focus on local value
TRANSCRIPT
CDMS Consulting Engineers
PO Box 5778
St Georges Tce WA 6831
P: (+61 8) 9421 9060
F: (+61 8) 9325 8311
ABN 72 159 772 675
W: www.cdmsengineering.com
A division of Midas Engineering Group
AUSTRALASIAN OIL & GAS CONFERENCE, PERTH 2014
FOCUS ON LOCAL VALUE-ADD SERVICE PROVIDERS
By Lionel Trewhella, Group Engineering Manager
> Structural > Mechanical > Design > Verification > Project Management > Structural > Mechanical > Design > Verification > Project Management
Key Attributes
• Working globally since 1986, with offices in Perth, Brisbane, Noosa and
Melbourne
• Dynamic and innovative niche consultancy
• Dedicated team providing customised service
• Specialists in structural, mechanical and piping engineering
• Unique solution finder
• Part of Midas Engineering Group
Pragmatic, efficient, complete engineering through
quality, personalised & exceptional service delivery
> Structural > Mechanical > Design > Verification > Project Management > Structural > Mechanical > Design > Verification > Project Management
Prelude
“If you think it costs too much to get an expert to do the job,
wait until you call in an amateur!”
> Structural > Mechanical > Design > Verification > Project Management > Structural > Mechanical > Design > Verification > Project Management
Presentation Outline
• Key learning outcomes
• Overview of offshoring
• Current O&G engineering capacity
• Importance of nurturing local talent
• How do we add value – examples
• Case study – financial comparison
• Conclusions
• Questions
> Structural > Mechanical > Design > Verification > Project Management > Structural > Mechanical > Design > Verification > Project Management
Key Learning Outcomes
• The immediate and flow-on benefits of utilising local engineering
consultants
• The importance of nurturing local expertise and reusing it throughout
the project/equipment lifecycle
• New perspectives on local versus overseas engineering design and
drafting costs
• How local engineering service providers add value for their clients
• Local design work can be done cost-effectively with quality, accuracy
and efficiency not necessarily present in work designed offshore
> Structural > Mechanical > Design > Verification > Project Management > Structural > Mechanical > Design > Verification > Project Management
Overview of Offshoring
• Offshoring = the transfer of work abroad, typically to lower cost centres
• Large EPC and EPCMs have been offshoring, or ‘worksharing’,
packages of their engineering and drafting work for about a decade
• Has been an issue for local fabricators and suppliers for many years
• Smaller engineering consultants now being affected by this ‘mindset’
and method project of delivery
• Our competitive advantage is being eroded as we are forced to
compete on a global stage
• Evaporation rate of engineering and design opportunities available to
local providers seems to be increasing
> Structural > Mechanical > Design > Verification > Project Management > Structural > Mechanical > Design > Verification > Project Management
Overview of Offshoring (Cont.)
Some of the obvious reasons for offshoring engineering and drafting
include:
• High AUD (though it is starting to come back down)
• High engineering and drafting salaries
• Explosion in enabling technologies – rapid information exchange
• Entrepreneurial spirit in emerging and developing economies
• Globalisation of supply chains
• Modular construction philosophy
> Structural > Mechanical > Design > Verification > Project Management > Structural > Mechanical > Design > Verification > Project Management
Current O&G Engineering Capacity
There are opposing views regarding Australia’s engineering capacity to
service the oil and gas industry.
On the positive side:
“Australia has proven capacity and capability in process and chemical
engineering, mechanical and piping engineering, electronic and
instrument engineering, electrical and power engineering, IT and
telecommunications, civil and infrastructure engineering, onshore,
offshore and subsea structural engineering, and project
management.”
Source: Australian Trade Commission
> Structural > Mechanical > Design > Verification > Project Management > Structural > Mechanical > Design > Verification > Project Management
Current O&G Engineering Capacity
On the negative side:
“…. there is a general consensus that WA does well in terms of design
and compliance with technical specifications [but] is not cost
competitive and there are not sufficient numbers of appropriately
qualified people.”
Source: Assessment of the Engineering Design Capability
& Capacity in the Oil & Gas Sector in WA, 2011
> Structural > Mechanical > Design > Verification > Project Management > Structural > Mechanical > Design > Verification > Project Management
Local Content Policies
A World Bank study on Local Content Policies (LCPs) gives the following
three classifications:
• ‘Assertive’ – e.g. Brazil, Indonesia
• ‘Encouraging’ – e.g. Australia, Malaysia
• ‘Neutral’
Australia’s LCP:
• Has no mandated targets for local content, procurement or recruitment
• Local goods and services are ‘preferred’ (as long as they are
competitive!)
