World-Class Project Performance with Value Improving / Best Practices

1. World-Class Project Performance with Value Improving / Best Practices Dr. Nick J. Lavingia, P.E. Chevron Project Management Consultant APEGGA Annual Conference, Calgary April 26-27, 2007 Nick Lavingia

2. Dr. Nick J. Lavingia, P.E.Project Management ConsultantChevron Nick has over 30 years of Global Project Engineering, Management, Consulting and Training experience in the Energy industry. As a Project Management Consultant at Chevron, he provides Consultation and Training to Project Professionals worldwide. Nick has a B.S. and M.S. in Chemical & Petroleum-Refining Engineering and a Ph.D. in Engineering Economics & Management from the Colorado School of Mines. He is a registered Professional Chemical Engineer in the State of California. Nick is a member of Project Management subcommittee for Athabasca Oil Sands expansion project. He has published and presented many papers at technical organizations and is a recipient of industry award from Pathfinder for outstanding Contribution to the advancement of Project Management Technology and Chevron Chairman’s award for implementing Value Engineering throughout the corporation. Nick Lavingia

3. Agenda • What are Value Improving / Best Practices? • What is the Impact of these Practices on the Bottom Line? • When to Conduct these Practices? • What is Selection Criteria for Applicable Practices? • Who should Participate in the Workshops? • What Information is Needed for the Workshops? Nick Lavingia

4. $ $ D AFE D D PFD D P&ID D EST EST Value Improving / Best Practices Phase 1 IDENTIFY & Assess Opportunities Phase 2 SELECT from Alternatives Phase 3 DEVELOP Preferred Alternative Phase 4 EXECUTE (Detail EPC) Phase 5 OPERATE & Evaluate (Share) • Pre-Funding Assessment • Decision & Risk Analysis • Project Execution Planning • Lessons Learned • (Seek) • Value Improving Practices by IPA • Peer Review • Post Project • Assessment • Business Evaluation Legend: AFE = Appropriation for Expenditure D = Decision Point PFD = Process Flow Diagram IPA = Independent Project Analysis, Inc. P&ID = Piping & Instrumentation Diagram Nick Lavingia

5. Project Execution Planning--Part A(The Strategic Project Planner by Richard Westney) Defining the business goals that will determine project success Nick Lavingia

6. Project Execution Planning--Part B(The Strategic Project Planner by Richard Westney) Defining major phases, milestones, risks, organization, staffing and best practices to be used Nick Lavingia

7. Project Execution Planning--Part C(The Strategic Project Planner by Richard Westney) How time, cost, quality and resources will be managed Nick Lavingia

8. What are Value Improving Practices (VIPs)? According to IPA: “VIPs are out-of-the-ordinary practices used to improve cost, schedule and reliability of capital projects”. • Used primarily during Front-End Loading • Formal, documented practices involving a repeatable work process with measurable results • Almost always facilitated by specialists from outside the project team There are dozens of special practices used in the industry that are possible VIPs such as team building, peer reviews, etc. Only practices with a demonstrated, statistically reliable connection between use and better outcomes are deemed VIPs. VIPs are more than: • “Just good engineering” • A special look at some aspect of the project • Cost reduction exercises • Audits • Project readiness reviews Nick Lavingia

9. Impact of FEL & VIPs (from IPA) RELATIVE CAPITAL COST AS A FUNCTION OF FEL 1.2 1.1 Relative Capital Cost FEL Improvement Only 1.0 Industry Average Cost = 1.0 0.9 FEL Improvement plus VIPs Good Fair Poor Best Practical FEL Rating Nick Lavingia

10. $ $ D AFE D D PFD D P&ID D EST EST Value Improving Practices by IPA* AFE Phase 1 IDENTIFY & Assess Opportunities Phase 2 SELECT from Alternatives Phase 3 DEVELOP Preferred Alternative Phase 4 EXECUTE (Detail EPC) Phase 5OPERATE & Evaluate • Classes of Plant Quality • Technology Selection • Process Simplification • Design to Capacity • - System Levels • Constructability • Customized Standards • Waste Minimization • Energy Optimization • Process Reliability • Modeling • 3-D CAD • Value Engineering • - Equipment Sizing • Predictive Maintenance Legend: AFE = Appropriation For Expenditure (Full Funding) EPC = Engineer, Procure & Construct CAD = Computer Aided Design PFD = Process Flow Diagram D = Decision Point P&ID = Piping & Instrumentation Diagram * IPA’s Value Improving Practices are Statistically Correlated with added value. Nick Lavingia

11. Classes of Plant Quality “A structured team review focused on validating project objectives and establishing the corresponding purpose design approach that best correlates with business needs. Also establishes the necessary facility to meet business goals. Characteristics such as capacity, life, product quality, flexibility, expandability, reliability, etc. are agreed to with decision maker”. Selection criteria: • Required on ALL projects to align project team with business objectives Documents required: • Spreadsheet with information on all 4 categories Who should attend: • Project Team and Project Sponsor When Used: • Phase 2 Nick Lavingia

