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Operating System 2.0 - Collaborating to Transform the Projects Industry

Tony BazziniSteve Cabano6 November 2019

Pipeline Leadership Conference 2019

Introduction: Tony Bazzini• Title: Chief Engineer – Project Management, ExxonMobil Global Projects

Company

• Degree: B.E. in Mechanical Engineering, Stevens Institute of Technology

• Experience/Professional Fields:– Responsible for providing guidance to senior ExxonMobil management on a range of complex project

execution and associated technical issues

– After joining Cost Engineering Division in 1981- became project cost engineer on the Cerrejon Coal Project in Puerto Bolivar, Colombia

– In 1987 - transferred to Technology Department's Plant Computing Division to develop computer-based plant monitoring systems

– In 1989 - was assigned to the Exxon Valdez recovery efforts in Alaska. Upon returning, transferred to Exxon Company, International's Supply and Transportation Department

– In 2008 - was named as Manager, Project Management Division, responsible for all project execution & staffing activities for refining and chemicals portfolio

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Introduction: Stephen (Steve) Cabano• Title: President, Pathfinder, LLC

• Degree: BS - Mechanical Engineering, Villanova University

• Years of Experience/Professional Field:• 30 years direct project management experience for owner & government clients

in Petroleum, Petrochemical, Chemical, Environmental, Power, Pharmaceutical, Food & Beverage, Mining, Industrial and Commercial industries

• Project Manager/team member in large project teams: responsible for costs, planning, scheduling, procurement, and similar project-related services

• Professional affiliation memberships include: AACEI ®, PMI, AIChE, ASTD, SAVE; board member and 2019 Chair of the Construction Industry Institute (CII), and Engineering and Construction Contracting (ECC) Association Board Member, (2006-2007 ECC Association Board Chair)

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Safety Moment

Topic Outline• About CII• Today: Current Industry Status• Tomorrow: Desired Future State of the Industry• Results: Expected Impact• Status Update: Fall 2019• Conclusions• Questions & Comments

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7

ABOUT CII

History of CII• Founded in 1983 by 28 organizations; now 143

• Organized Research Unit (ORU) of the Cockrell School of Engineering (CSE) at the University of Texas at Austin (UT)

• First structured owner-contractor-academic research collaboration for the constructed project

• Global collaboration to advance the capital projects industry through research and deployment of Best Practices

CII Member Companies – Owners

CII Member Companies – Contractors

CII Member Companies – Service Providers

CII Safety – Injuries/ 100 Workers /Year14.3 14.2

13.0 13.1 12.2 11.8

10.6 9.9 9.5

8.8 8.6 8.3 7.9 7.1 6.8 6.4 6.3 5.9

5.4 4.7 4.3 4.0 3.9 3.7 3.8 3.6 3.5 3.2 3.1

7.196.12

5.324.31

3.443.00 2.66 2.30

1.60 1.59 1.671.03 1.02 1.23 1.16 0.88 0.72 0.58 0.68 0.57 0.64 0.81 0.43 0.40 0.37 0.42 0.38 0.26 0.22 0.24

0

2

4

6

8

10

12

14

16

19890.33

19900.41

19910.48

19920.50

19930.53

19940.61

19950.64

19960.77

19970.52

19980.77

19991.00

20000.94

20011.12

20021.07

20031.13

20041.20

20051.33

20061.30

20071.77

20082.09

20092.40

20102.27

20112.09

20122.64

20132.83

20143.20

20153.22

20163.33

20172.90

20182.63

Tota

l Rec

orda

ble

Inci

denc

e Ra

te (T

RIR)

Year and Work-Hours (Billions)

Industry*CII

*OSHA Construction Division, NAICS 236-238 (SIC 15-17) Reflects OSHA reporting change

Seventeen CII Best PracticesAdvanced Work Packaging Materials ManagementAlignment PartneringBenchmarking & Metrics Planning for ModularizationChange Management Planning for StartupConstructability Project Risk AssessmentDispute Prevention & Resolution Quality ManagementFront-End Planning Teambuilding

Implementation of CII Research Zero Accidents Techniques

Lessons Learned

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TODAY:Current Industry Status

Industry Advancement?

