focus on local value

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

E: [email protected]

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


Prelude

“If you think it costs too much to get an expert to do the job,

wait until you call in an amateur!”


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


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


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


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


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


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


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


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.


Local Content Policies – Success or Failure?

0

10

20

30

40

50

60

70

80

90

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


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


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.


Nurturing Local Providers (Cont.)

Source: APESMA


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’


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


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


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


Innovation – Triaxial Vessel

CDMS-designed 70MPa Vessel for Testing Carbon Sequestration Rates


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,


Drafting Offshore

Case 3: Engineering Offshore,


Drafting Offshore

Case 1 Costs (E, L, DD all Onshore)


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


Total Hrs 22440

Total $

3,053,770

Case 2 Costs: Engineering

Onshore, Layouts Onshore,

Detail Drafting Offshore


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


Total Hrs 24475

Total

2,555,345

Case 3 Costs: Engineering

Offshore, Layouts Onshore,

Detail Drafting Offshore


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


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


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


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


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


Questions?


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