 3 low-sulphur
mandate are where most of the 2016 capital spending budgets will go (see Table 1)
.
Table 1.
Source: Industrial Information Resources.

At the start of 2016, there were more than $12 billion worth of announced North
American projects for 2016 construction kick-off in IIRs database, but IIR expects to
see just over $6 billion going through this year. The largest amount of money will be
going toward crude slate flexibility programs (see Table 1).
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The grassroots refineries that take up much of the 2016 announcements have been
announced and pushed back for years, IIR said. The purpose of the grassroots
facilities is to have refiners regionally located to the feedstock source and products
destination.
With tighter margins and volatile crude oil prices, companies are not willing to take
risks on the larger projects that are more uncertain. There is hesitation on any
projects that may not seem necessary right now, according to Chris Paschall, IIRs
vice president of global research for the petroleum refining industry. Maintenance
projects are slowing down as well as cash flow decreases.

Moving forward, more companies may focus more on the small-to-medium capital
projects, as opposed to pushing larger projects.
What constitutes small, medium and large varies per some of the refiners, however
an engineer at HollyFrontier said the company would likely focus on the
small-to-medium projects that will cost around $20-30 million and give higher yield,
as opposed to pushing large projects totalling $100 million and above; an Exxon
manager said that small projects would be under $100 million.
The majority of capital projects being considered are in the chemical, natural gas
and liquefied natural gas sectors right now. Small projects happening now are less
than $50 million, medium projects range from $50 million to $500 million and large
projects are over $500 million, according to Jacobs Monteiro.
Regulatory spending
Basic spending approved in 2015 to meet environmental regulations continues as
refiners rush to meet environmental regulations, including the Tier 3 gasoline
mandate. Industrial Info Resources estimates that $1.2 billion will be spent on Tier 3
work.
The Tier 3 gasoline mandate requires that the sulphur content of gasoline must be
further reduced from 30 parts per million to 10 parts per million on an annual
average basis by January 1, 2017. Refiners estimate that the proposed new rules will
cause the cost of gasoline to increase because it would require additional hydro
treating equipment to remove sulphur, as well as revamps and expansions to
existing hydro treaters to achieve the reduction.
Projects strategic to growth

Some companies have chosen to focus on the projects that are strategic to their
growth.
Tesoro, for example, has reduced its 2016 capital spend outlook by approximately
$500 million to $1 billion. This includes $700 million in capital for Tesoro and $300
million in capital for Tesoro Logistics (TLLP), the company said in its rst quarter
earnings call in May. The reduction for Tesoro is primarily related to the timing on
large projects.
In light of the capital spend decrease, Tesoro remains focused on the strategic
projects that are still considered economical and necessary for long-term planning.
Tesoros Los Angeles Renery Integration and Compliance (LARIC) project is in the
permitting process and engineering phases, and is expected to be completed in late
2017.
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Tesoro plans to invest $460 million to physically connect, further integrate and
upgrade the adjacent Carson and Wilmington facilities in California so that the
combined Los Angeles renery operates more cleanly and eciently.
Pending permitting and approvals, the LARIC project will improve air quality,
substantially reduce local emissions and upgrade refinery equipment, among others.
The project is being thoroughly reviewed by the South Coast Air Quality
Management District (SCAQMD) as of May 2016.
Meanwhile, the companys West Coast mixed xylene project aims to tap the
high-demand Asian market, and is in the permitting and process engineering phase.
It is expected to be complete in 2018.

The Vancouver Energy project is being undertaken to improve logistics capabilities.

