L1a-Introduction to Projects

Lecture 1 Overview to Managing Financial

Performance and Projects

Topics to be covered What is a Project? Why do it? Understanding the Stages of a Project, Steps for carrying out a feasibility study.

Tools Required for Feasibility Studys Project development & Profitability Analysis

- Revenue Forecasting

- Capital Cost Estimating

- Operating Cost Estimating, Cash Flow Analysis

- Time value of money

- Net Present Value, Discounted Cash Flow Methods

Content 1. What is a project and why do it? 2. The five stages of a project 3. Creating value from a project 4. Project Success

What is a Project & Why do it?

A unique set of activities with defined start and finish times, undertaken to meet established goals/objectives/deliverables within defined constraints of scope, cost, time, quality and stakeholder/customer satisfaction. WorleyParsons

Example: Project for flood protection scheme

www.selkirkfloodscheme.com

Projects Projects vary in scale and complexity,

from small improvements to existing products to large capital investments. However they are all: An investment of resources for an objective A cause of irreversible change Novel to some degree Concerned with the future Related to an expected result Definitions related to process engineering applications Greenfield new plant on a new site Brownfield existing plant modified

Content 1. What is a project and why do it? 2. The five stages of a project 3. Creating value from a project 4. Project Success

The Five Stages of a Project

Determine

project feasibility and alignment with

business strategy.

Select the preferred

development option(s) & execution strategy.

Finalize project

scope, cost and schedule and Sanction

Project. Prepare for

Execute Phase.

Produce an operating

asset consistent with scope, cost &

schedule.

Evaluate &

Operate asset to ensure

performance to specifications and maximum return to the

Client.

Front End Loading

IDENTIFY Project

Identification

SELECT Scoping / Feasibility

DEFINE Pre-FEED/

Front End Eng

Procurement / Fabrication/Constrn.

EXECUTE Detailed Engineering

OPERATE Commissioning

Close-out

Development

Execution

Full Funding Approval

Understanding Stages of a Project Importance of the Gate System

The Gate System is a formal system which enables the amount of capital outlaid to progressively increase in line with the development of the project

A Gate System review is conducted at the end of each stage to confirm the readiness/appropriateness for the project to proceed to the next stage, and the capital, people and resources required for the next stage

Understanding Stages of a Project Importance of the Gate System

http://www.renewableenergyworld.com/rea/blog/post/2013/11/geothermal-visual-project-cost-and-risk-profile-at-various-stages-of-development

Understanding Stages of a Project Importance of the Gate System Large amounts of capital are required by projects, monies which could be used elsewhere in a business. Therefore proper justification of expenditure is essential.

Phased approach enables the amount of capital outlaid to progressively increase in-line with development of the project (and at points where there is a reduction in risks)

Gate System enables this to be done

Understanding Stages of a Project Key Steps/Outcomes for Each Stage

Front End Loading

IDENTIFY Project

Identification


DEFINE Pre-FEED/

Front End Eng




Close-out

Development

Execution


Stage 1 Identify 1. Identify need and be clear on it Market Need Increased capacity

Product quality

New product / replacement

Opportunity

Plant Need Efficiency / reliability

Raw material issues

Energy conservation

Logistics

New technology

Safety, legal and / or environmental need

Stage 1 Identify 1. Identify need and be clear on it 2. Brainstorm ideas Market Need Increased capacity New plant?

-Different location? -Different technology? -Import?

-Produce different product -Research possible options

Product quality

New product / replacement

Opportunity

Plant Need Efficiency / reliability

Raw material issues

Energy conservation

Logistics

New technology

Safety, legal and / or environmental need

Stage 1 Identify

1. Identify need and be clear on it 2. Brainstorm ideas 3. Develop Database

- Develop feasibility quality data on: - Potential sales volume and price - Plant investment for various sizes /technologies - Operating costs

- Sources - Any in-house data - What are competitors doing? - What is there in literature - What is the market situation

Stage 1 Identify

1. Identify need and be clear on it 2. Brainstorm ideas 3. Develop Database 4. Identify Issues for Consideration

- How big? potential sales, market size, market share, new plant or de-bottleneck, capital constraints, feed stock constraints.

- What technology? product quality desired, feedstock type, source, availability, yield, operating cost, equipment life

- Location? proximity to market, raw material availability, construction and operating labour availability, taxation treatment/incentives

- When? time for screening, planning, design and approval, time for construction

Design Constraints

Stage 1 Identify

1. Identify need and be clear on it 2. Brainstorm ideas 3. Develop Database 4. Identify Issues for Consideration 5. Select alternatives for evaluation - considering different size, process,

location, timing and base case of do nothing

Stage 1 Identify. Increased capacity? Case 1 Do nothing

Years

Prod

uctio

n

Production Capacity

Stage 1 Identify. Increased capacity? Case 2 debottleneck or import

Years

Prod

uctio

n

Production Capacity

Stage 1 Identify. Increased capacity? Case 3 New Plant

Years

Prod

uctio

n

Existing Capacity

So there is a choice. The same outcome, an increase in capacity is achieved for both options (debottleneck versus new plant) but the options vary in terms of the capital costs, operating costs, construction timeframes, location, options for improved product quality. It is the impacts of these other variables that we are evaluating.