Source: World Bank Study
> Structural > Mechanical > Design > Verification > Project Management > Structural > Mechanical > Design > Verification > Project Management
Local Content Policies (Cont.)
Controversy over LCPs:
• Protectionist?
• Breach WTO rules?
• Act to perpetuate inefficient industries?
• Harm economic growth?
The answers to these will come from the economists and lawyers!
From CDMS’ perspective, Australia’s current ‘encouraging’ LCP is proving
to be ineffective in providing real benefits to local engineering service
providers.
> Structural > Mechanical > Design > Verification > Project Management > Structural > Mechanical > Design > Verification > Project Management
Local Content Policies – Success or Failure?
0
10
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30
40
50
60
70
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100
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Verification Only Design and/or Detailing
CDMS Jobs Per Year - Pressure Vessels for Oil & Gas Clients
> Structural > Mechanical > Design > Verification > Project Management > Structural > Mechanical > Design > Verification > Project Management
Nurturing Local Providers
Why is it important to nurture local (engineering) service providers?
• To stop the general erosion of engineering skills. When young
engineers have minimal and / or sporadic design opportunities, they
cannot develop the confidence required to design efficiently.
• To ensure the knowledge and skills of our experienced engineers are
not lost – ‘brain drain’
• To ensure we have an appropriately skilled engineering workforce able
to meet the future demands of the industry
• To give local providers the confidence that, given realistic opportunities
to participate in winning major project work, they can invest in training,
technology and innovation
> Structural > Mechanical > Design > Verification > Project Management > Structural > Mechanical > Design > Verification > Project Management
Nurturing Local Providers (Cont.)
• To give local providers the opportunity to add value at the front end of
projects. Engagement only at the construction phase provides far
fewer opportunities for innovative thinking
• To give WA the opportunity to build a solid vault of knowledge and
successful project delivery strategies, ideally which could serve as a
‘reference’ manual for all engineers for future projects.
The final point here is a long-term ideal which will not happen if history
continues to repeat itself! Refer to the list of major projects over the page
and where they were engineered.
> Structural > Mechanical > Design > Verification > Project Management > Structural > Mechanical > Design > Verification > Project Management
Nurturing Local Providers (Cont.)
Source: APESMA
> Structural > Mechanical > Design > Verification > Project Management > Structural > Mechanical > Design > Verification > Project Management
How Does CDMS Add Value?
• We have in-depth knowledge of Australian and International design
codes - we know the codes, we don’t just ‘tinker’ with them
• In turn, this allows us to pre-empt various issues and highlight potential
hidden costs in complying with a particular code
• We design efficiently – members, plates thicknesses, welds, lifting
lugs; we do not need to rely on ‘standard’ details
• We don’t make costly errors – in material sizing and selection, MMDT
calculations, fatigue calculations, and so-on
• Versatility – we can design for routine, run-of-the-mill problems but we
can also solve highly unique problems. We are often called upon to
solve problems that fall outside the ‘norms’
> Structural > Mechanical > Design > Verification > Project Management > Structural > Mechanical > Design > Verification > Project Management
How Does CDMS Add Value? (Cont.)
• Practicality – we have a long history of working with fabricators who tell
us very quickly what is possible and what is not practical!
• We can provide solutions on live plant
• We can provide assistance throughout the full product lifecycle:
design fabrication transportation installation
• We understand our environment, the logistics, conditions, remoteness
- the unique issues with getting projects done here
• We can be contacted at any time and meet face-to-face to resolve
potential issues quickly
> Structural > Mechanical > Design > Verification > Project Management > Structural > Mechanical > Design > Verification > Project Management
How Does CDMS Add Value? Versatility
Offshore Topside
Structures
Water Authority Mildura:
50m Φ Tank
Pressure
Vessels
GE Water Brisbane:
Pipe Stress Analysis
Subsea hook for chain
relocation
Special Designs:
Offshore Winch
Components
Design Verification: Calciner Pressure Vessel Design Verification Finite Element
Analysis
Offshore Topside
Structures
Minara Heat Exchanger:
Transport /Lift Study Mining Structures
> Structural > Mechanical > Design > Verification > Project Management > Structural > Mechanical > Design > Verification > Project Management
How Does CDMS Add Value? Innovation
Carbon Sequestration
“If we wish to sustain the use of oil, gas, and coal to meet energy demands in a
carbon-constrained world and to provide time to move toward alternative energy
sources, then it will be necessary to plan for and implement CCS over the coming
decades. Subsequently, we should expect a continued need for CCS beyond the
end of the century”.