Though announced in 2013, the project is ongoing. The Washington State's Energy
Facility Site Evaluation Council (EFSEC) closed the public comment period in
January 2016. EFSEC is set to begin its adjudicative phase with hearings to be held
in June and July of 2016, Tesoro said in its first quarter earnings call in May. The
company expects a final Environmental Impact Statement to be issued this fall,
followed by a recommendation to the Governor of Washington.
Tesoros $90 million naphtha isomerization project at Anacortes, Washington, which
is designed to target optimizing gasoline production and comply with reduced
sulphur gasoline regulations, is expected to start up in 2018.
Maintenance projects that can wait another year, infrastructure projects and crude
flexibility projects are taking less priority.
Turnarounds
The number of turnarounds completed in 2015 was down sharply as refiners
delayed projects to process the flood of inexpensive crude oil. While some
turnarounds are still being delayed another year, spending on turnarounds "is larger
and longer right now," according to Paschall.
Indeed, the average cost of a turnaround is about $5.9 million for 2016, compared
to $4.9 million in 2015, according to IIR data.
The largest maintenance project being tracked by Industrial Info Resources for this
year has already been completed. Valero finished a $16 million turnaround project at
its Benicia, California refinery in March. The 49-day project included the 77,000 b/d
FCCU and 20,000 b/day SF alkylation unit. IIR is also tracking four U.S. turnarounds,
each valued at $15 million, which will see completion by the end of 2016.
Overall turnaround activity for 2016 is estimated at $752 million, versus $677 million
in 2015, IIR said.
Figure 5.
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Source: Industrial Info Resources.
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Petrochemical projects
Companies with downstream operations have an advantage and will not feel the
pinch as much as energy companies that are purely upstream.
Capex investment is holding steady in the petrochemicals sector and
petrochemicals have become a much bigger source of income for the fully
integrated refiners in 2016.
ExxonMobils chemical business, for example, accounted for 75% of the $1.8 billion
profit the company reported in the first quarter of the year. It made $1.36 billion
producing major chemicals such as ethylene and propylene, but lost $76 million in
oil and gas.
Just two years ago, when oil traded over $100/b, ExxonMobils chemical business
accounted for less than 13% of Exxons profit as the major delivered $7.8 billion in
profits. Meanwhile, Shell made $377 million in chemicals in the first quarter,
compared with adjusted net income during the same period of $1.55 billion.
In a low-oil price environment, the petrochemical segment profits are more
prominent in portfolios, so those segments become targets for capital allocation as
a result, boosting capacity expansions and industry shifts.
New capacity in the US will largely take advantage of the NGL feedstocks, methane
and ethane, and ammonia-urea based production.
There are currently six ethane crackers under construction and one in a
pre-construction phase on the U.S. Gulf Coast for a total of about 8.74 million
metric tons of new annual ethylene capacity five of which are slated to come on
stream by the end of 2017, according to Petrochemical Update estimates. There are
multiple other expansions, as well as project announcements on the Gulf Coast and
the U.S. Northeast/Mid-Atlantic.
2016 CAPITAL PROJECT EXECUTION

CHALLENGES AND OPPORTUNITIES
Energy companies remain cautious in making any sort of capital investment in the
low-cost oil environment. Many jobs in progress are getting the final investment
decision revisited, with some projects placed on hold or cancelled, and others
being placed under cash-flow restrictions or slow rolled, according to Jacobs
Monteiro.
Refiners are taking this opportunity to further drive innovation and optimization of
their systems and work processes, partly driven by their forced de-staffing due to
less work, and partly driven by their need to gain an edge against their competitors.
Project planning process: more due diligence than before
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According to IPAs Marton, energy companies can still use some of the same project
planning best practices in a low-cost oil environment, but they need to be
implemented in light of the current project and business environment.
For example, the value of time is lower with lower-margin projects, therefore focus
should be more on capital cost than on schedule. In a way, companies have to shift
the project mentality from delivering projects quickly to make a big profit to picking
the projects that fit the business strategy and have good returns and the right scope,
as well as focusing planning on minimizing the cost of the project.

