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Project Overview
When BG Group entered the Ladder LNG project, the successes and challenges that it would encounter over the next few years were unforeseen. Ladder LNG provides BG Group project managers with a powerful example of how complex projects can change over time, and how issues can be resolved with a shared commitment to get the work done, focused stakeholder partnership and influencing, and an innovative approach to solving project issues. Ladder LNG is a joint venture established to construct and operate a liquid natural gas (LNG) import terminal in Bridgehead, in the country of Westland. BG Groups board sanctioned investment in the project in September 2004 at a cost of 144 million, with projected completion in November 2007. The project was structured as a joint venture between three shareholders: BG Group, owning a 50% interest in the development, Asiagas owning 30% and Gogas owning 20%. BG Group and Asiagas each contracted for 50% of the capacity in the terminal. The governance of Ladder is provided by a board of five directors two from BG Group and Asiagas and one from Gogas with a BG Group employee as General Manager. The strategic intent of the project was to diversify BG Groups LNG portfolio and secure import capacity for the expected growth in the Westlandic gas market. The contractor selected for both the front-end engineering and design (FEED) and engineering, procurement and construction (EPC) was a joint venture between Fisher and Teknik (FTJV), led by Fisher in a 70:30 split of responsibility. Fisher was responsible for the overall management of the project with monthly reporting obligations to Ladder LNG. This was a fixed price contract, so the anticipated risk was contained. The project was completed at a total cost of 224 million in June 2009. Despite the issues encountered, the final construction costs achieved were comparable to the costs of other LNG projects led by competitors1. Moreover, the project had an excellent health and safety record, partially attributable to the Cracked IT programme, in which donations were made to local charities for health and safety performance, thereby creating a culture in which safety was reinforced on the ground. Over the intervening years, the project encountered a number of difficulties and challenges. These will form the subject of this case study, with opportunities for reflection at each of three phases. The intent is to have participants consider how they would have reacted in each of these phases, as well as to reflect on the overall project and what could have been done differently, or should be retained, for use on future BG Group projects.
Based on the EPC Capital Expenditures on LNG Regasification terminals. Sources include: BG Group, Poten and Partners -, Global Insight & Oil and Gas Journal.
As the project progressed, further issues continued to arise. One major issue that arose focused on the internal rate of return (IRR) of the project. The IRR is used by BG Group to evaluate the profitability of a project by comparing project costs with projected revenues over a given time period. The original IRR of the Ladder LNG project was estimated at a relatively low IRR for the industry but above the BG Group hurdle. However, it began to drop after several changes to the initial budget were discovered. The initial assumption of the plant being a baseload LNG facility fell through, causing an increase in projected operating expenses from 5.1 to 7.4 million in January 2005 and reducing the IRR further. Projected electricity consumption increased from 7MW to 13.4 MW, and while the cost of electricity had been estimated at 28/MW, actual costs were closer to 48/MW. This had a further negative impact on IRR. These changes, along with an increase in steel prices that had not been hedged, resulted in a significant drop in project profitability.
Questions You have been assigned by BG Group as the new Ladder Project Manager for the LNG project. 1. What questions would you ask upon your arrival? 2. How well defined was the project at the outset? What technical, commercial and project management due diligence and planning should or could have been undertaken before the start of the project? 3. Make a list of the key issues on the project. Which ones can you affect in your role? Which ones do you need to watch out for in the longer term? Which ones do you need others to become involved with, and how will you obtain their support? 4. What impact do you think the different interests of the project stakeholders will have on the project outcomes? 5. What are the key actions that you would suggest at this point of the project? Consider legal, contractual, cultural and risk factors of the project.
Phase 1 Epilogue
In June 2007, the Ladder LNG team realised that there was an opportunity presented by the refurbishment of the adjacent power station. They negotiated an arrangement whereby the boil-off gas from the Ladder plant could be used by the power station with minor modifications to the plant design. In exchange, the power station would provide Ladder with the electricity it required. This change negated the reduction of IRR caused by the increased electricity requirement and cost. Furthermore, this change in design enabled the plant to store LNG and operate as a merchant plant rather than a baseload LNG plant, allowing deliveries of LNG only once every 500 days, rather than every 50 days. This change would also allow BG Group to exploit price differentials by attracting spot cargoes and redirection/arbitrage opportunities with other BG Group terminals, enabling the direction of shipments to the most lucrative port, rather than having to supply the Ladder plant on a frequent basis. This change also improved the economics of the project by increasing the IRR. To fund this change, the project had to dip into the contingency budget of 20 million to cover some of the cost increases. This decision reduced their ability to respond to later project challenges. Additionally, the team was unable to recover the costs of the increased steel price that had not been hedged for by the contractor. At this point, the nature of the contract meant the project was still operating with limited visibility by Ladder and BG Group into the activities of FTJV. As will be seen in the next phase, the lack of action in this area caused serious implications for the subsequent project delivery.
