Capital projects in the era of $50 oil

(c) www.despair.com

Epic fail.  This post is a segue to the one published a little over a week ago (O&G 3.0, Reboot).  And, much like its predecessor, it echoes a fascinating article published in the The Economist, December 17th 2016 edition.  Entitled “out with the old”, the article articulated a clear demonstration that the received dogma espoused by modern management theory is in fact failing managers of all stripes.  “The gurus”, wrote the author, “have lost touch with the world they seek to rule”.  The current state of economic affairs worldwide tends to prove out the assessment.  It is an argument that I have been advancing over the past year, in the more prosaic world of project management.  The thesis, which forms the basis of my book investment-centric project management due in May 2017, posits that traditional project management (TPM) was failing capital projects everywhere, up until 2014, and will worsen the situation in 2017, as the oil and gas industry emerges from the great dislocation.  Failure statistics in 2014 were indeed brutal: across the globe and over many industries, 30% of projects valued at $20M (TIC) failed to meet budgets or schedules or both.  At the $100M level, the failure rate climbed to 50%.  And beyond $1B, a staggering 60 to 70% of projects went bust.  Unless something dramatic is fix the traditional practice of project management, expect these failure rates to explode in the coming years.  Managing capital projects when oil was at $147 was already strained beyond limits; managing them in the era of $50 oil, on the basis of the status quo, is a disaster waiting to happen.

The status quo is often justified, but rarely justifiable. 

The need for change is overwhelming and daunting to the adherents of the ersatz science.  The range of changes is beyond the scope of this post.  But we can start with a few salient elements.  First we ask, what is a project?  Most project professionals will define it in terms nurtured by the TPM orthodoxy.  The PMI for example will define a project as an agent of change, undertaken as a temporary endeavor to create a unique process, produce or services.  It is sufficiently generic to allow myriad interpretations that could remain true to its spirit.  Nevertheless, this definition (along with its many variants) is also sufficiently inchoate as to be useless.  Consider this entirely new perspective:  a project is the development of a profitably performing asset.  The asset is the revenue-generating entity to be operated commercially for the benefits of its shareholders.  The asset exists to deliver sustained returns on investment (ROI) to shareholders, throughout its economic life.

The maximization of the ROI rests on three vectors: the volume of revenues generated by the asset; the cost incurred to generate them; and the profits resulting from the combined effects of revenues and costs.  In this context, the project is never an end unto itself.  It is merely the means to the end sought: the profitably performing asset.  The project is no longer ended when commissioning is completed, which otherwise misses completely the purpose of the asset, since you have no clue whether the asset is profitably performing or not.  That occurs much later, when the asset has been ran through its paces and proven out.  Defining the end in this manner has profound implications on the way budgets are managed, including the necessary abandonment of the cherished constraint trifecta (budget-schedule-quality), which forces the project manager to choose to control two and accept the third to land where it will.  You cannot achieve a profitably performing asset if you manage by this triangle.  The only guarantee is that the budget will be spent; and the work may be finished on time.  But you will leave the entire matter of profitability undefined, unknown and unpredictable.

Project management.  A similar argument can be extended to the practice of project management.  Failure statistics clearly point to the conclusion that TPM does not guarantee project success to owners, nor furnish sufficient probability of success to justify the initial investment.  Some project professionals may be tempted to explain away the failure record with the widely-held belief that the fault is not with the accepted principles of project management, but with the failure to implement them.  This is too simplistic an explanation.  To every problem there corresponds a simple, elegant solution – and it is wrong.  The fact of the matter is that modern projects are always executed within a formal TPM framework, and adhere to the rigid plans, strategies and procedures imposed by the owner at the outset.  Few if any will ever come in on budget and on schedule.

The generally accepted definition of project management goes something like this:  a set of skills, processes, procedures and plans to execute a project in such a way that all stakeholders’ needs are satisfied.  In this interpretation, project management is reduced to allocating and managing resources to achieve a set of objectives.  The definition takes on a pronounced procedural character which takes the form, on a daily basis, of execution plans and strategies.  They are in turn constituted into management schemes over schedule, cost, quality, human resources, communications, risk, procurement, construction management, systems and standards.  The managing of a project is thus encapsulated in the aphorism if you fail to plan, you plan to fail.  However, although planning is a necessary condition to execution success, it is not a sufficient one.  For example, I was once involved with a multi-billion dollars project whose execution strategy tallied 800 pages of plans, procedures, processes and templates.  Despite this depth of details, the endeavor eventually floundered.

What should project management be?  It is the development of a profitably performing asset.  Functionally, it is three different things: an organization, a business, and a relationship nexus.

That will do for now.  Your thoughts?

 

 

 

 

 

 

 


Leave a Reply