Globe & Mail (Canada): Shell planning, timing brings major project in under budget

PATRICK BRETHOUR

CALGARY — In a sector short of everything from concrete to carpenters, Shell Canada Ltd. has pulled off an increasingly rare feat with its $400-million project to retool its Edmonton and Montreal refineries — coming in under budget.

Good timing played a big part in that accomplishment, an important one for Shell after it overspent by billions in building its Athabasca Oil Sands Project earlier in the decade.

“Let me be very honest. We were very fortunate in getting these projects built when we did. I'm glad we didn't leave it even six months later,” said David Weston, senior vice-president of oil products for Shell Canada. The project wrapped up construction in December.

But more than simple luck was at work. Among the key lessons for Mr. Weston: Some bargains can end up being too costly; high-level intervention can squelch small problems before they threaten the entire project; and a little stretching never hurt anyone.

Shell had pushed for fixed-price lump sum contracts with many of its contractors in negotiations in early 2004. By the spring of 2005, those deals were very favourable for Shell, as costs in the industry rose. A little too favourable, Mr. Weston said. A subcontractor had signed a deal that would have given Shell work worth $15-million to $17-million at 2005 prices, but for which the company was only paying about $10-million to $12-million, based on the conditions of 2004.

Mr. Weston said Shell was entitled to get the work done at the original price, but that the contractor had little incentive to do so. Rather than stick to the letter of the contract, Shell shifted gears, spending a little more to save a lot of money and time. “Ultimately, you have to look at the cost of slowing down the whole project.”

This early intervention was possible because Mr. Weston, and a senior counterpart at the chief engineering firm, were sitting in on project meetings, the Shell executive said. That senior executive attention also made it easier to spur suppliers who had to ration product among competing projects, he added. “If there are things that require a steer, you're more likely to be able to give it at a useful time,” Mr. Weston said.

The same committee had a ritual where members would have to give an example of a budget-saving innovation at each meeting — a simple way to ensure that every dollar was being stretched to its limit.

Finally, there is the art of ensuring that contractors stretch to meet budget. In practice, that meant setting a higher bar for outside firms, with the implicit understanding — at least within Shell — that there was a smaller chance of reaching that goal. So, Shell set a budget for its own purposes that it believed it would have a 90-per-cent chance of achieving. For external contractors, a lower budget was set, with the company accepting that there was only a 50-50 chance of meeting it.

The result was that Shell's refinery-conversion project came in under budget — barely — costing about 1 per cent less than originally projected. But the size of the gain is less important than the fact that it exists at all, for Shell.

“Our credibility as a company hinges on our ability to deliver projects,” Mr. Weston said.