With the original project deadline three months away and progress moving painfully slowly, Ladder and the shareholders knew that changes were needed. They decided to negotiate a completion agreement with the other partners and FTJV.
Supporting materials Abridged version of Project Reinvestment Approval paper of July 2008.
Questions You have been assigned by BG Group as the Project Manager on Ladder LNG, and your brief is to get the project back on track. 1. How would you structure the completion agreement? What would you include? 2. How would you mitigate the risks on the register at this point in the project? What are the key risks that are missing from the register? 3. What do you think could be done to improve the productivity of the subcontractors? What do you think are the main causes of the poor productivity and poor industrial relations? 4. What risks does a modification to a fixed price EPC contract introduce into a project? What risks does it eliminate?
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Phase 2 Epilogue Ladder made several changes at this point in the project. Firstly, Teknik replaced Fisher in the management of the project, and agreed to provide detailed weekly reports. These weekly reports significantly improved Ladders ability to monitor the project and to ensure that it would be completed to the revised timeline. Secondly, a completion agreement was structured between the partners to address the shortfall and the resources needed to complete the project. Given the revised scope and cost of the project, it was re-sanctioned by the BG Group board in July 2008 to authorise additional project management and contractor costs. The revised budget for the re-sanctioned project was as follows: BG Group share Original sanction Additional contractor Agreement) costs (resulting from Completion million 144 45 18 9 5 3 224
Capital at risk as a result of the partner dispute Additional Ladder project management costs BG GROUP project costs Potential additional contractor fees Total
These costs originated in the following areas: The additional contractor costs (45m plus 18m capital at risk) related to BG Groups 50% share plus Gogas 20% share of the cost of the Completion Agreement (rescue) plan, which was approved in March 2008 Additional Ladder project management costs arose as a result of a significant under-estimate of these costs at sanction in 2004, combined with additional costs associated with the delay in project completion BG Group project costs were not included at all in the original sanction. The schedule delays increased the risk that the EPC contractor might once again run out of funds
The capital at risk resulted from the refusal of Gogas to contribute its share of the cost overrun negotiated in the Completion Agreement, on the grounds that it should be covered as part of the operating expenses rather than the capital cost of the project. BG Group and Asiagas agreed to share the cost of Gogass portion of the over-share in a 70:30 ratio, pending expert determination that they were confident would be won. This dispute was later resolved in BG Groups favour. The major risk, which was not included on the risk register, came from the false security provided by the fixed price contract with FTJV. As can be seen, the fixed price contract continued to tie Ladders hands in terms of demanding accountability from FTJV, who supposedly held the risk in the contract, and resulted in a drastic increase in the project cost.
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Supporting materials Authority Request for EPC Contract Termination Deed Briefing Note on Completion of LNG Import Terminal (22 Nov 08)
Questions You are the Manager on this project in charge of the lessons learned investigation. 1. 2. 3. 4. How would you compile the key lessons learned from Ladder LNG? What points from Ladder should be used in other projects? Who would you include in the lessons learned session? Who were the key stakeholders for this project? How could they have been managed differently to achieve a different outcome? 5. What drivers do you think influenced the behaviour of the different stakeholders on the project?