Without knowing the future of the oil and gas markets, strategic planners have a
tremendous challenge to predict which projects will prove to be successful and
which should be delayed or taken off the books all together.
HollyFrontier uses a three-step approach in determining project viability.
Return on investment and the original investment needed are major factors for
making decisions on projects. The companys development group would do a full
analysis and provide best- and worst-case scenarios. It will then use logic to figure
out where to go from that point, according to an engineer at HollyFrontier.
The top three considerations are what projects are already in place, what projects
the company has to do (environmental requirements) and the overall profitability
(what cash flow is needed to get it done and what is the pay off when it is done).
HollyFrontier has downstream operations so it continues to make investments,
though not as robust as in 2015.
In the first quarter of 2016, HollyFrontier incurred capital expenditure of $149
million, compared to $173 million in the first quarter of 2015. HollyFrontier expects
to incur capital spending of around $600 million in 2016.
Its Woods Cross Expansion project in Utah is expected to start up in late May 2016.
The crude and poly units have started, and the fluid catalytic cracker (FCC) is under
commissioning. The refiner has completed the crude flexibility and crude tower
modification modules of the project, which will result in higher production of
naphtha and distillates.
HollyFrontier has also completed its Tulsa FCC modernization project. The project is
expected to improve yields, increase capacity and result in annual earnings
improvement of around $20 million.
Meanwhile, Valero uses a four-step multi-team gated approach in determining the
future of capex projects.
In the first gate, the project is discussed and developed with senior management
and then handed over to engineering to get capital cost investment. In the second
gate, engineers develop the design to get capital investment. The leadership team
approves the project at this point. In the third gate, managers ask for money to
begin the project. In the fourth and final gate, the management team asks for phase
four funding and the scope is frozen.
Besides using a detailed strategic approach, companies are also taking longer to
develop projects and complete due diligence.
Kleiss said that in these cases, Valero, for example, takes more time and does a
more thorough investigation. This means it will take longer to take a project through
the entire process.
Valero uses a collaborative team approach to determine which projects will move
ahead right away. Management screens ideas and performs an in-depth analysis to
see how the project would perform in a variety of environments, including high-oil
price, low-oil price, volatile prices, high and low crack spreads, supply, demand and
more.
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Refiners are looking at price differentials for gasoline streams, crack spreads, volume
gain, and value between product and feedstock price.
Kleiss added that several of the companys projects remain beneficial to long-term
and short-term growth strategies.
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Valeros strategic plan approved in 2015 included $2.6 billion of capital spending for
2016, the company confirmed in its first quarter 2016 earnings call. Approximately
$1 billion was allocated to strategic investments to drive long-term earnings growth.

As far as refining growth strategy, Valeros new Corpus Christi crude unit in Texas
was completed at the end of 2015 and became operational in 2016. The companys
St. Charles hydrocracker expansion in Louisiana was completed in March, and the
new Houston crude unit in Texas is on track to start up in the second quarter of
2016.
The Houston Alkylation project, which was approved in January, is now undergoing
detailed engineering and procurement. Completion of the alkylation unit is
expected in the first half of 2019, the company said in May.
Opportunity: Advanced Work Packaging (AWP)

Several energy companies are using the slowdown to rethink and restructure how
things are done, and especially improve productivity at the construction level.
Advanced Work Packaging (AWP) is one of the innovations refiners are focusing on,
according to Dale Adcox, application engineer and senior construction specialist at
Bentley Systems. AWP is the back-to-front project planning and execution process
for defining, aligning, sequencing and pacing the execution of EPC packages that
allows projects to be designed and built more predictably.
In simple terms, it is the formalization of the packaging process for construction
work packages, engineering work packages, procurement packages and installation
work packages.
Bentley has partnered with the IPA to develop an AWP philosophy, roadmap and
tools to utilize construction-driven engineering in both planning and direct project
execution.
The solution monitors the engineering work packages for example, vendor
documentation making sure they are of high quality, follow the proper metrics,
are properly sequenced based on the path of construction, and can be corrected
on time if needed. AWP is part of the entire life cycle of a project, starting with
phase two at conceptual design all the way through phase six, hand-over and
close-out.
AWP uses data, including industry expertise, current market situation, case studies
and models, to develop the project life cycle from project definition to system
turnover with an emphasis on field implementation.
AWP also brings the construction team early on by phase two as opposed to not
engaging construction until later in the process. According to Adcox, the problem
with bringing construction in later is that there is no detailed transfer of knowledge.
For example, procurement may not order the correct items at the correct time, or
investment could be wasted because details are not specific enough.
By contrast, AWP works as an alignment process to bring innovation and
technology teams together to give teams the ability to see things as information
becomes available.
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AWP requires a systematic approach to facilitate the technology and best-practice

deployment across the project lifecycle. It calls for an exchange of information
between engineering, construction, commissioning and handover, with the work
packages serving as the unit of that information exchange, according to Bentley.
Many of the energy projects that are proceeding in the current market place,
especially large projects over $500 million, are making a go of using the AWP best
practices developed and validated by the CII and implemented by a number of
different vendors, contractors and consultants.

