Managing your offshore project: Front-end Loading and cost accuracy

In part two of his series on the best ways to manage an offshore development, Leandro Basilio takes us through best practice in the crucial front-end loading stages

Given the magnitude of investment observed in an offshore full field development, it is necessary to adopt appropriate methods and processes to ensure the economic viability of the projects, as well as to effectively control the fulfilment of scope, schedule, quality and risk mitigation.

In the past decades, various initiatives have been put in place to organise project management knowledge with an emphasis on methodologies outlined by the Project Management Institute (PMI) and Independent Project Analysis (IPA).

The oil and gas industry has consistently used the combination of both methodologies of the PMI and IPA in the development of major projects, with particular attention on the front-end loading methodology (FEL), which combines an approach of so-called "rolling wave planning", with a vision of technical and cost integration in the light of the IPA's empirical tools.

Figure 1 shows the typical phases of an offshore full field development project, adapted from BARBOSA et al.


Figure 1 - Typical phases of an offshore full field development project, adapted from BARBOSA et al.

As shown in Figure 1, the FEL methodology is focused on the early stages of a project, aiming at progressively increasing the level of maturity of technical information, limiting investment in each phase, and ensuring that the decision-making about the continuity of the project in each phase can be developed based on both technical and financial documentation.

After the approval of the FEL 3, the level of maturity for the project is fitting for the beginning of the execution phase.

A basic exploration of the three FEL phases follows here:

FEL 1: Opportunity identification
- This is the business assessment phase, where the verification of strategic alignment with the company’s business plan and market opportunities takes place.

The engineering associated with this phase is based on an index of similar projects. This step involves the definition of the scope and objectives of the project, as well as an initial estimate of the amount of investment required, by providing a range of variation in cost.

At this stage, the calculation of the main viability indicators is also performed, such as the internal rate of return, net present value (NPV) and discounted payback.

FEL 2: Conceptual engineering
- This is the stage of development that includes the evaluation and selection of conceptual alternatives.

The main focus of this phase is the development of conceptual engineering for options listed in FEL 1, in order to compare the options and define, through the results of the financial-economic assessment of each option, which alternative will make it through to the next phase.

At this stage, analyses of technological and construction solutions available are performed, aiming at evaluating and selecting alternative concepts, along with the development of conceptual specifications and cost estimates, within a range of variation. In the case of best estimates this will range between -15 per cent and +20 per cent if considered as a reference Class 4, or between -10% and +10% if considered as a reference Class 3, as defined by AACE International.

This is also the point of the process where value improving practices (VIPs) are workshopped as a formative guide for the basic engineering phase.

It is possible that more than one conceptual alternative is recommended for the next stage. This option is customary for projects that exhibit high technological complexity, when a design competition may be recommended in the next phase.

In FEL 2, financial KPIs are crucial to approve the project to proceed to the next phase: if the return on investment has a calculated NPV of less than zero, the project should either be cancelled or revised.

FEL 3: Basic engineering - 
In this phase, the focus is the construction and the preparation of the project for its corporate approval and future implementation.

The basic engineering of the selected option in FEL 2 is performed, allowing the calculation of project capex with greater precision. The engineering solution selected in FEL 2 is technically detailed and more VIPs are considered in the development of the basic engineering design.

In this way, it is possible to obtain a variation in costs, in the best estimate, between -5 and +5 per cent, according to Class 2 of the cost estimates classification matrix, defined by AACE International, in addition to the consolidation of the main KPIs for economic viability.

The correlation of the classification of cost estimates defined by AACE International and the FEL methodology follows specific business criteria defined by each company. In some corporations, the FEL phases are subdivided, generating sub-phases such as FEL 2a and FEL 2b.

This subdivision reflects the need to create intermediate gates for decision-making, seeking to prevent long stages leading to inadequate solutions regarding the achievement of general interests for the company. Figure 2 shows the accuracy ranges in the cost estimates based on the classes, represented by the blue area of the chart, according to AACE International.


Figure 2 - Accuracy ranges in the cost estimates based on classes, according to AACE International

Based on the description of the phases of an offshore full field development project, it is possible to conclude that the level of integration between the various disciplines in the FEL 1 and FEL 2 phases is crucial in the generation of optimised solutions with a focus on financial and economic KPIs.

Due to many limitations and constraints observed in an offshore project, the generation of alternatives in these phases has been usually based on the development of concepts with the greatest technological maturity and with the lowest possible capex.

Based on this approach, the generation of optimised concept options with a focus on NPV, presents a high cost in terms of time and required engineering resources. Therefore, the evaluation of the NPV of each conceptual alternative is usually performed as an isolated function of the finance discipline, calculated at the end of the engineering process.

With the fron-end loading plan covered, we will use the next part of our series to cover the general concepts involved in the conceptualisation phase and the usual workflow for the elaboration of alternatives in a full field development project.