Capital projects in the era of $50 oil – Part 2

The two-legged stool.  In this second installment of my exploration of the new reality of capital project delivery, I take on a sacred cow of the project management dogma: the constraint trifecta, named for the trade-off triangle familiar to anyone who was ever associated with projects (see image below).  Traditional project management (TPM) practice states that a project is managed by choosing to control two of the three apexes and watch the third one land wherever it will.  If your project is a lunar launch or the Olympics, time and quality are your constraints; in O&G capital projects, the choice will usually fall on the quality-cost dynamic duo.

Constraint trifecta

This philosophy of execution control is ubiquitous in this and other industries, the logic being that the three constraints are mutually exclusive when taken together.  The consequence of this approach is the introduction of cost arbitrage to the management of the project’s budget.  All expense decisions will be made to maximize cost effectiveness – an euphemism for choosing to pay less now at the expense of earning more profits later in the future (when the project is generating revenues).  This is cost arbitrage in action.  The ultimate measure of success of the project is the attainment of an actual TIC that is less or equal to the starting budget, an outcome that is explicitly embraced by the TPM philosophy.  If, on the other, the aim of owner is to maximize shareholders ROI over the operating life of the asset, the constraint trifecta works against it.

Hidden beneath: the future

Look at what you missed.   Managing by the constraint trifecta guarantees two things: 1) the budget will be spent completely; and 2) the resulting asset will never achieve its ROI potential.  Simply put, there is zero possibility of achieving high levels of sustained profitability by the operating asset when it is realized through the pursuit of cost arbitrage.  As I wrote in my upcoming book investment-centric project management, what is cheapest now costs the most later.

But profitability is not the only sacrifice made at the altar of cost effectiveness.  The entire operating cost model for the asset is missing from the picture, once the project has reached its TPM-based conclusion.  In effect, the constraint trifecta is akin to the proverbial tip of the iceberg (in the same shape too).  All that lies beneath it, such as the revenues generated, the operating costs, the performance of the asset and the all-important profits, they remain hidden from view, un-quantified and unknown.  That is the ramification of ending the project at the end of start-up.

The constraint diamond.  To achieve a profitably performing asset (PPA) – introduced in my previous post – one needs to look upon the budget as the invest

The asset imperative: future profits

ment vehicle to realize the asset.  The goal in this case is not to get things done as cheaply as possible, but to do the things that will maximize the ROI performance of the asset once it is in operation.  The constraint trifecta is abandoned in favor of the constraint diamond.

All expense decisions during the project are made by considering their impact to what lies beneath the surface (revenues, performance, expenses, profits).  And, significantly, the end of the project is shifted to the right to include the validation of the nameplate performance during operational inception.  If the nameplate is not verified, the project is required to fix what is deficient or failing, so that the long-term profitability of the asset is protected.

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