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Brownfield capital effectiveness

It’s all about bang for the buck at the best pace, but there’s a twist. Stuart Elliot shares how recognizing the three distinct categories of brownfield projects leads to three distinct paths to improved capital effectiveness.

Stuart Elliot

by Stuart Elliot

21 January 2020
man brainstorming ideas on board

Introduction

It should be easy to agree on these four basic statements about brownfield projects and portfolios:
1. The purpose of any brownfield project is to improve an existing asset.
2. A project improves an asset, officially, at the milestone of Operations Acceptance.
3. Aging assets may need hundreds of improvements.
4. Resources including time, money, and know-how are limited and uncertain.

brownfield asset management equation micrographic

As budgets tighten, there’s an increasing demand to better manage portfolios. Yet without an agreed-upon definition of Brownfield Capital Effectiveness, how can we know if we’re even headed in the right direction?

Brownfield project categories

Because brownfield projects maintain and enhance the inherent capability of an operating facility, a lagging indicator of effectiveness might be found in a plant’s operating results. But those results can also be attributable to maintenance and operations, not just the projects themselves.  The connection is too ambiguous to rely on as a means of driving improved performance. We’ll need direct indicators.

It helps to recognize and acknowledge that there can be three distinct kinds of projects within a brownfield portfolio:

Category A: Larger standalone projects with well-delineated resources, justifications, and, often, plot space
Category B: Multiple projects with low variability, often linked within a seasonal program, such as drilling programs, well pads, gathering systems, conveyor extensions, or long-distance pumping stations 
Category C: Multiple independent projects with high variability in size, arrival times, sponsorship, and justifications in support of a process facility

The drivers, controls, standards, and indicators for each of these three categories are different. To maximize the economic value from each category (and thereby for the portfolio as a whole) each has its own version of Capital Effectiveness. While they may have bang for the buck and time constraints in common, because the work itself is so varied, what works in one category doesn’t necessarily translate to optimization in the other two.

Without an agreed-upon definition of Brownfield Capital Effectiveness, how can we know if we’re even headed in the right direction?

Category A: Large standalone brownfield projects

These are big, multi-year projects including process debottlenecking or the addition of new process units at an existing facility. There’s a known range of commercial and contractual options with some room for further creativity. Project approval is not certain in advance but when finally granted, it triggers an immediate start date. 

For Category A work, capital effectiveness in terms of ROI and NPV is intended to be locked in at approval. Funding is available only for the few projects at the top of the list. Success or failure of the project is monitored in the usual ways around On Time, On Budget, On Spec.

Emerging techniques to improve Capital Effectiveness are coming from digitization where an “operation starts now” mentality influences even the earliest stages of design work while yielding increased benefits throughout the operating life of the new asset. 

Benchmarking using Independent Project Analysis (IPA) and Construction Industry Institute (CII) practices is common as a basis for lessons learned and for directing improvement efforts. Category A projects are the kinds of brownfield work for which IPA and in-house project controls based on Project Management Institute standards are best-suited.

Sometimes we see boldly-led Category A projects with outstanding, breakthrough results. Other times we see boldly-conceived projects that result in failure. There are no guaranteed paths to project success, but there are plenty of ways to improve the odds. CII has shown that extraordinary project results arise from having a compelling business need, a respectable plan, and useful management involvement.

For Category A projects the mantra, “Do the right project, do the project right” fits perfectly. The principle of “bang for the buck at the best pace” means selecting projects with the very best economics and delivering them on budget and on time.

Category B: Multiple brownfield projects with a small degree of variability 
These include well pads, gathering systems, and other repetitive surface development work. The challenge of this category of projects resembles manufacturing where standardization, 6 Sigma, Lean, Automation, and similar productivity drivers improve costs and durations.

Category B workload usually requires optimization to finalize the project slate, enabling delivery to be planned with a measure of confidence. Once the best work has been identified, low cost engineering, modularization, and repeatable construction practices will drive Capital Effectiveness. A 30% target improvement in Capital Effectiveness may be achieved by optimizing this entire work cycle, with organizations often compounding these initial improvements in subsequent years.

