The energy industry’s low ROI is due to several factors, including persistent market volatility, disruptions in supply and demand, and the fluctuating geopolitical situation. But the biggest culprit is the way capital projects have been managed.
Traditionally, oil and gas companies have built portfolios of large capital-intensive projects with operating models that fail to align with corporate objectives. These models are rife with inefficient processes, deviate from best practices and lack adequate communication, accountability and even engineering talent. They also reflect the risk-averse nature of the industry by perpetuating a culture of “gold-plating” their projects with features and assets that cover every conceivable contingency. It’s no wonder IT spending soars, assets remain underutilized, and project delays and cost overruns become the rule, rather than the exception.
A model for agility
There is a better way. By employing a new, agile operating model, oil and gas companies can plan and execute more capital projects, more quickly, for less cost. This model defines the strategic and technical capabilities and management processes that are needed, by whom and where. The project scope and milestones are tailored to ensure steady progress toward desired outcomes. Transparency, knowledge management and open communication create a culture of relentless improvement. Fit-for-purpose talent ecosystems drive efficiencies at every stage of the project. Critical thinking is encouraged among all parties to simplify work and drive innovation.
From zero to 60
The new capital projects operating model applies zero-based principles and practices to eliminate unnecessary costs. Oil and gas companies can focus on precisely what is needed to achieve the right outcome—not on designs, budgets or operating models that might have been applied in the past. Starting each project from a blank slate has huge advantages. For one oil major, a zero-based approach freed $1.1 billion that could be reinvested in growth.
Importantly, a reimagined capital projects operating model also focuses on speed of execution. Several digital enablers are particularly relevant for accelerating returns, including digital project lifecycle management, which allows companies to follow an integrated, linear, standardized but flexible, intelligent and automated process that serves as the single source of truth throughout the project lifecycle. Digital platforms and cloud-based collaboration tools are also critical because they enable organizations to maintain seamless collaboration across all teams, internal and external.
Operating models that utilize zero-basing and digitally enabled tools have the potential to improve a company’s return on average capital employed (ROACE). Accenture Strategy analysis has identified the potential ROACE impact of capital projects transformation for five major oil and gas companies.
Competitiveness with a capital “P”rojects
Oil and gas companies now have the opportunity to seize a new operating model. Doing so requires them to shift:
- From customized, linear and function-driven design and execution processes to a standardized, agile, cross-functional and integrated approach.
- From a design process that plays it safe to a zero-based process that plays it smart.
- From a network of suppliers that delivers what is asked to an ecosystem of partners that delivers exponential value.
- From traditional skills to new skills, supported by a constantly evolving, sustainable pool of talent and knowledge.
Those that successfully make these transitions will execute capital projects more quickly and economically. Their actions will no longer be driven by schedules or costs, but by a focus on value that boosts competitive agility and fuels the growth the industry needs.