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Questions 1. What would you do as a Projects Director? 2. What went well on Ladder? What does this show about BG Group? 3. How do value changes (such as merchant plant) get reflected in the project? 4. How do you think the value delivery of the project could be modified? 5. What have you learned about managing legal and commercial risk? 6. How do you think project risk could have been managed differently? 7. What impact does the project complexity and control have on the project outcomes? What can be done to mitigate these impacts? 8. What courageous conversations would you have had and when? 9. How could stakeholders have been engaged differently? 10. How did Ladder integrate continuous delivery and improvement behaviours on the project? What else could have been done? 11. Did Ladder team members show a concern for others on the project? How can this be used on other projects? 12. What opportunities did Ladder have to connect and collaborate within the team? How could more opportunities have been created? 13. How could challenging on the project have been more effective? 14. How did Ladders actions in anticipating and innovating solutions to the extra energy costs improve the project? How could this be done on other projects? 15. How did Ladder team members use impact and influence to achieve the project goals? 16. Did the Ladder team inspire a shared commitment in the project? Why or why not? 17. What aspects of the environment did the Ladder team need to understand to be successful?
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Project Overview
This case outlines the key events of the Albustan project, located in Elbonia and the largest offshore installation ever built and installed in the Gulf of Elbonia. The case highlights the importance of risk management, contracting strategy, and stakeholder management, with regards to both contractors and partners. The Albustan project was part of the third phase of the West Coast Development (WC 3c) conducted by BG Group, together with their partners. The first two phases of the WC Development were completed in 2003 with seven wells drilled from the Addar platform. In April 2005, BG Group and their partners decided to proceed with the further development of the WC acreage. Phase 3 of the development was initiated at this time; the project was split into three parts, phase 3a was the drilling of a sub-sea well tied back to Addar and phase 3b involved the drilling of three more subsea wells also tied back to Addar. Phase 3c, which is referred to here as the Albustan project, involved several integrated components: Installation of a new platform at the Albustan field Drilling of four new platform wells Drilling and tieback of a single subsea well Tieback of the new platform to the existing Addar platform via a 20 pipeline Modifications to the existing Addar Platform to accommodate Albustan Gas as it passed into the export pipeline.
The project entered front-end engineering and design (FEED) in September 2005. Once completed, the board sanctioned the project in July 2006, with full partner approval in April 2007, at an estimated total cost of USD875 million. Project completion was targeted for the end of Quarter 4 of 2008. A consortium of The Halide Company Inc (HCO) and Marine Construction Inc. (MCO), both based in the US, completed the detailed engineering, procurement, installation and commissioning (EPIC). HCO also subcontracted a local company Elbonia Fabricators PL (EFCO) to build the topsides, the largest ever to be built in the country. The project was completed on 14 January 2009 at a total cost of less than USD875 million. At the time of writing, all four platform drilled wells have been completed together with two additional wells (under a separate phase, WC Phase 3d) under budget and ahead of time and have been handed over to operations.
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Supporting materials
Contract Strategy June 2006 Phase 3c Project Objectives June 2006
Questions
You are in charge of the BG Group Albustan Define phase team and are preparing for confirmation of the fixed topside platform design by the readiness review committee. 1. How would you manage the transition from the Define to the Execute phase of the project given that key members of the project team have little or no experience of fixed platform projects? 2. What would you do to alleviate any remaining Partner concerns over the design? 3. How would you manage the stakeholders on the project? 4. What contracting strategy would you advise for the project? 5. What are the critical factors to consider in order to make this strategy work? 6. What would you consider when developing a contracting strategy to manage risk?
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Phase 1 Epilogue
The FEED was completed in July 2006, by HCO, working out of their local office in Elbonia. The end of FEED coincided with a significant turnover in project leadership, which was attributable to the lack of experience in managing offshore platform projects. This change could have had significant impacts for the project. Managers in several critical positions were replaced, including the Project Manager who was a subsea engineer rather than topside expert and the Engineering Manager who had downstream, rather than upstream experience. This provided the project team with appropriate skills going forward giving the project a far better chance of success. Negotiations took place with three consortia in competition. The intent of these negotiations was to reveal profit, overhead and Heavy Lift Vessel availability from the competing entities. The element of competition was retained for as long as possible. Eventually a combination of local content and global experience was achieved through the selection of a consortium of HCO and MCO based in Houston, with a nominated subcontractor for fabricating the topsides being EFCO. As part of the agreement, HCO immediately began the detailed design of the topsides whilst MCO commenced the detailed design for the jacket. EFCO would fabricate the topsides locally. This strategy satisfied expectations for local content, while at the same time providing some surety of project success. In addition, MCO would be responsible for the transportation and installation risks, thereby addressing a significant concern in the project timeline. Of the two other consortia considered, both were unable to commit to the installation equipment required and insisted on a four month FEED verification period. Partner relationships had broken down by such an extent by that an offer was made by the new project team to conduct an independent design review using a contractor of the partners choice. The partners selected SBB (a subsidiary of CFN). This independent review gave partners the reassurance that their concerns were being heard and that the design concept was indeed optimal. This alleviated the concerns of the partners, and allowed the project to move forward to sanction. The BG Group board sanctioned the project in July 2006, with full partner approval in April 2007, at an estimated total cost of USD875 million: Summary of Budgeted Costs Base Cost Development Drilling Pre sanction Costs Total Base Cost Project Contingency Drilling Contingency Total Project Cost $ million 613 151 21 786 63 25 875
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Supporting materials
Phase 3c - RR5 Readiness Review Report June 2006 Phase 3c - Project Execution Plan Phase 3c Cost Estimate Summary
Questions
1. What are the risks involved in the contracting arrangement? 2. Which are the most serious risks to the project at this point and how can they be mitigated? 3. Who should be responsible for the risks? 4. Assess the benefits and challenges of implementing open book accounting on a generic project. Design a plan to implement open book accounting how could this be achieved?