Graphic showing possible
sites for geological storage
of C02
Source: Michael Sheppard
Source: Michael Sheppard
> Structural > Mechanical > Design > Verification > Project Management > Structural > Mechanical > Design > Verification > Project Management
Innovation – Triaxial Vessel
CDMS-designed 70MPa Vessel for Testing Carbon Sequestration Rates
> Structural > Mechanical > Design > Verification > Project Management > Structural > Mechanical > Design > Verification > Project Management
Innovation – Triaxial Vessel
CDMS-designed 70MPa Vessel for Testing Carbon Sequestration Rates
> Structural > Mechanical > Design > Verification > Project Management > Structural > Mechanical > Design > Verification > Project Management
Case Study – Financial Comparison
ITEM HOURS
RATE
($/hr)
TOTAL
($ AUD)
Civil Engineering 990 196.00 1 194,040
Structural Engineering 1520 196.00 297,920
Mechanical Engineering 1250 196.00 245,000
Piping Engineering 2300 196.00 450,800
E & I 2 - - -
Eng. Check – all disciplines 350 270.00 94,500
Engineering 6410 Sub total 1,282,260
Civil modelling / layouts 420 180.00 75,600
Structural modelling / layouts 1060 180.00 190,800
Mechanical modelling / layouts 710 180.00 127,800
Piping modelling / layouts 1450 180.00 261,000
Civil detailing 1190 140.00 166,600
Structural detailing 2340 140.00 327,600
Mechanical detailing 1660 140.00 232,400
Piping detailing 3350 180.00 603,000
Drafting Check – all disciplines 850 230.00 195,500
Drafting 13030 Sub total 2,180,300
Total Hrs 19440
Total $
3,462,560
Case 1: Engineering Onshore,
Layouts Onshore, Detail
Drafting Onshore
This case study compares the
costs of engineering and
drafting for an actual Oil &
Gas project [cannot be
named] with a total CAPEX of
$75M (AUD). Three different
scenarios are considered as
follows:
Case 2: Engineering Onshore,
Layouts Onshore, Detail
Drafting Offshore
Case 3: Engineering Offshore,
Layouts Onshore, Detail
Drafting Offshore
Case 1 Costs (E, L, DD all Onshore)
> Structural > Mechanical > Design > Verification > Project Management > Structural > Mechanical > Design > Verification > Project Management
Case Study (Cont.)
ITEM HOURS
RATE
($/hr)
TOTAL
($ AUD)
Civil Engineering 1010 196.00 1 197,960
Structural Engineering 1620 196.00 317,520
Mechanical Engineering 1350 196.00 264,600
Piping Engineering 2450 196.00 480,200
E & I 2 - - -
Eng. Check – all disciplines 350 270.00 94,500
Engineering 6780 3 Sub total 1,354,780
Civil modelling / layouts Onshore 420 180.00 75,600
Structural modelling / layouts Onshore 1060 180.00 190,800
Mechanical modelling / layouts Onshore 710 180.00 127,800
Piping modelling / layouts Onshore 1450 180.00 261,000
Civil detailing Offshore 4 1190 28.50 33,915
Structural detailing Offshore 4 2340 28.50 66,690
Mechanical detailing Offshore 4 1660 28.50 47,310
Piping detailing Offshore 4 3350 28.50 95,475
Drafting Check – all disciplines 5 Onshore 3480 230.00 800,400
Drafting 15660 Sub total 1,698,990
Total Hrs 22440
Total $
3,053,770
Case 2 Costs: Engineering
Onshore, Layouts Onshore,
Detail Drafting Offshore
> Structural > Mechanical > Design > Verification > Project Management > Structural > Mechanical > Design > Verification > Project Management
Case Study (Cont.)
ITEM HOURS RATE ($/hr)
TOTAL
($ AUD)
Civil Engineering Onshore 75 196.00 1 14,700
Structural Engineering Onshore 120 196.00 23,520
Mechanical Engineering Onshore 100 196.00 19,600
Piping Engineering Onshore 180 196.00 35,280
Civil Engineering Offshore 6 1010 38.50 38,885
Structural Engineering Offshore 6 1620 38.50 62,370
Mechanical Engineering Offshore 6 1350 38.50 51,975
Piping Engineering Offshore 6 2450 38.50 94,325
E & I 2 - - -
Eng. Check – all disciplines 5 1910 270 515,700
Engineering 8815 3 Sub total 856,355
Civil modelling / layouts Onshore 420 180.00 75,600
Structural modelling / layouts Onshore 1060 180.00 190,800
Mechanical modelling / layouts Onshore 710 180.00 127,800
Piping modelling / layouts Onshore 1450 180.00 261,000
Civil detailing Offshore 4 1190 28.50 33,915
Structural detailing Offshore 4 2340 28.50 66,690
Mechanical detailing Offshore 4 1660 28.50 47,310
Piping detailing Offshore 4 3350 28.50 95,475
Drafting Check – all disciplines 5 Onshore 3480 230.00 800,400
Drafting 15660 Sub total 1,698,990
Total Hrs 24475
Total
2,555,345
Case 3 Costs: Engineering
Offshore, Layouts Onshore,
Detail Drafting Offshore
> Structural > Mechanical > Design > Verification > Project Management > Structural > Mechanical > Design > Verification > Project Management
Case Study (Cont.)
