David Rosenberg
Senior Consultant
Independent Project Analysis (IPA)

Realizing the Owner Value In FPSO Projects

Wed, 01/21/2015 - 23:14

Floating production, storage, and offloading (FPSO) projects have the capability to deliver significant value to an owner oil company’s portfolio. Unfortunately, most FPSOs fail to deliver the expected value. FPSO projects can deliver value to owner companies through a number of different avenues. FPSOs are regarded as the industry’s “go-to” go-fast solution. An FPSO vessel can be contracted using a leased option, transferring a significant amount of the capital cost to operations costs. With more than 150 FPSOs deployed worldwide, FPSO contractors have a reputation of knowing their business. The general perception held by owner oil companies is that they do not need to define the FPSO or monitor FPSO contractors with the same scrutiny as other projects. Plus, as a fast and potentially cheap concept, leased FPSO projects are ideally suited for marginal fields. Clearly, this execution model for FPSO projects should deliver significant value to field owners. Unfortunately, IPA project data points in the opposite direction. The track record suggests that FPSOs struggle mightily to delivery on the promise of significant cost savings. In IPA’s database of 96 completed FPSOs, these projects compare very poorly against other offshore concepts. FPSO projects experience worse outcomes in cost and schedule predictability, and the frequency of significant operability problems. This amount of cost growth represents a US$270 million overrun of the sanction estimate on the average FPSO in the IPA dataset. This poor performance seriously weakens the owner value proposition of the asset. The good news here is that within our sample of FPSOs, one small group delivered exceptional results. Fewer than 20% of the FPSOs in the IPA dataset delivered nearly on time, returned unused contingency to the project organization, and operated as expected. Here, we will identify how these well-executed FPSOs bucked the trend by completing execution on time and on budget, delivering value to their field owners.

IPA has determined that the “go-to” go-fast characteristic that makes FPSOs most attractive is what often causes them to fail. FPSO projects’ reputation for speed is justified. On average, a well-defined and executed FPSO can be deployed with a 16 percent faster execution schedule than facilities of a similar level of complexity. This speed is not transferable to definition. Unfortunately, too many owner project teams try to accelerate definition. The reason this happens is because the two key drivers of project success, project team integration and project definition completeness, are undermined. As a result, project results suffer. When projects move too rapidly through project definition, it is much harder to achieve asset team integration. When asset team integration is not achieved, the project results suffer. Not having all functions present often results in misinformed target setting, reflecting poorly considered trade-offs, and a fundamental lack of alignment of objectives. On average, FPSOs that do not achieve asset team integration experience 22% more cost growth and 15% more schedule slip. It is also important to note that the worst performing projects in the IPA sample were projects where the teams were not integrated. The other key driver is project definition completeness. This process develops the scope, plans, and processes of how a capital project will meet business objectives. It also addresses key questions about a project, such as its objectives, its scope, its schedule, its execution plan, and its stakeholder engagement plan. For FPSO projects, we see that successful FPSOs complete this definition and, as a result, set more realistic project schedule. 

delivery targets. Other FPSO projects who fail to complete this definition almost always fail to deliver on their promised schedule and nearly all of them experience exorbitant cost overruns in the effort. FPSO project outcomes are related to two aspects of project definition: engineering definition and project execution planning. IPA’s assessment of engineering definition considers the status of specific engineering design deliverables and participation by key stakeholders. Cost growth in FPSO projects shows a direct relationship with engineering definition. Those projects that complete their FEED engineering deliverables prior to the start of project execution experience very little cost growth on average. As the maturity of the engineering deliverables degrades, the average cost growth increases. However, many projects enter execution with little more than a functional specification. Those projects experience some of the highest levels of cost growth IPA has observed in FPSO projects.

Conversion FPSOs – those built from tanker hulls – require special consideration. IPA often observes converted FPSOs where the steel replacement work is often dramatically underestimated. This usually results in dramatic cost growth and seriously late delivery. The easiest way to avoid this growth and slip is to inspect the hull of the tanker to be converted prior to project sanction. When the project team fully understands the true scope of the steel replacement work prior to project authorization, they are best positioned to develop accurate cost and schedule estimates for these projects. If engineering definition addresses the scope of what needs to be built, PEP addresses the roles and responsibilities of all of the key participants and lays out the timing and ’choreography’ of all of the activities in designing and assembling the FPSO. The completeness of the PEP can have a significant impact on a project’s cost and schedule results. When done completely, the best array of sequencing, timing, staff, resources, and contracting and procurement strategies is more easily identified and selected. Project risks are also more easily identified and mitigated. Finally, a robust PEP with a detailed execution schedule helps in aligning the project cost and schedule estimates, helping prevent the phenomenon of overly aggressive schedules discussed earlier. FPSO projects that fully develop their project execution plan, as well as their detailed schedule, deliver projects on time. Unsurprisingly, as the level of detail of the PEP erodes, the average schedule slip increases.

Over 80% of FPSO projects experienced significant cost growth and schedule slip as they attempted to accelerate the project definition stage. As a result, these projects did not have integrated asset teams, very little detail in their PEP and engineering definition, and set very aggressive schedule targets. These formed a veritable “unholy trinity” of project practices. These end results, and the inability of owners to deliver the full value of the project opportunity, is not surprising. In order to deliver an FPSO project on time and on budget, one must resist the desire to accelerate project definition, and allow sufficient time to form an integrated asset team and complete FEL. This is the best way to deliver on the promise of value in an FPSO project.