98%of mega-projects

>$1 Billion experience cost overruns of 80%

(Source: Bechtel)

95%of all projects

FAIL to meet one or more of their

business objectives

(Source: CII)

70%of all projects are not

completed within 10% of budgeted cost or schedule

(Source: CII)

>40%of project capital is

WASTED on transactions

(Source: CII/NTNU)

“I think the current model within our industry is broken.” – Ian Edward, Interim CEO, SNC-Lavalin

(on August 1, 2019, after SNC-Lavalin reported a $1.6B loss and their stock dropped to a 14-year low)

We Are Not Delivering Financially

+60%

Dow Jones U.S. Heavy Construction Index (DJUSHV) vs. DJI (Sept 13, 2014 – Sept 13, 2019):

-11%0.5% profit on $93B in 2018

Dow Jones Industrial Average

Dow Jones U.S. Heavy Construction Index

Poor Productivity (Of Capital)

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• Need to improve capital efficiency

• Not attracting enough investment

• Financially unhealthy (0.5% net profit)

• $1.6T lost productivity each year, globally

• 5.7% increase in U.S. construction cost in 2018 (vs. 1.9% inflation)

• Breakthrough vs. continuous improvement• Improve 2.5% / year via Best Practices, but…

• Industry declines 3% / year

1980’s Piping Productivity vs. Today18

1 Larger diameter, higher pressure and temperature projects (e.g., ethane crackers, LNG facilities, and similar)

Source: 2019 CapExperts LLC

Primary Sources of Transactional Waste

Trends: Increasing Fragmentation and Complexity

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OWNER

SV S SV

V

1960s($10s M)

S VSubcontractor Vendor / Supplier

S

S

S

V V

V

V S

S

OWNER

TODAY($1000s M)

GCENG.

SS

S

S

OFF-SITE FAB.

S

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ENG.

ENG.

GC

GC

BANK BANK

V

V V

OFF-SITE FAB.

VSS

BANK BANK

S

BANK

SS

VV

V

SS

BANK

OWNER

S

V

S SV

V

1990s($100s M)

GCENG.

V

V

V S

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BANK

V

Best Practices are the best of what we know today, but they won’t necessarily

make you successful tomorrow. The world is moving fast. By definition,

Best Practices are yesterday’s news.

• Today’s BEST PRACTICES and technology POINT SOLUTIONS are good, but they aren’t delivering step-change improvement

• Why? Because they are being applied to an inherently broken business model

• We need a NEW BUSINESS MODEL that allows our best efforts to thrive:• Advanced Work Packaging (AWP)

• Early (agile) planning

• Alignment and team building

• Modularization and off-site fabrication

• Zero accident techniques

• …and more…

Band-aid Solutions?

Overused, Yet Nonetheless TRUE

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TOMORROW:Desired Future State

of the Industry

Harmonizing Project Delivery and Business Support

Operating System 2.0 (OS2) Overview• OS2 is a new business and commercial model for the capital

projects industry• How can we use the capital project to enhance business outcomes?• How do we accelerate our organic growth by using our capital better?

• OS2 will enhance the health and stability of the industry• Intelligent finance, accounting, tax, legal platform for a globally-distributed industry• Participating companies can leverage their own capital• Provide enabling environment for point solutions to thrive

• Key words: Distributed, Speed, Agility• Reverse the trends toward costly vertical integration (distributed risk, finance)• Dramatic reduction in time for planning, selecting, engaging, integrating, executing

Key Questions26

“How can the project better enhance business value?”

“Can we make projects a preferred investment choice for the C-suite?”

“Can we eliminate significant transactional waste through better contracting and collaboration?”

“Can we procure materials and services based on ROI/ROCE instead of just initial cost?”

“Can we leverage advanced computing power to improve project outcomes?”

“Can we better take advantage of global trade and tax regulations?”

“Can leasing provide a better option for funding capital projects?”

“Can we improve the overall financial health of the industry?”

OS2 Business Model Comparison27

vs.

Capital Markets

Owners

EPC / CM

Subcontractors

Labor

DistributorsVendors / Suppliers

Manufacturers

Raw Materials Companies

Banks(Owners, Private Equity, Bonds,

MLP’s, Syndicates)

Commercial Finance Integrator (IT) Tax

(Open Source, Cloud-Enabled Thin Platform)

(40% Transactional Cost)

(1/10th Transactional Cost)

TODAY’S “OS1” BUSINESS MODEL OS2

Case Study: Aerospace Industry• B787 Development Cost: From $10B to $6B (-40%)• B787 Development Time: From 6 Years to 4 Years (-33%)

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supports

demands

Suppliers

50 Tier 1 Suppliers

Engineering Engineering

Progression

Ecosystem

Fabrication

Fabrication

Construction

AssemblyPO’sHIGH Transaction Costs LOW Transaction Costs

Business Support (OS2 IAP Sponsors)

Confirmed w/ signed IAP contracts (currently $1.57 million for 9/19-8/20)

Budgeted, expected confirmation by November 1, 2019

Business Support (CII OS2 Research)• Operating System 2.0 (OS2) Industrial Affiliates Program (IAP)• Faculty / Researchers from the University of Texas at Austin• Four initial research areas:

– Supplier Verification– Dynamic Risk Pricing Engine– Blockchain-Enabled Smart Contracts– Permanent Plant Equipment Leasing

