Article originally published in International Mining (IM), December 2018. Reproduced with kind permission.
After several lean years, EPC and EPCM contractors are starting to refill their order books. Dan Gleeson spoke to several of the biggest providers and found out how they are improving cost and schedule accuracy through technology
It’s fair to say EPC (engineering, procurement and construction) and EPCM (engineering, procurement and construction management) contractors were hit hard, post-2011.
As mining companies took writedown after writedown during the bear market on revised commodity prices and project valuations, contractors were left without any work and a number of previous developments that had suffered from schedule and cost blowouts.
As Dave Lawson, President, Mining and Minerals at EPC/EPCM provider Wood (which took over Amec Foster Wheeler for $3.3 billion last year), said: “The less than prudent M&A and project developments seen during the last commodity Super Cycle had a dramatic negative effect on mining companies.
“There were many projects that endured significant overruns and delays that delivered serious damage to miners’ balance sheets.
“This not only soured the mining companies but, possibly more importantly, the sources of their capital.”
The returns mining companies had promised failed to materialise, leaving project financiers out of pocket and unwilling to fund more developments.
This sentiment is continuing to affect project investment today, and is why most of the capital invested is, so-called, ‘stay-in-business’ expenditure; typically replacing reserves through brownfields.
In keeping with this conservative theme, risk allocation and reduction have become key features in the development of new projects.
As Lawson said: “There is still a tendency to shy away from mega-projects and push toward smaller, less capital-intensive and, sometimes, peripheral projects or phased development (of what would have previously been one-shot, mega-projects) with early cash flow generation funding further phases.”
This risk aversion does not mean projects are not moving forward – there are plenty of brownfield assets on the table, even more blueprints for expansions and the odd greenfield asset – but there are more elements being considered before developments are signed off.
Many contractors IM spoke with said project funding arrangements have a direct bearing on what type of projects are approved.
Ron Douglas, Executive Vice President, Project Delivery, Ausenco, said: “Investment thresholds are often determined by where the development capital is sourced. If commercial debt (or new equity) is required, then a development is required to indicate robust economics. However, if financed from internal cashflow, then it may proceed with a higher risk profile or a lower return.”
Mark Wainwright, Managing Director of Mining for Turner & Townsend – a company often contracted in by EPC/EPCMs for technical assessments – said not all project owners are after the same type of returns.
“Returns can be impacted by the nature of the programme – greenfield, brownfield and stay-in-business – which are funded differently. We also see resource constraints, political pressures and funding sources as other factors playing out in returns,” he said.
In order to affect the projected returns, EPC and EPCM contractors are increasingly seeking earlystage involvement. This should provide them with the ability to take ownership and responsibility for the future direction of the asset in question before it gets too far down the track.
Wood’s Lawson said: “Each stage of a project’s development is built upon and around the previous engineering phase, be it prefeasibility study (PFS), feasibility study (FS), basic engineering or detailed engineering. The incumbent, with experience in the previous phase, should be in the strongest position to win the next phase provided they have the requisite expertise and have delivered successfully.”
Ausenco’s Douglas says: “It is difficult for a client to trust an engineering company with their funds (usually significant sums of money) without early involvement, as it is foolish to just rely on commercial contracts to protect your interests.”
This trust works both ways. Mining companies, still cautious of developing projects based on the capital cost overruns coming in and out of the recent boom, are trying to ensure project schedules and cost estimates are kept to.
There are various ways to do this – employing a contractor from an early stage being one – with some mining companies looking at a fixedprice EPC route. Others are trying to incentivise accurate scheduling with additional payments on top of a normal EPCM package.
Bechtel’s Mining & Metals President, Paige Wilson told IM that the company’s metals and mining division has been including incentive and penalty-based contracts for over 25 years.
“We frequently have key performance indicators tied to ‘how we work together’ in addition to ‘the results’ we deliver.
“This approach fully aligns objectives with our clients, creates a feedback-rich environment and drives the right behaviour on projects.”
Wood’s Lawson expanded on this theme: “There appears to be a resurgence in the EPCM space of a risk/reward approach where some enlightened customers realise the EPCM partner has many factors within its control that can form the basis of equitable risk sharing.
“The project failures of the Super Cycle have produced a reaction from owners who want stronger mechanisms to hold their EPCM contractors responsible.”
There are some golden rules when installing incentives and penalties, according to these EPCM contractors:
- Include clear objectives with reasonable and attainable goals;
- Ensure those carrying the risks are in the best position to control it;
- Make sure an open dialogue with a project owners’ team is established and continues throughout.
EPCM providers are open to signing contracts that dictate such clauses, but they normally only do so where, again, they have been involved at an early project stage and can dictate the project direction.
This is probably why, the big EPC and EPCM contractors are trying to ensure the bulk of project work is carried out in-house.
Bechtel’s Wilson said: “We establish the best combination of both external and internal skills in engineering to project needs, as well as the right balance of construction executed by contractors and direct hire construction by Bechtel.
“Our data shows that when we control the critical path with our direct hire workforce, applying world-class productivity tools and procedures to reduce costs, we add the most value to our clients by constructing the facilities that represent their revenue stream.”
This is all a matter of reducing risk in project execution, according to Christo Visser, Senior Vice President – Origination, for DRA Global.
“In delivering comprehensive solutions, the organisation is able to mitigate overall project risk and interface risk between various contractors – this ultimately leads to overall project risk reduction.
“Financiers also tend to prefer funding projects backed by larger, more established engineering firms and often shy away from contracts that are divided among smaller, higher risk, less profitable, less financially strong organisations,” Visser said.