Vital for ongoing operations, Category B’s Capital Effectiveness is measured by metrics like NPV÷I, by the ability to serve the next activity in the value stream – often a drilling program – and by comparing against prior year performance. It may take two or three iterations to reach the optimum, so view Category B work with an eye to making it even better in future. 

The mantra can be “Design one, learn, build many.” That’s bang for the buck at the best pace, arranged to sustain ongoing operations by maximizing efficiency.

There are no guaranteed paths to project success, but there are plenty of ways to improve the odds.

Category C: Small brownfield projects with a high degree of variability 

These are found in and around aging process facilities; many Category C projects resemble major maintenance tasks but without an expectation of being repeated. Scope, arrival time, resource requirements, sponsorship, business drivers, and complexity are all over the map. Once approved, a project competes for shared resources every week with dozens of similarly variable tasks until it is handed over to Operations. 

At most aging facilities, the Category C portfolio is increasingly dominated by sustaining projects which reduce risk and increase asset integrity. Only a few purely ROI projects will be funded if the asset decay curve is steep, because the first step in making money at an old facility is to stop losing it to poor reliability. We need a rate of asset improvement to overcome the rate of asset decline.

Of course, this means that if the asset needs hundreds of improvements, hundreds of projects need to meet their Operations Acceptance milestone. 

While clients and contractors currently govern this work as individual projects, improved capital effectiveness does not arise from improved project-level predictability. For Category C, Capital Effectiveness comes from picking the slate of projects that most improve the asset per dollar spent, and then finding ways to maximize the overall pace of completion. 

But how do you select best bang for the buck work in a portfolio dominated by risk reduction projects? Fresh thinking is required to apply economics to improvements in risk. For each possible project we’ll need risk deltas, i.e. an estimate of both initial risk, and residual post-completion risk. When risk deltas are translated into numeric values they allow projects to be compared regardless of size. Bang for the buck is just risk delta divided by project cost, and there’s a value for each project on the list. To maximize Capital Effectiveness in picking, favor those projects with the highest Bang for the buck, and work down the list over time. 

chart showing risk

Once the slate of projects is selected, pace of completion comes less from project management and more from fields like Queuing Theory and Economics. Because most of a Category C project’s life span is spent waiting in a queue somewhere, we apply practical lessons from Queuing Theory to improve flow and perform at the economically optimum level of ‘busy.’ One unexpected management lever is the number of active projects competing for limited resources.

Pace of completion for Category C is predominantly driven by portfolio management, not individual project management. That’s the primary reason for distinguishing Category C from Category A and B work. If we aren’t optimizing ‘traffic’ levels in this category we aren’t optimizing portfolio value. 

There’s so much variance across different companies’ facilities that the most meaningful benchmarks of improvement for Category C are comparisons with previous years’ performance at the same location. Risk deltas can be summed just as NPVs can be summed. Organizations can be aligned around picking the best projects for this year’s budget and then improving the pace of completion compared to previous years.

If maximizing Capital Effectiveness is the target, what’s the mantra for Category C? Bang for the buck at the overall best pace. It’s important to overcome the rate of asset decline with a rate of asset improvement. 

What about cost certainty? While it’s annoying if a fire water system replacement project comes in at 25% over budget, it likely would still have been approved at the higher figure had it been known. What’s less acceptable is having no replacement fire water system in place before the original system fails. And it’s never helpful when people pad initial estimates and schedules to create an illusion of certainty.

Conclusion

Each of the three categories of brownfield work has different drivers and a different path to maximizing Capital Effectiveness. Each one is about bang for the buck at the best pace, but each roadmap is different.  Using the principles outlined in this article, we’ve helped clients generate step changes in asset improvement per annual dollar spent, improving what matters most. 

team members discussing solutionSome clients have doubled their Capital Effectiveness for Category C work within 24 months through our straightforward, transparent, and reproducible techniques. Results can be measured by improved Brownfield Capital Effectiveness, and the benefits will be evident in plant operations and business results. 

We know what it takes to help organizations understand the true causes of their challenges and to identify and implement solutions. We’re here to help you be better portfolio managers, to strengthen your business by getting more asset improvement sooner, for less. 

The road up to best passes through better; we’re ready to help you refocus your portfolio management journey until you can confidently continue on your own. 

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