Stage 1 Identify. Increased capacity?

Key Steps/Outcomes for Each Stage Stage 2 - Select

EXECUTE

Front End Loading

IDENTIFY Project

Identification


DEFINE Pre-FEED/

Front End Eng


Detailed Engineering OPERATE

Commissioning Close-out

Development

Execution


Selected variables for consideration (i.e. debottlenecking versus new plant), gathered data on them and now is the time to give them some analysis, scoping and feasibility to see how they compare to each other - Market analysis - Technical analysis - Financial analysis - Ecological Analysis

Stage 2 Select

1. Define Bases and Assumptions for each alternative (based on your database)

- Sales/production volume (market share) - Product and by product prices - Raw material cost - Operating costs - Distribution cost - Capital cost - corporate outlook - Taxation rate

Stage 2 Select

1. Define Bases and Assumptions for each alternative

2. Evaluate and Compare - Rough screening to short list alternatives

Stage 2 Select New Chloralkali facility (electrolysis of salt to produce chlorine and caustic soda). Parameter Weighting Karratha Perth Gladstone Prox. To raw mat 0.15 9 4 9 Prox. To market 0.20 6 9 6 Shipping Facilities 0.10 9 9 9 Environmental 0.10 8 4 6 sensitivity Infrastructure 0.15 7 9 8 availability Constr/Op labour 0.15 4 9 6 availability Govt incentives 0.05 9 7 9 Land cost 0.05 9 3 7 availability Climate/impact 0.05 4 9 6 TOTAL 70.0 73.5 72.5

Stage 2 Select


2. Evaluate and Compare - Rough screening to short list alternatives - Carryout economic evaluation of

combinations of perhaps the three best locations and three best plant size (tools presented in later lectures).

- Determine preferred alternatives (usually one with highest Net Present Value calculation procedure discussed in later lectures)

Stage 2 Select


2. Evaluate and Compare 3. -Test preferred alternatives for what if

Government laws change, supply agreements not renewed, new process discovered,

Sensitivities impact on economics if parameters vary by probable inaccuracy (eg: +/- x%)

price, volume, capital cost, operating cost

Stage 2 Select


2. Evaluate and Compare 3. -Test preferred alternatives for what if -Test preferred alternative for

Environmental and safety Issues potential greenhouse gas production, waste

management, flammability, explosivity.

Stage 2 Select


2. Evaluate and Compare 3. -Test preferred alternatives for what if -Test preferred alternative for

Environmental and safety Issues - Test preferred alternatives versus Best of

Competition If industry/price can absorb new

investment And no disadvantage vs best of

competition Then Project should be attractive

Stage 2 Select


2. Evaluate and Compare 3. - Test preferred alternatives for what if - Test preferred alternative for

Environmental and safety Issues - Test preferred alternatives versus Best of

Competition 4. Decide and Recommend

- Should project proceed to next stage - If so, which alternative(s) should be developed

further

Stage 3 - Define

EXECUTE

Front End Loading

IDENTIFY Project

Identification


DEFINE Pre-FEED/

Front End Eng




Development

Execution


Stage 3 Define Also termed Front End Engineering & Design

1. Design bases agreed: - Project philosophy, scope and objectives - Preliminary P&ID layout - Major equipment specifications - Control logic - Preliminary Hazop review 2. Basic engineering & design carried out for one selected

alternative 3. Project Execution Plan fine-tuned (critical path & long lead

items identified) 4. Basis established for Contractors Detailed Engineering

Design Investment now OK for formal approval Project scope

developed such that cost estimate and schedule accurate to -10/+15%

At End of Stage 3 Formal Approval Takes Place

Capital cost estimate accurate to -10/+15% Detailed operating costs determined Detailed economics carried out Business plan consistency confirmed Base business profitability confirmed Consistency with Budget RISK OF THE PROCESS REDUCED READY TO MAKE A

BIGGER INVESTMENT

EXECUTE

Front End Loading

IDENTIFY Project

Identification


DEFINE Pre-FEED/

Front End Eng




Development

Execution


Key Steps/Outcomes for Each Stage Stage 4 - Execute

Detailed Engineering and Drafting Construction Packages

produced Procurement of Equipment Construction of plant Pre-commissioning of equipment Cost Estimate accuracy -5/+10%

EXECUTE

Front End Loading

IDENTIFY Project

Identification


DEFINE Pre-FEED/

Front End Eng




Development

Execution


Key Steps/Outcomes for Each Stage Stage 5 - Operate

Commissioning/start-up of plant Monitor/adjust plant during warranty period Warranty period/Project performance assessment Post Audit/Project re-appraisal Complete Close-out

EXECUTE

Front End Loading

IDENTIFY Project

Identification


DEFINE Pre-FEED/

Front End Eng




Development

Execution


In a Design House Determine customer needs

Set design specifications

Predict fitness for service

Generate design concepts

R & D if needed

Build performance models

Customer approval

Evaluate economics, optimize & select design

Detailed design & equipment selection

Procurement & construction

Begin operation

Structure of a chemical engineering project

Chemical Engineering Projects ~50% - Modifications and additions to

existing plant, usually carried out by the plant design group

~45% - New production capacity to meet growing sales demand. Repetition of existing designs, with only minor design changes.