Notes
1. Average rate for allocation of hours based on (approx.) 20% x graduate, 40% x
experienced, 30% x senior, 10% x lead rate
2. E&I engineering and drafting subcontracted onshore
3. Increase in engineering hours to account for packaging of drafting and / or
engineering works for offshore provider
4. Hourly Rate $25 - $32 (AUD) for drafting from Bangalore Office (Note: $55 –
$65 (AUD) for drafting resources supplied ‘onsite’). Rates all inclusive.
5. Hours include expatriate drafting management and/or engineering
management. Allowances for checking time based on actual metrics from
previous projects with offshore packages
6. Hourly Rate $35 - $42 (AUD) for engineering from Bangalore Office. (Note: $65
– $80 (AUD) for engineering resources supplied ‘onsite’). Rates all inclusive
> Structural > Mechanical > Design > Verification > Project Management > Structural > Mechanical > Design > Verification > Project Management
Case Study (Cont.)
Engineering & Drafting Cost vs Total Project Cost
EPCM Cost vs Total Project Cost
EPCM Cost = E&D + $4.5M (E&I + procurement + construction management)
Summary of Costs
Case EPCM Cost ($) Total Project ($) EPCM % of Total Delta (%)
1 7,962,560 75,000,000 10.62 0
2 7,553,770 74,591,210 10.13 0.5%
3 7,055,345 74,092,785 9.52 1.1%
Case E&D Cost ($) Total Project ($) E&D % of Total Delta ($)
1 3,462,560 75,000,000 4.62 0
2 3,053,770 74,591,210 4.09 408,790
3 2,555,345 74,092,785 3.45 907,215
> Structural > Mechanical > Design > Verification > Project Management > Structural > Mechanical > Design > Verification > Project Management
Case Study (Cont.)
Comments
• The additional work that has gone into packaging up the WBS, producing SOWs, managing
the additional subcontracts and providing expatriate management, has created an overall
potential saving (assuming all other things being equal) to the project of 1.1%
• The numbers could be run again using the ‘onsite rates’, reducing the checking time
proportionately and removing the expatriate management costs
• No case has been looked at where layout drafting is also done offshore
• Is the 1.1% difference adequate mitigation against the potentially additional risks including:
− the increased difficulty in controlling schedule
− inefficient / overdesign
− the inherent errors and continual rounds of markups and re-work
− communication issues and the increased complexity of managing the project
integration
− scope crossover / inefficiency
− the low morale of the local team
> Structural > Mechanical > Design > Verification > Project Management > Structural > Mechanical > Design > Verification > Project Management
Conclusions
1. More needs to be done by the government to ensure local service
providers realise actual, measurable benefits from the potential
opportunities in the Oil and Gas sector
2. Simple comparison of rates for engineering and drafting services
will always appear to support the case for offshoring. However,
the actual savings over the total project value are not as
impressive, particularly in light of the additional risks
3. There are competent, experienced engineers in Perth – we need
to ensure there are viable and fruitful (project) avenues to transfer
their knowledge
4. We need to shift our thinking and not simply accept that the bulk
of the engineering and drafting on major projects has to be done
offshore
> Structural > Mechanical > Design > Verification > Project Management > Structural > Mechanical > Design > Verification > Project Management
References
• Australian Trade Commission, Oil & Gas Industry Capability Document, 2013
• Department of Commerce, Assessment of the Engineering Design Capability &
Capacity in the Oil & Gas Sector in WA, 2011
• World Bank Study, Local Content Policies in the Oil & Gas Sector, 2013
• APESMA , Report to the Western Australian Government on local engineering
issues and policy, February 2013
• Carbon Capture and Sequestration, Paper by Michael Sheppard
> Structural > Mechanical > Design > Verification > Project Management > Structural > Mechanical > Design > Verification > Project Management
Questions?
> Structural > Mechanical > Design > Verification > Project Management > Structural > Mechanical > Design > Verification > Project Management
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