There must be a paradigm shift in the way EPC projects are delivered in the next decade. For oil & gas projects, the outcomes are largely predictable. However, decarbonization projects are relatively new so there is greater need for mutual learning between the client and the contractor.
Baroruchi Mishra, Group CEO, Nauvata Energy Transition (NET) talked about this and more in a candid interview with Times Tech.
Q. With over three decades in oil & gas and now energy transition, how do you envision the next decade for EPC and PMC companies in adapting to the decarbonization wave?
Baroruchi: There must be a paradigm shift in the way EPC projects are being delivered. EPCs will need to significantly improve in the following areas:
Goal Alignment: Greater alignment of goals with the clients will be needed. For Oil and Gas projects, the outcomes are largely predictable as large number of projects have been delivered in this space. However, decarbonization projects are relatively new and so there is a greater need for mutual learning between the client and the contractor to manage risks and to ensure predictable outcomes. A “One Team” approach helps increase mutual trust and deliver the desired project outcomes.
Dealing with Technical Novelty: While Solar and Onshore/Offshore winds , the two key sectors of decarbonization, will lend themselves to a cookie cutter approach in engineering and project delivery i.e. repeatable, standardized and offering significant opportunities for supply chain reuse, New Energies projects like Hydrogen, Offshore Floating Winds, Biofuels ( 2G, 3G Ethanol), BioLNG, CCUS etc. have significant elements of novelty in them. Ability to deal with novelty needs ingenious approaches to problem solving.
The current EPC style of engineering and subsequent delivery of the contractual scope based on the “rely-upon-information” provided by the client, will need to change to a joint problem solving approach.
Dealing with cost challenges: Most of the decarbonization projects are cost-challenged. So the typical approach of EPC contractors managing risks with front loading of risk premiums is going to be suboptimal – both for the contractors and the clients. High costs will dither project developers from undertaking these projects – this is a lose-lose proposition for both parties.
EPCs will need to ensure that clients pay only for risks that materialize after the risk mitigants have been transparently applied. New approaches to risk management like Bow-Ties with strong and rehearsed preventative and control barriers will need to be jointly developed by the client and the contractor.
New Contracting Constructs: Decarbonization projects will also need contracting constructs which are different from Lum Sump/BOT type EPCs. Cost transparency will be key to cost control. Some contracting approaches that could be used are Open Book Estimation ( OBE) method with a price ceiling, Convertible Re/EPC (reimbursable initially , converted to Lump Sum EPC when quantities and prices are established), EPCM with an outcome based fee structure , Split Contracting with Wrap Around Guarantee (WAG) Agreements etc. These could offer higher productivity at an optimal cost.
Digitalization – key enabler: EPC companies will need to adopt digital tools at the enterprise level so that they can be effortlessly applied to individual projects, and not only if the “client pays for it”. This will help optimize costs and improve productivity. Use of 4D, 5D planning tools, real time visualization, digital twins etc. improve capital and/or execution efficiency. For supply chain optimization, it will help to evaluate use of block-chains to ensure an optimal supply chain management through traceability, transparency and smart contracts, which are self-executing agreements with predefined rules and conditions to automate and streamline various supply chain processes.
Project Management Consultancy (PMCs) will also need to change. Unlike the present, where the PMC acts as a contractor to the client, the PMC has to become an integral part of the project management team of the client. In the current construct, most of the PMCs are manhour-based contracts, which do not help as they are not outcome focussed. Clients need to form an Integrated Project Team (IPT) without duplication of roles between the client and the PMC. This will create ownership for the outcomes in the PMC and will prevent the Client and PMC from doing business with each other , rather than managing the project!
Re-skilling to close the skills gap will be key to both the EPC/PMC contactors and the clients. In PSUs, which have the financial heft to undertake decarbonization projects, there is a need to develop skill sets for Project Management .Unlearning and relearning will be key to success.
Very often, the only way the PSU teams manage projects is by throwing a copy of the contract at the contractor and/or by reading the riot act on Liquidated Damages( LD’s) for delays, without realizing that schedule is not of the essence when the LDs are imposed. The concept of keeping the contactor cash-flow neutral which is principle 1.0.1 of any project management is not well understood by the clients. Cash flow neutrality can be achieved without allowing the contractor to indulge into unjust enrichment.
When working for the BG Group, project managers like me were sent to the Said Business School, Oxford for Project Management training. We interacted with industry experts there to understand the best practices in managing risks and delivering predictable outcomes on our projects. It used to be a tremendous learning ; we could bring to bear that on our company projects. Some companies like Shell have Project Academies which train project Managers.
Q. During your tenure at Shell, you were involved in several cutting-edge initiatives in plastic circularity and green hydrogen. What learnings from Shell are you applying at NET Enterprise to drive new energy solutions?