12. Classes of Plant Quality--Categories CHARACTERISTICS Nick Lavingia

13. Technology Selection “A formal systematic process by which a company searches for technology outside of the company (or, in some instances, in other divisions within the company) that may be superior to what is currently employed”. Selection criteria—Use this VIP if: • Alternate technologies are available • There are significant benefits in new technology • Future position in market can be enhanced • Risks and rewards for new technology are understood • There are various types of equipment to perform process function Documents required: • PFDs and cost estimate Who should attend: • Project Team and Technical Experts When Used: • Phase 2 Nick Lavingia

14. Technology Selection--Ranking Criteria Nick Lavingia

15. Process Simplification “A disciplined analytical method for reducing investment costs--and often operating costs as well—by combining or eliminating one or more unnecessary process steps. This VIP uses the traditional Value Engineering methodology (Functional Analysis) to focus on process steps rather than individual equipment”. Selection criteria—Use this VIP if: • Project involves large number of process steps • There are alternative options for performing process function Documents required: • PFDs and cost estimate Who should attend: • Project Team and Process Representatives When Used: • Phase 2 Nick Lavingia

16. Value Engineering “A disciplined method used during design, often involving the use of an internal or external V.E. consultant, aimed at eliminating or modifying items that do not contribute to meeting business needs. V.E. is a creative and organized method for optimizing the cost and performance of a facility. It is a function-oriented, systematic approach to eliminate and prevent unnecessary costs. The purpose of a V.E. study is to improve decision making and obtain lowest life-cycle cost without reducing quality.”. Selection criteria—Use this VIP if: • Capital investment is a key driver Documents required: • PFDs, Plot Plan, P&IDs and cost estimate Who should attend: • Project Team, Experts from outside the Project Team and V.E. Facilitator When Used: • Phase 3 Nick Lavingia

17. COMPANY Function of a Pencil Component Function(s) Cost ($) B S x Make Marks Pencil 0.40 x Eraser Remove Marks 0.05 x Band Secure Eraser 0.03 x Improve Appearance x 0.09 Wood Support Lead x Transmit Force x Display Info x 0.03 Paint Protect Wood x Improve Appearance x Logo 0.02 Advertise Company x Lead 0.18 Make Marks Alternatives--Mechanical Pencil, Marker, Chalk, etc. B = Basic Function S = Support Function 96-06-10 Nick Lavingia

18. HOW WHY SAME TIME PRIOR LATER FAST Diagram -- Definition • Identify functions, not equipment. • Breaks large complex problem down into manageable pieces to facilitate evaluation. • Good basis for brainstorming. • Look for non-value adding steps; Functions that you Do and then Undo: • Cool off, then heat. • Solidify, then melt. • Let down, then repressure. • Dissolve, then dry. • Store, then retrieve. • Use in conjunction with cost information. DESIGN CONSTRAINTS CRITICAL PATH OUTPUT HIGHER FUNCTION INPUT LOWER FUNCTION BASIC FUNCTION SEQUENTIAL FUNCTION CONCURRENT OR SUPPORTING FUNCTION SCOPE LIMIT SCOPE LIMIT Nick Lavingia

19. FAST Diagram--Big Oil Example Nick Lavingia

20. FAST Diagram--Offplot Facilities Example Nick Lavingia

21. FAST Diagram—Office Building Nick Lavingia

22. Value Engineering Documentation Nick Lavingia

23. Design to Capacity “The heart of this VIP is choosing how much allowance should be added to each major piece of equipment or system to meet business requirements. This practice is to set the lowest practical over-design factors to minimize excess capacity. Different equipment types or parts of the plant may be built to different levels of conservatism”. Selection criteria—Use this VIP if: • There is complex process with a number of process steps • Equipment costs represent a major portion of total project cost • Future expandability is critical • Significant pre-investment options exist • Significant cost increase of major equipment at specific capacity points Documents required: • PFDs, equipment drawings and cost estimate Who should attend: • Project Team, Process Representatives and Equipment Experts When Used: • Phases 2 and 3 Nick Lavingia

24. Design-to-Capacity - Level Objectives EQUIPMENT DESIGN-TO-CAPACITY LEVELS Level 1 Level 2 Level 3 TYPICAL PAST PRACTICE EQUIPMENT COLUMNS 1.0 1.10 1.25 1.25 HEAT EXCHANGERS 1.0 1.10 1.25 1.25 REACTORS 1.0 1.10 NOTE 1 1.0 API FURNACES 1.0 NOTE 2 NOTE 2 1.0 LEVEL CONTROLLED 1.0 1.10 1.25 1.0 PUMPS (NOTE 3) FLOW CONTROLLED PUMPS (NOTE 3) 1.0 1.10 1.25 1.10 PIPING 1.0 N/A - NOTE 4 N/A - NOTE 4 1.0 - NOTE 5 RECYCLE CENTRIF. 1.0 1.10 NOTE 6 1.05 COMPRESSOR RECIPROCATING COMPRESSOR 1.0 N/A - NOTE 7 N/A - NOTE 7 1.0 Nick Lavingia