This ties in neatly with the idea EPC and EPCM providers should be employed in the early stages of a project, a time when having a complete suite of capabilities under one roof is most telling, according to Ausenco’s Douglas.
“Being a mine to port provider is most useful in the study phase where clients have a ‘one stop shop’ and a single integrator of the study document – otherwise the client needs to take on this role and the challenge is ensuring there are no gaps at the interface points,” he said.
The integration of services also has an impact on the overall cost, DRA Global’s Visser says. “This reduces risk for clients through less interfaces which, in turn, places downward pressure on costs by eliminating margins on various companies and reduces management teams required to assist with the project.”
Mining companies and contractors have been aided in cost and schedule forecasting with the evolution of technology. The big data, automation and electrification buzz is not just confined to the operational phase of mining, it also has relevance in design and build.
Turner & Townsend sees opportunities to influence and design project data with recent technology improvements.
“This will focus on the needs of the various stakeholders with a primary focus on:
- “Mapping and understanding what data is really needed for all stakeholders at each gateway approval;
- “Data sharing single-source data and the ability to append the data sets;
- “Timelines of production of the data;
- “Defining the data deliverables in all project consultant contracts with associated timing and sequencing to drive project-aligned behaviours.”
Bechtel’s Wilson said automation and digitalisation were allowing the company’s innovation initiatives to deliver “tangible” benefits.
“On the process innovation side, we are leveraging automation and other process technologies to reduce power and water consumption, and labour requirements in the plants we are designing.”
This also expands to both the project execution and productivity aspects. “We have been investing heavily in developing innovative, industry-leading approaches to improve field productivity,” Wilson said, adding these approaches are being applied to the Chile and Peru copper markets to “drive a step change in execution performance and financial returns to our clients”.
The company has wrapped some numbers around these goals, with Wilson saying a realistic target is to reduce capital costs of large copper concentrate projects by 3-5%, representing some $50-$150 million in savings.
WSP’s Latin America division agreed with Bechtel when it came to the expanding use of automation, digitalisation and management of big data in the region. It said water and energy consumption were two key focus areas.
Wood’s Lawson pointed to a recently awarded PFS contract award with Antofagasta’s Mineral Centinela SA division as a good example of how the company was leveraging these technologies. The project will support the studies of centralisation of monitoring and control for its mining operations in Chile through a “technologically-advanced integrated operations centre”.
This includes cloud-based data storage and information management for the company’s operations.
More and more, EPC and EPCM providers are developing their own unique expertise in these fields to differentiate their offering.
Pöyry’s Director of Mining & Metals Technology, Janne Tikka said: “ The development in process automation has enabled Pöyry to design the most energy and cost-efficient plants throughout the industry sectors. At the same time, Pöyry has developed its own EPCM deliveries towards more automated solutions using modern planning and management tools.”
Its Smart Site™ “toolbox” for industrial plant digitalisation is one example of this, where all site processes and operations are designed and implemented to increase efficiency and support sustainable solutions through digitalisation and intelligence of different systems.
In Australia, specific projects have upped the ante when it comes to the use of digitalisation and automation, according to WSP (which incorporates brands such as Parsons Brinckerhoff and Technip TPS). This has seen companies look to other industries to bolster their offering.
“Rio Tinto’s Koodaideri project, currently underway in Western Australia and labelled as a mine of the future, has employed an EPCM provider (WorleyParsons) specifically because of their familiarity of these skills in the oil and gas industry,” the company said.
WSP has worked with its own digital business unit, which employs software developers and systems analysts, to provide miners with concept studies of internet of things-based condition monitoring systems for predictive maintenance, the company added.
DRA Global s Vissen (sp), too has noticed this evolution: “The digitisation of the engineering and design landscape opened up a whole new world of collaborative design and information sharing.
“Significant advancements in the development of engineering design software tools to cater for these demands have been evident in the building industry’s adoption, and subsequent improvement in efficiencies, and is slowly but surely spreading to the mining industry.”
Enhanced visualisation tools and virtual reality safety training are two such technologies the company is using as part of this mining project push.
So, where are these new innovative approaches likely to be applied in the future?
As earlier parts of the article hinted, copper and South America (Chile and Peru, in particular), are two areas where demand is ramping up. These two countries are the biggest global producers of the red metal and are not expected to relinquish those places in the near-future.
Then there are a number of projects in the Australia iron ore space – BHP’s South Flank, Rio Tinto’s Koodaideri and Fortescue Metals Group’s Eliwana being three of the bigger ones – moving into development.
WSP said: “Investment decisions in iron ore in Australia (for three major examples, at least) are being made based on replacing product as older mines approach end of life. The appetite to spend is buoyed by the need to maintain market share.”
Bechtel noted continued demand for its services from the bauxite sector in north Queensland, while there has been returning demand for Australia coal and copper, according to WSP. The greatest increase for services in Australia is with “techbased commodities, such as lithium”, the company added.
Ausenco’s Douglas gave a shout out to gold when asked where the greatest demand for its services was coming from. “Gold will always progress as this is a different metal that behaves unlike traditional commodities,” he said.
This is also the case in Africa, according to Visser, who mentioned the yellow metal, copper, battery metals and potash as standouts in terms of demand segments.
While regional differences in demand remain, there is consensus on the direction of future projects.
Wood’s Lawson said: “Leveraging best practices and expertise from other sectors like manufacturing and oil & gas, we are focused on finding new and better ways to optimise productivity, sustainability and predictability with digital and automation and controls solutions.”
These technologies, in tandem with integrated offerings and the proliferation of risk sharing models, may act as ways to avoid the project execution mistakes of the past. IM