In mid-2015, for example, Shell announced that it will begin developing a suite of
AWP-based data centric solutions, called ProjectVantage, to drive down cost
inflation in the design, construction and engineering of its projects.
The ProjectVantage framework provides an integrated data-centric platform to
deliver safer, faster and better capital projects. These components are integrated
and are designed to enable data consistency across suppliers and engineering
disciplines.
The company said it expects to see key savings in design and engineering from the
single-source availability of up-to-date design information, semi-automated data
validation, and consistency checking across disciplines, locations and contractors.
According to Adcox, AWP can give a 25% improvement in productivity and 10%
savings on costs. The industry best practice was established in 2014 and was
chartered to review current work packaging practices and identify an enhanced
model for implementation.
In essence, AWP is a planning methodology that takes large complicated work
scope and organizes it into smaller, more manageable packages from the
engineering phase, procurement phase and construction phase, Jacobs Monteiro
said.
Monteiro was unable to share a specific example due to confidentiality agreements,
but said that in projects where AWP is applied correctly, there is a significant
reduction in safety incidents, high craft productivity exceeding 105% compared to
original estimates, excellent quality with historically low amount of rework and
historically low number of punch list items during system turnover, and meaningful
schedule gains.
Opportunity: Minimize scope

As refiners look at cost-saving measures, many will find efficiency gains in the
design of a lean scope. As its name suggests, lean scoping is about scope efficiency
or competitive scoping, or streamlining scope to only what is necessary.
In a low-oil price environment, companies are seeing more minimal scopes,
according to Marton. Some of the items on the scope in higher-profit times such as
nice-to-haves, expendability, excess built in capacity, pre-investment for future
expansion and operational improvements are currently being minimized or taken
out.
Marton points out that lean scoping is not just a facilities exercise, but a
development mind-set that asks: whats the most I can do with the least amount of
investment, and what is a minimum acceptable scope, rather than how big can I
make this scope?
IPA, in collaboration with an owner firm, has developed scope benchmarking tools
that define the industry average scope solution for a given set of inherent conditions
(reservoir characteristics, location and water depth, etc.).
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According to the company, the industry should give serious consideration to the
notion that in order to make projects profitable at less than $50/b, it needs to go
beyond just asking for supplier discounts and should think hard about doing more
with less and finding efficiency gains early.

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Opportunity: Vendor and manpower contract

strategies
Refiners should look at and understand the current capital project environment and
plan execution strategies that take advantage of the situation. Vendors and contract
workers, for example, may have less work in a less heated construction market and
might be willing to take on different contract strategies.
The market place is also driving a higher rate of joint ventures between contractors
as they unite to weather the leaner market place and provide clients the enticement
of the best of both contractors means and methods, according to Monteiro.
In addition, refiners could look toward strengthening their current teams and
building teams for the long term as demographics change and senior talent retires,
IPAs Marton said.
Developing the schedule from the beginning is another best practice IPA is seeing
success with. When the schedule is built, attention needs to be put into adding
critical resources, heavy lift, manpower, time and cost. in this way, project teams
can get a better understanding of executing the project as planned.
CONCLUSION
Weak oil prices, long supply and the decline in margins have led to a reduction in
capital spending in the energy sector for the years 2016 to 2018, a drop from the
sharp estimates of 2014 when oil prices averaged just under $100/b. Projects facing
the most scrutiny are the larger ones requiring capital expense over $100 million, as
well as upstream projects, deep-water drilling projects and the oating LNG
factories.
Refiners with downstream operations will see margins increasing by the end of 2016
and will continue to invest in the smaller-to-medium projects that will contribute to
long-term strategies. Projects using low-cost shale to produce petrochemicals and
maintenance projects to meet environmental mandates will continue as well.
Refiners can use the low-oil price and volatile market environment to their
advantage by adjusting best practices and better defining their growth strategies.
AWP, rethinking contracts, minimizing scope and developing a thorough schedule
from the start are a few of the opportunities refiners can use in a low-oil
environment in order to continue successful capex project planning and execution.
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2016 Refining Capital Projects Out Look

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2016 Refining Capital Projects Out Look

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