Remaining new processes, developed from laboratory research, through to pilot plan, to a commercial process.

Techno-Economic Analysis 1. Executive summary 2. Technology description

Process chemistry, Process specification 3. Commercial analysis

Product applications, competitor assessments, Existing and planned capacity.

4. Economic analysis Pricing, investment analysis (explain capital cost

estimates etc.), Financial analysis 5. Risk analysis

Process hazard analysis, EIA, Commercial risk 6. Appendices

CONTENT 1. What is a project and why do it? 2. The five stages of a project 3. Creating value from a project 4. Project Success

What is Value?

Value : What client is looking for

Examples: Lowest cost

Quickest schedule

Highest safety/reliability

Highest return

Ensure: Right cost outlaid to achieve best value

Creating Value (Worley) IDENTIFY SELECT DEFINE EXECUTE OPERATEGate Gate Gate Gate

Poor Proj

ect

Selection

Optimum Project

Definition/Execution

Optim

um P

roje

ct

Sele

ctio

n

Poor Project Definition/Execution

Select the Right Project Develop and Deliver the Project Right

Valu

e

Front End Loading

IDENTIFY SELECT DEFINE EXECUTE OPERATEGate Gate Gate GateIDENTIFY SELECT DEFINE EXECUTE OPERATEGateGate GateGate GateGate GateGate

Poor Proj

ect

Selection

Optimum Project

Definition/Execution

Optim

um P

roje

ct

Sele

ctio

n

Poor Project Definition/Execution

Select the Right Project Develop and Deliver the Project Right

Valu

e

Front End Loading

CONTENT 1. What is a project and why do it? 2. The five stages of a project 3. Creating value from a project 4. Project Success

Success Delivery of whats expects

On time Within budget With quality Develop productive relationships

Tools to assist teams to meet goals on schedule and within budget.

Microsoft Project expected to produce similar outputs in DP

Further reading Lecture notes Wearne, S.H. (1989) Control of Engineering Projects,

Thomas Telford. Morris, P.W.G. (1997) The Management of Projects,

Thomas Telford Smith, N.J. (2008) Engineering Project Management.

Recap: The Five Stages of a Project

Determine

project feasibility and alignment with

business strategy.

Select the preferred

development option(s) & execution strategy.

Finalize project

scope, cost and schedule and Sanction

Project. Prepare for

Execute Phase.

Produce an operating

asset consistent with scope, cost &

schedule.

Evaluate &

Operate asset to ensure

performance to specifications and maximum return to the

Client.

Front End Loading

IDENTIFY Project

Identification


DEFINE Pre-FEED/

Front End Eng




Close-out

Development

Execution


Topics to be covered What is a Project? Why do it? Understanding the Stages of a Project, Steps for carrying out a feasibility study.

Tools Required for Feasibility Studys Project development & Profitability Analysis

- Revenue Forecasting

- Capital Cost Estimating

- Operating Cost Estimating

- Cash Flow, NPV/DCFR, etc

Lecture 1 Overview to Managing Financial Performance and ProjectsTopics to be coveredContent What is a Project & Why do it?Example: Project for flood protection schemeProjectsContent The Five Stages of a ProjectUnderstanding Stages of a ProjectImportance of the Gate SystemUnderstanding Stages of a ProjectImportance of the Gate SystemUnderstanding Stages of a ProjectImportance of the Gate SystemUnderstanding Stages of a ProjectKey Steps/Outcomes for Each StageStage 1 Identify Stage 1 Identify Stage 1 Identify Stage 1 Identify Design ConstraintsStage 1 Identify Stage 1 Identify. Increased capacity?Stage 1 Identify. Increased capacity?Stage 1 Identify. Increased capacity?Stage 1 Identify. Increased capacity?Key Steps/Outcomes for Each StageStage 2 - Select Stage 2 SelectStage 2 SelectStage 2 Select New Chloralkali facility (electrolysis of salt to produce chlorine and caustic soda).Stage 2 SelectStage 2 SelectStage 2 SelectStage 2 SelectStage 2 SelectStage 3 - Define Stage 3 DefineAlso termed Front End Engineering & DesignAt End of Stage 3 Formal Approval Takes PlaceKey Steps/Outcomes for Each StageStage 4 - ExecuteKey Steps/Outcomes for Each StageStage 5 - OperateIn a Design HouseStructure of a chemical engineering projectChemical Engineering ProjectsTechno-Economic AnalysisCONTENTWhat is Value?Creating Value (Worley)CONTENTSuccessTools to assist teams to meet goals on schedule and within budget.Further readingRecap: The Five Stages of a ProjectTopics to be covered

Documents

L1a-Introduction to Projects