Baroruchi: I am trying to be bring in global best practices in our project delivery at NET although it needs to be said that through its JV with SBM Offshore ( one of the largest global players in the FPSO segment) , engineering best practices of global players are already ingrained in NET’s ways of working. Some areas I am working with the teams are as under:
Rigour in Stage Gate Delivery : The stage-gate delivery focus with a clear understanding of engineering and project deliverables at the end of Select, Define and Execute phases of the project lifecycle is key to success . Many of our clients have not carried out FEED( Front End Engineering Design) or sometimes their expectation of FEED is akin to Detailed Engineering outcomes. I try to use my learnings from BG Group and Shell to ensure that the right level of Project definition is provided to the clients at each stage of the Project.
Avoiding Belt and Braces approach: Fit for purpose scope is key to keeping costs down specially in energy transition projects. Designing a facility with excess redundancies adds to the Capex and the Total Cost of Ownership. Companies like Shell deploy the concept of competitive scoping to get to a minimum technical scope that meets the project intent safely.
Novel approaches to Risk Management: Quite a few technologies in the Energy Transition projects are at a TRL6/7 (Technological Readiness Level); at TRL9, the technology is completely commercialized. Commercializing of a new technology at scale is a challenge. Our ability to put an upper bound on the technology risk and assign a monetary value to it would prevent cost and schedule surprises during execution. To do this, understanding the strengths and weaknesses of the technology is important.
Companies like Shell use a concept called Development Release (DR) which is a statement of readiness of a new technology for commercialization. DR is preceded by a very rigours support and challenge process and peer reviews. I am using these learnings to help clients choose the right technology whenever an opportunity presents itself.
Use of benchmarking: Credible benchmarking to understand whether the costs and schedules are appropriate, would be key to success. There have been instances where teams have worked on FEED for greenfield Deep-Water Oil and Gas projects with three month’s delivery timeline which beats any available benchmark ( not even a Best In Class Benchmark); this could lead to suboptimal project definition at FID.
Proper use of benchmarks to set targets for cost at the front end of the project life cycle and creation of an opportunity register to get to those targets is a good practice that companies like Shell follow. On target-setting , IPA, one of the better-known project benchmarking and analysis companies, have established the dictum of “you get what you set”- within limits of credibility of course!
Defining the Project Premise, Value Drivers and Key Success factors. Sometimes the projects move by drift if the direction is not clearly set in the beginning. This leads to suboptimal outcomes. The responses of the Project leadership and the projects teams to dilemmas that crop up during the project delivery are also not well resolved in the absence of a clear project premise and a clear set of value drivers for the project. Also, a widespread understanding of the key success factors helps the team prioritise actions that have a direct contribution to the project success.
Team development and team integration; Great teams deliver great outcomes. Projects which are well resourced with competent people and have good team dynamics within the team, are bound to give better results.
Q. CCUS is emerging as a pivotal decarbonization tool. Based on your experience with ONGC and others, what are the key hurdles and opportunities in implementing CCUS projects at scale in India and globally?
Baroruchi: I would say most of the hurdles are in the mind. There is a large section of our technocracy who do not believe in CCS as a pathway for helping India meet its NET Zero goals. Some believe that CO2 utilization (the “U” in CCUS) will help but it has been well established that there is only a limited abatement possible with CO2 utilization alone.
To achieve Net Zero by 2070, India will need to capture and store 0.5 to 1 giga tonnes/annum of CO2 by 2050. Out of our total emission of 3.5 gigatonnes of CO2/year , 0.4 gigatonnes will need to be captured and stored in depleted oil and gas fields or in saline aquifers – every year, starting today! This will ensure a just transition, which will allow continued use of fossil fuels to ensure that the energy security, energy equity and sustainability are in balance for the country and the hard to abate sectors – cement, steel and power, continue to contribute to its GDP growth. Against this requirement, we are at nil now.
Winds, Solar and EV are the only three material initiatives that are being implemented to reduce our carbon footprint. Biofuels, Hydrogen, CCUS need to be brought into the mix at scale soon.
I have talked about some of the hurdles before – they largely relate to
Lack of awareness and/or urgency – CCS projects are seen as too abstract and not value generating in visible terms. The selection/screening criteria for the CCS projects that are applied by the PSUs are the same that they would apply for Oil and Gas projects. Folks don’t appreciate that CCS projects have to be done with a compliance mindset.
Lack of clear policies and regulations: Compliance mindset does not come into play if the policies are not clear and regulations are weak or absent. This is different from Europe/USA where the policies of Carbon Emissions are very clear. Limits to emissions are clearly set and there are incentives to help the industry comply. This has helped the CCS projects framing and delivery in these countries.
Policy confusion around undefined long-term liabilities is another showstopper for companies that would like to undertake CCS projects.
Absence of Proven Geological Reserves – Multiple desktop studies have been carried out but a project level reserve is yet to be proven and a CCS project framed around it. Some MOU’s have been signed with Global companies which are delivered CCS projects but not much has come out of it except reports!