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STATUS UPDATE: FALL 2019

Status Update: Fall 2019• OS 2.0 Sponsor Meeting held in early October 2019• Purpose: to obtain Sponsor feedback on proposed direction of OS

2.0 research program • A mix of sponsors attended (BHP, Suncor, CoAA and ExxonMobil)

Status Update: Fall 2019• CII proposed following focus of the initial research effort:

Status Update: Fall 2019• This proposed focus, while interesting, was not thought to be well

aligned with current Industry needs/priorities• E.g. - Equipment leasing area was deemed to be of limited value while

supplier verification was seen as being too narrowly focused on just material & equipment suppliers and not sufficiently expansive to include contracted service providers like EPC providers

• Attendees broke out into two groups to discuss changes needed

Status Update: Fall 2019• After interactive, collaborative discussion – agreement reached to

align initial focus of OS2 program with highest priority needs of the Industry:

Status Update: Fall 2019Revised focus differs from original proposal in several significant ways:• Biggest addition is explicit addressing of risk –

– Primary enabler of issues faced in our business today • Broadened out supplier focus to include contracted services (EPCs) • Recommended engagement of experts from Organizational behavior

and data science areas – Many roots have ties back to interpersonal / team interactions and data

analytics

Status Update: Fall 2019Revised focus differs from original proposal in several significant ways:• Risk model to be based on factors available from both private &

public sources … – Would help increase characterization of risks in transparent fashion

• Tailorable to each company’s needs/unique attributes – Other deliverables will flow from this model

• Will include engagement of multi disciplinary experts from other non-engineering departments

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RESULTS:Expected Impact

projected

OS2 Will Mitigate Escalating Costs

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1998(Actual)

2038(Projected)

2018(Actual)

$100M

$200M

$300M

$400M

$500M

$600M

Nominal $100M Heavy Industrial

Project

Data Averaged Across Multiple Capital

Projects

(1998 Baseline, adjusted for inflation)

$222 M

$568 M

$100M

OS235%

Schedule Comparison: EPC vs. PEpC vs. OS2

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Analysis performed by CII Performance Improvement Group (March 2013)* Each project was normalized to $250M

100% FEP complete PRIOR to PROCUREMENT start (n = 97)

Weeks 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 105 110 115 120 125 130 135 140 145 150 155 160 165 170 175 180 185 190 195 200 205 210 215 220 225FEP 62 weeksDesign 91 weeksProcurement 92 weeksConstruction 93 weeksStart-up 25 weeks

LESS THAN 100% FEP complete PRIOR to PROCUREMENT start (n = 53)

Weeks 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 105 110 115 120 125 130 135 140 145 150 155 160 165 170 175 180 185 190 195 200 205 210 215 220 225FEP 76 weeksDesign 85 weeksProcurement 102 weeksConstruction 78 weeksStart-up 22 weeks

PrairieDog Platform via OS2 Delivery Model (projected)Estimated Range 100-145 Weeks

Weeks 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 105 110 115 120 125 130 135 140 145 150 155 160 165 170 175 180 185 190 195 200 205 210 215 220 225Agile Planning ~113 weeks

Concurrent Design* ~70 weeks

Manuf. & Fabr. ~82 weeks

On-Site Assembly ~40 weeksStart-up ~92 weeks

* Concurrent, Supplier-Led Design (Reuse ~70%; Custom ~30%)

Overall 225 Weeks

EPC

PEpC

OS2

Overall 190 Weeks

35 Weeks (16%)

80-125 Weeks (~50%)

Total Cost of Ownership• 35% cost reduction• 50% cycle time reduction• 60% better ROCE*• 250% more projectsPlus…• 300% more profit for

participants (e.g. engineers, suppliers, constructors, etc.)

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* Return on Capital Employed

Conclusions• Transformation is needed, if we don’t do it, someone will do it for us!• We (the Owners) need to address the business value of capital

spending - we are not in the business of building projects• We (the Contractors) need to focus on providing value, not spending

man-hours• Need to engage our legal, accounting, supply chain, etc.

counterparts in the solution• We cannot be afraid of change: Uber, VRBO, & Tesla have

revolutionized their industries. We need to as well!

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Questions / Comments?

Steve Cabano

Pathfinder, LLC11 Allison Drive

Cherry Hill, NJ 08003(856) 424-7100

slcabano@pathfinderinc.comwww.pathfinderinc.com

Cherry Hill Calgary Houston Mexico City

Tony Bazzini

ExxonMobil Global Projects Company22777 Springwoods Village Parkway

Wellness 2 – 6A.474Spring, Texas 77389

832-625-6828

anthony.m.bazzini@exxonmobil.comhttps://corporate.exxonmobil.com