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Phase 2 Epilogue
The open book accounting approach was successful and an independent benchmarking review conducted at the end of the first six months of the Execute phase concluded that the EPIC costs were within an acceptable range, especially considering the market environment at the time. The open-book accounting approach created a high level of trust between the project stakeholders. The use of open book accounting further permitted BG Group to eliminate unnecessary risk premiums by contractors. For example, MCO had estimated the weather risk at USD20 million, which they then increased to $40 million for risk pricing purposes. However, BG Group decided to accept the risk relating to weather themselves and place $20 million within the provisional sums section of the contract to be used only if a weather event occurred (in the event, despite the weather risks occurring, less than $12 million was paid with the remainder retained by BG Group). To address the risks inherent in EFCOs selection, BG Group worked closely with the organisation to ensure that good safety practices were in place. Further, BG Group encouraged EFCO to invest in welding schools that could develop local skills within the community, which could subsequently be deployed on the fabrication effort. The risk of industrial dispute could not be avoided. The weather and labour relations risks did occur, which ultimately threatened the project delivery date. These and other delivery challenges will be discussed in the next phase.
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Supporting materials
Monthly Report no. 50, period ending 25 Jan 09
Questions
You are the Manager on this project in charge of the lessons learned review: 1. 2. 3. 4. What do you think are the key lessons learned from Albustan? What points from Albustan should be used in other projects? Who would you include in the lessons learned session? What drivers do you think influenced the behaviour of the different stakeholders on the project?
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Phase 3 Epilogue
The overall implementation was completed on 14 January 2009, despite the realisation of major risks. In fact, the industrial dispute coincided with delays in the transportation of the jacket and thus allowed extra time to finish the topsides. In the final analysis, despite the realisation of many of the risks anticipated, the platform was ready to start-up on 24 December 2008 and was only held back by the Deepdive III performing the final pipeline tie-ins as the vessel struggled with heavy currents and poor sea conditions. However, the deliberate decisions to contract strategically and to pursue the difficult option of open book accounting allowed the project to proceed through difficult times. Challenges from partners were addressed with external support, and the commitment to aspects like local content contributed to positive relationships with government stakeholders. Although it can be seen that the Albustan project was not without challenges, it has been equally recognised with a number of awards. Contractors MCO and HCO both rewarded the project with internal awards, and BG Group won the Association of Project Management (APM) 2009 Overseas Project of the Year award and Elbonias Energy Chamber Award. It is also worth noting that the success of this project compared to earlier projects in this region improved the overall perception of BG Groups project delivery capability in the area and of the capacity of local contractors. EFCO especially has benefited from follow-on work due to their experience on Albustan, which has had a positive impact on the local economy.
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Supporting Material
Shared Learnings Report.
Questions
18. What would you do as a Projects Director? 19. How do you think the value delivery of the project could be modified? 20. What have you learned about managing legal and commercial risk? 21. How do you think project risk could have been managed differently? 22. What impact does the project complexity and control have on the project outcomes? What can be done to mitigate these impacts? 23. What courageous conversations would you have had and when? 24. How do you think the stakeholders could have been engaged?
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