Lack of experiences and fear of failure – This is understandable as we have not done CCS projects in India. However, the fear of failure is amplified by a “fear of audits” in companies like ONGC; this discourages risk taking behaviours. The government auditors themselves have almost no experience or appreciation of how projects are delivered, especially energy transition projects, and yet they have the power to pull up progressive employees who want to deliver by taking some financial/execution risks which might deviate from the norm.
Opportunities:
India sits on a huge opportunity for CCS. Companies like ONGC own most of the Oil and Gas fields. Studies estimate 3.4 gigatonnes of unconstrained CO2 storage potential in Oil and Gas fields alone. Saline aquifers have an unconstrained storage potential of ~300 giga tonnes. When constraints are applied, the storage would be reduced by ~80 percent in the Indian scenario due to the social (2000 people/km2) and technological constraints ( well density, reservoir/rock properties/zone contamination etc.). Even with this reduction, it would be enough to frame at least ten material CCS projects.
One caveat, however, is that the oil and gas fields are not depleted yet. Therefore, there could be possibilities for companies like ONGC to use the captured CO2 to enhance oil production by CO2 injection through a process call CO2- EOR. It can also evaluate increase in gas production in the coal seams that it operates in Jharkhand by use of CO2 to enhance coal bed methane production through a technology called ECBM.
ONGC and other Oil Companies have the financial heft to undertake these projects and set the process rolling from the country. Ultimately, they would be able to create a revenue stream by offering their CO2 pipeline and geological storage infrastructure to private or public players who would need to capture and sequester their CO2, once the regulations and cap on CO2 emissions come into force.
In this regard, ONGC can emulate ExxonMobil. Exxon is investing heavily in CCS projects as it believes that CCS resents a massive opportunity to make money while helping the environment. It believes that the market for CCS will be worth $4 trillion by 2050. Exxon has already signed six CO2 transportation and sequestration contracts worth 16 million tons per year, thereby creating a multibillion-dollar revenue stream for itself. Some of its contracts are with CO2 emitters like Calpine – the largest power producer from natural gas in the US , CF industries – fertilizer manufacture etc. Exxon has developed a 125,000-acre sequestration site in Louisiana which helps it provide these transportation, storage/sequestration solutions to the hard to abate sectors in the US.
Q. NET Enterprise is now offering front-end engineering, digitalization, and consultancy globally. What differentiates NET’s approach in a competitive EPC landscape?
Baroruchi: Since we are not as big as the large EPCs our processes are simpler and our overheads are lower. We can, therefore, offer a cost advantage. We are value driven; we evaluate the most cost effective development pathway for the client if the client is willing to allow us that space. We offer solutions which could help the client reduce their project costs.
Since I have worked on the other side of the table – as a client in ONGC, Enron, BG Group, Shell etc. for more than thirty two years, I have a good appreciation of what good looks like for the clients in the operate phase of the project where all the revenue is generated. I try to bring that experience into our delivery.
We can offer integrated digital solutions for the operate phase if the clients opt for it. These help with improved productivity, data driven decision making and reduced unplanned shutdowns – these are key to a healthy revenue stream for the operators.
Q.You’ve had an international career with roles in Shell, BG Group, and now NET. How important is global collaboration and cross-border innovation in executing large-scale energy transition projects?
Collaboration is key. At the knowledge level, it breaks the “frog in a well” mindset and attitude. Exchange of ideas and shared R&D ensures lower R&D costs and faster innovation. This is a key success factor for CCUS projects.
At the project delivery level, it helps manage capital risks, achieves financial close faster on the project, helps pool in resources to fill capability gaps and ensures sufficient support and challenge in the team’s so that the optimism-bias of any one company delivering the project is avoided.
Collaboration could also ensure open-access cross-border storage . This is being done in European CCS Projects like Northern Lights (Norway). Depleted Oil and Gas Fields or Saline Aquifers in India could be offered for CO2 storage to European players ; this would trigger a revenue stream that would help to deliver more CCUS projects.
Collaboration also helps with creation of regional carbon markets; entities in one country can trade carbon offsets or carbon credits with another under Article 6 of Paris Agreement or create voluntary carbon markets through use of Verified Carbon Standards by Verra, Gold Standard etc.
Examples of global collaboration on projects in operation are many ; Northern Lights in Norway (Equinor, Shell, Total Energies), Gorgan CCS in Australia(Chevron , Exxon, Shell), Quest in Canada( Shell, Chevron, Marathon Oil), ACTL in Canada ( Enhance Energy, Wolf Midstream) etc.. Projects which are under development are also very heavy on collaboration – Porthos in Netherlands (EBN, Gasunie, Shell, ExxonMobil, Air Liquide), Aramis in Netherlands (Gasunie, Shell , TotalEnergies, EBN) are some examples.