25. Design to Capacity--Example Nick Lavingia

26. Design to Capacity Documentation Nick Lavingia

27. Constructability “Analysis of the design, usually performed by experienced construction manager, to reduce cost or schedule and improve safety in the construction phase”. Selection criteria—Required on ALL projects: • Construction safety is important • Congested plant layout • Require special lifting arrangements • Complex plant for construction or constructed during a plant turnaround Documents required: • Plot plans, piping layouts, equipment drawings and craft discipline drawings Who should attend: • Project Team, Construction Specialist and Heavy Lift Contractors When Used: • Phases 2, 3 and 4 Nick Lavingia

28. Customized Standards “Engineering standards and specifications can affect manufacturing efficiency, product quality, operating costs and employee safety. Sometimes the cost of a facility is increased by the application of codes, standards and specifications that exceed the facility’s needs”. Selection criteria—Use this VIP if the project: • Life cycle cost is the key driver • Owners standards and specs are not mandatory • New specs and standards apply Documents required: • Local and industry specs and standards and cost estimate Who should attend: • Project Team, Specs and Standards Experts When Used: • Phase 2 Nick Lavingia

29. Waste Minimization “A stream-by-stream analysis of how waste is generated by a process and how those waste streams can be eliminated, reduced, recycled, turned into saleable by-products or treated”. Selection criteria—Use this VIP if the project: • Is an environmentally driven project • Generates significant waste • Located in environmentally sensitive area Documents required: • Heat & Material Balances and PFDs Who should attend: • Project Team, Licensors and Technical Specialists When Used: • Phases 2 Nick Lavingia

30. Energy Optimization “A simulation methodology for optimizing the life cycle costs by examining power and heating requirements for a particular process. The objective is to maximize total return based on selecting the most economical methods of heat and power recovery”. Selection criteria—Use this VIP if the project: • Is a significant energy consumer • Alternate designs exist that can reduce energy consumption Documents required: • Heat & Material Balances and PFDs Who should attend: • Project Team and Pinch Analysis Experts When Used: • Phases 2 Nick Lavingia

31. Process Reliability Modeling “Reliability simulation uses sophisticated computer simulation modeling capabilities to simulate the mechanical reliability of a process facility. Reliability modeling is a quantitative analysis of annual production and plant availability aimed at improving overall production capability. The practice is a method for evaluating the affect of different design configurations on plant availability and can help decide what equipment to spare and how to minimize downtime”. Selection criteria—Use this VIP if the project: • Reliability and availability are key project drivers Documents required: • PFDs, Plot Plans, P&IDs and Equipment Failure and Repair Data Who should attend: • Project Team, Reliability Group and Simulation Modeling Expert When Used: • Phases 2 and 3 Nick Lavingia

32. Reliability Modeling Reviews impact on total facility Highlights areas of opportunity Allows unlimited “What-If” cases Model can easily be updated Highlights impact on revenue stream Determines overall plant or facility operating factor Reliability Centered Maintenance Reviews one piece of equipment Identifies how to improve operating factor Reviews how to decrease maintenance expense Develop contingency plans in the event of a failure Determine how to mitigate failures Reliability Modeling Vs. Reliability Centered Maintenance Nick Lavingia

33. Reliability Modeling--Data Needed Operating Rate (Units/Hour) Scheduled Outages--Frequency (#/Year) Scheduled Outages--Duration (Hours) Equipment Description (Model #) Equipment Failure Rate (#/Year) Equipment Repair Time (Hours) Nick Lavingia

34. Reliability Modeling--Benefits • Quantifies Operating Factor • Provides a Tool for “What if” Cases • Provides data to justify Capital Expenditures • Identifies areas for Reliability Centered Maintenance (RCM) Nick Lavingia

35. 3-D CAD “Extensive use of 3D Computer Aided Design (CAD) during FEL and detailed engineering. The objective is to model the project in the computer to reduce the frequency of dimensional errors and spatial conflicts that cause design changes during construction. The use of 3D CAD also improves visualization for operations input and training”. Selection criteria—Use this VIP if the project: • Is a greenfield project or stand alone • Existing facility drawings are available in 3D CAD Documents required: • PFDs, Plot Plans, P&IDs, Detailed Equipment Arrangements and Equipment Drawings Who should attend: • Process Licensors, Technology Specialists and Contractors When Used: • Phases 2, 3 and 4 Nick Lavingia

36. Predictive Maintenance “An approach to maintaining facilities whereby equipment is monitored and repairs effected as indicated before failure. Predictive maintenance makes use of advances in sensor and instrumentation technology to monitor characteristics such as heat, lubrication, vibration, cracking, noise, and presence of corrosion products”. Selection criteria—Use this VIP if the project: • Involves large rotating equipment or machinery • Reliability and availability are key project drivers Documents required: • PFDs, Plot Plans, P&IDs and Equipment Drawings Who should attend: • Project Team and Predictive/Preventive Reliability Group When Used: • Phase 3 Nick Lavingia

37. Summary Structured Project Development & Execution Process and Application of Applicable VIPs at the Right Time with the Right Participants can help achieve World-Class Project Performance: • Better • Cheaper • Faster • Safer PROJECTS Nick Lavingia