In the media: Capex projects in the process industry in a time of rapid change
02/21/2023
Rising energy prices, reduction of nitrogen emissions, personnel shortages and changes due to the Covid pandemic, are affecting business investments in the process industry. With the current volatility, it is difficult to plan large Capex projects, which anyway quickly have a two-year lead-time from concept to implementation. Companies are therefore intensively looking for methods to be more resistant to the influence of these external factors.
The consultants and engineers of Bilfinger Tebodin, have to deal daily with the increasing uncertainty in the market. During a discussion session at the European Industry & Energy Summit 2022, Joost Zittema, Jeroen Triepels, based on questions by Wouter van Gerwen, offered a look behind the scenes at Bilfinger Tebodin. They explained what they encounter with customers and how to deal with Capex projects in these uncertain times.
Financial predictability
A major bottleneck in large projects is financial predictability. According to Jeroen Triepels, Region Director at Bilfinger Tebodin, customers struggle to forecast long-term costs due to volatile energy and transportation prices, and rising labor costs. 'Since the beginning of 2021, equipment costs have increased 16% and installation and bulk materials have become 31% more expensive. Contractors are also harder to schedule, and when they succeed, it is at higher prices. You see costs increase during a project. What happens to your business model if there is a substantial increase in the prices of, for example, raw materials, transportation, energy, personnel or allowances? That affects the validity of the business case.'
Environmental requirements
There are also more and stricter environmental requirements coming at companies. Joost Zittema, Consultant Industrial Sustainability, sees that there are all sorts of unknown factors that threaten the process industry and cause projects to be delayed or postponed. Examples include the impact of increasingly stringent nitrogen regulations or the reduction and pricing of CO2 emissions. 'In practice, these new rules often lead to the postponement of projects and during the waiting period materials become more expensive.’
Bilfinger Tebodin's customers are not the only ones who have to deal with constantly changing environmental requirements; their customers must also comply with them. ‘Sustainability and circularity are seeping further and further into the production chain from society. For example, there are calls for less packaging or circular materials. Companies must comply with these to maintain their license to operate.’
Dealing with complexity
Although the externalities cannot be influenced or controlled, Zittema says we can assess sensitivity to changes in these externalities. 'Based on this sensitivity, and the cost distribution, different investment options can be evaluated. This also makes it possible to establish a range for the investment costs of the various options. This forms the basis for the final investment decision. This sensitivity analysis also clarifies the risks to the business case. Based on this, action can be taken to mitigate risks. During the course of a project, risks and measures are regularly reassessed and coordinated with stakeholders.'
The latter is very important, Zittema argues. 'Often decisions are made by one organization, but you have to integrate all stakeholders and keep them informed about the status of the project. That is how you keep them aligned and involved. We also follow trends and international standards and create a sustainability plan for stakeholders. In doing so, we focus on the total life cycle of both the product and the production process.'
Culture change
Dealing with uncertainties, according to Triepels, requires a cultural change from linear design thinking to a more open approach with constant change and small adjustments. 'Traditional projects focus on as little change as possible. The new situation sometimes causes stress. Engineers always base their decisions on facts and now they have to make decisions based in part on risk sensitivity. The big challenge in this way of working is good cooperation with everyone in the chain. We therefore organize special workshops with the customer to keep everyone involved and informed.’
Pitstop
One of the workshops is the so-called Pitstop. Triepels: "In this workshop, we determine the success factors of a project and identify the risks that could potentially hinder this success. Based on this outcome, some options are discarded. By testing the remaining scenarios against different criteria, a weighted choice can be made. We outline these remaining options at a high level, including investment cost implications and sensitivity to external factors. Finally, we do an interactive planning session to understand the timeline. These Pitstop sessions are repeated regularly throughout the project to reassess risk and sensitivity.'
This approach also includes compliance and sustainability. This is necessary, according to Zittema, because laws and regulations in this area are constantly changing. 'To ensure that our customers meet both their sustainability ambitions and their license to operate, an integrated approach is needed.'
Summing up, Van Gerwen stated; "The fact-based linear engineering model must be replaced by an iterative model with partial assumptions that require immediate verification and validation. Above all, all stakeholders must remain informed, aligned and engaged.'
