To a great degree, North America has been on an offshoring binge for the last three decades. Canadian and U.S. companies outsourced pretty much anything that could be outsourced. Why? It’s simple: lower-priced inputs to production, which at the time more than offset the higher risks and costs of logistics and transportation. The exception to this trend—or at least a timid late adopter—was the Canadian oilsands industry.
Fast forward to 2009-10. The luminaries of the oilpatch were not sitting idle during the global financial crisis and the tightening of capital markets. Indeed, that unique situation meant they would need to have stronger economics for their oilsands plants if they were to actually proceed. Some of them ventured out directly to examine the potential competitive advantages of offshore fabrication. But interestingly, at the same time, their U.S. industrial and oil and gas counterparts were beginning to embrace the strategy of re-shoring, or bringing the manufacturing work back home.
As the world came slowly crawling out of the financial crisis, things in western Canada were picking up rapidly. The spectre of oilsands project cost and schedule escalation was rearing its ugly head yet again as it had in 2006-07; all the more reason to make a step-change in how plants are designed and built. The push was on hard by 2011 to head offshore for alternative approaches to oilsands project delivery.
We appear to have been late getting into offshoring in the oilsands sector, and not because some folks did not try. The list is long of CEOs and VPs who were calling for it. By 2012, almost every large engineering, procurement and construction management (EPCM) house in Calgary and Edmonton had some form of drafting/engineering work share program in place and on offer. And every major oilsands producer was in some way exploring what cost differentials might be available from offshoring parts of project delivery. But it’s been slow going.
Some tried India and China for work share drafting and engineering. Others tried lump-sum jobs via Korea or Italy and engineering or pipefittings from Thailand and Vietnam. Some of these expeditions succeeded in bringing value, while others were fraught with disaster and ended as cautionary tales. Recall a certain global tier-one oil company trying to move Alberta-sized modules through the continental U.S. They eventually, and after much delay and cost, had to chop them up. But if we are honest with ourselves in the patch, we haven’t progressed nearly as far as we would have liked in the past decade toward the goal of globally integrated project delivery. The barometer for this is straightforward. The dollar-per-flowing-barrel capital cost for an in situ plant is no lower today than it was in 2006-07.
Meanwhile, back in the U.S., the tide was turning to re-shoring—and rapidly so. Why re-shoring? Simple—the cost of some inputs to production have fallen in the U.S. while they have been increasing in major developing nations. And over the same period, the risks and costs of logistics and transportation associated with offshore sourcing have been rising.
The oilsands industry was late to offshoring. Are we going to be late to re-shoring? Not likely. In fact, the number and variety of service providers available to the sector has been multiplying rapidly over the last decade. Could it be due to the relatively high demand? Or the prospect of long-term brownfield capital projects? Or the new players bringing in their old partners? All have contributed to providing oilsands producers with options that did not exist in 2006-07. However, the producer companies do not seem to be achieving the value yet. Our dollar-per-flowing-barrel capital cost is not dropping.
We had better understand that in order to sell our products competitively into a global market our inputs to production must be globally competitive. There are hydrocarbon alternatives that the world can and will move to if we are not competitive. Competitive inputs + competitive pricing = market share attraction/retention.
Today, the $1.2-billion (approximate price of a mid-size commercial SAGD plant) question is, do we re-shore or offshore fabrication? The answer is both. But establishing the right balance won’t be easy. And just as important in getting to that balance is how we achieve our goal of globally competitive project capital costs.
Partnering for value
On the services side, many of us have participated in or heard the storyline of, “We need to stop selling hours and sell value instead.” That sounds great in the C-Suite or at the high-level business development meeting. The challenge is that over the past 30 years the owner side and the large EPCMs have built a fairly impressive set of project management and supply chain management systems to get oilsands megaprojects built. Just ask Rick George or Steve Williams, previous and current CEOs at Suncor, how easy it is to change the direction of these large, sophisticated structures.
It is not impossible, though. It’s about project management 101. It needs to start at the top and be pushed hard through the entire organization. Ask yourself as a CEO or VP of an oilsands company or a major EPCM, “How many true partnering arrangements do we have in place and functioning well?”
There are some examples. Arguably one of the more successful and long-running value-based partnering arrangements would be between Syncrude and WorleyParsons, named “CoSyn.” Going for close to 30 years, the CoSyn organization has staff from both companies working side by side, setting value gain objectives and achieving them on a regular basis. We need more of that in our industry from the top right down to the piping spool and assembly yards where the big dollars get invested for oilsands projects.
Designing for global delivery
The saying goes, “You can’t put a square peg in a round hole.” Actually you can—if you size it correctly. And so it goes with obtaining and delivering global inputs to Canadian oilsands projects. Modularization is part of the solution. Every major EPCM says they have the service offering. Is anybody buying? This is an area where we’ve been spinning our wheels over the last decade. Luckily it seems to have been gaining some traction over the last five years. We are accustomed to “Alberta-sized” or extra large skids and modules assembled in and around Edmonton for shipping on the high line to project sites. The problem is that they are mostly a lot of air. And if we want to ship from any distance, we don’t want to pay to ship air.
A variety of players have stepped up and are designing their plants now so that skids and modules fit in the global shipping equivalent of an envelope. The signing of partnering arrangements to make this happen still seems a bit thin in our industry. However, Grizzly Energy, Devon and Imperial have all made strides with Ledcor, for example, in executing modular construction. Shell has worked with Jacobs to set up modular design and off-site fabrication across North America. We need much more of this to compete globally.
In order to sign up global fabrication partners, we need to provide them with something they can manufacture rather than fabricate “one offs.” The holy grail of standardization applies here. We’re unlikely in our lifetime to see Suncor, Devon and MEG standardize to a common set of modules between them for any central plant or field facility. However, they have each been working hard in the past number of years to standardize their own components. And they have been exploring global delivery options, which includes local partners for long-term service delivery. This can be taken further to solidify, gain and share value through true partnering (such as the CoSyn model).
Moving from good to exceptional project management
Modularization, standardization and partnering all sound great. These elements must come together through globally integrated project delivery. Just saying the words “globally integrated” causes many managers to “go turtle.” It is not nearly as scary as it sounds. It does, however, rely heavily on exceptional project management: the right tools and information in the right hands at the right time.
Without globally integrated project delivery, we will not achieve the step-change in capital cost needed to help our oilsands projects improve their competitive position for supply.
In summary
By reading this thought perspective, hopefully you are rethinking “global,” offshoring and re-shoring. China, India, Korea and other overseas suppliers are part of the solution to globally integrated project delivery. The global solution also includes Alberta, B.C., Saskatchewan, Canada’s central and Atlantic provinces, and the U.S. The principles of modularization, standardization and partnering apply equally to gaining value from service providers locally, regionally, nationally and internationally.
What is the correct balance of offshoring or re-shoring inputs to oilsands projects? The answer is different for each producer. You may decide to offshore all the piping spool for two specific well pad modules across all well pads for the next 10 years. Or you may standardize several central processing facility skids and size them for global assembly and shipping (even from Calgary to Fort McMurray) across six facilities. Whatever the case, we need to set goals for our management teams that activate the desire to do the hard work required to design and implement this path. The alternative—going turtle—is no longer an option. Now let’s get to it.
Michael Price is president and CEO of Westfab Industries.
Would you like to write a guest column? Please contact Deborah Jaremko at djaremko@junewarren-nickles.com to discuss.
Source Article from http://www.oilsandsreview.com/index.php/oilsands-news/columns/106-9773-the-1-2-billion-fabrication-q
