Mining and metallurgical companies rely on specialist contractors to handle their big development and expansion projects. E&MJ asked some of the world’s leading EPCM providers for their views on a range of important issues.
By Simon Walker, European Editor
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| The train load-out at Rio Tinto’s Nammuldi iron-ore mine; Aecom was the EPCM contractor. |
With greenfield developments and expansions to existing operations alike often carrying budgets that run into billions of dollars, mining companies need to ensure that they are spending their shareholders’ money in the most effective way. And, of course, mining companies may be good at mining, but that is no guarantee that they have the experience or personnel resources to be able to undertake major projects on an in-house basis. Even the largest in the world cannot afford to maintain their own dedicated design and execution team on the off-chance that a suitable project will become available.
Welcome to the world of the engineering, procurement and construction management (EPCM) contractor: the company that will take a project through all its stages from inception to commissioning, and then often beyond that. Some of these firms are specifically mining-orientated; others regard mining and metallurgy as one of a number of their business areas, together with servicing the oil and gas, infrastructure, chemicals, defense, and other sectors that frequently require highly complex engineering and management capabilities.
If the full EPCM route is not to a customers liking, then other companies can offer alternatives by looking after the engineering, procurement and construction (EPC), while leaving project management to the client, or even just engineering and procurement (EP). The scope of services can also range widely, from input to a particular design feature that requires specialist knowledge to handling projects in their entirety by being able to draw on experience in every facet of engineering and management that is needed. And for an EPC contract, the end point can also vary from mechanical completion to full commissioning and handing over to the client, a plant with guaranteed performance.
Cost escalation has been a major feature of many—but by no means all—projects over the past 10 years. In some cases, cost overruns have been nothing short of frightening: the example of BHP Billiton’s Ravensthorpe nickel project comes to mind in this respect, with capex more than doubling over the four-year period from approval in 2004 to commissioning in 2008. Indeed, this was one of the early “billion-dollar-plus” projects that really registered within mining, and for it to go so badly sounded a warning bell for the industry as a whole.
On reflection, maybe the bell did not sound loud enough, for project cost increases have been a feature worldwide since then. The expression “on time and under budget” has not been seen too often in companies’ annual reports recently. Why?
To try to find out, E&MJ asked a number of companies involved in the EPCM business to give their views on this and other aspects of project contracting. Providing their thoughts were Dave Lawson, president for global mining and metals markets at Amec Foster Wheeler; Steve Rusk, mining vice president at Stantec; Dale Clarke, executive vice president for mining and metallurgy at SNC-Lavalin; and Kent Phillips, senior director for mining business development at Aecom.
INFLUENCES: INTERNAL OR EXTERNAL?
The first question E&MJ asked looked at how much of the cost escalation seen over recent years has been down to insufficient internal planning, in relation to external influences over which project management has less control. From Amec Foster Wheeler, Lawson suggested that cost-escalation in capital project development has been due to a number of circumstances. “Principally,” he said, “construction costs have increased due to a scarcity of resources over which project management groups have little control.”
Rusk from Stantec looked at the problem from a different perspective. “Mining projects are becoming more and more complex, making them challenging to plan, estimate and control,” he explained. “In the last 20 years, the primary method of mitigating risk has been increasing the level of detail. The logic behind this being: more detail, more control and more certainty.
“This increased level of detail is pushed into the earliest stages of projects. To deliver to this increased level of detail, many assumptions must be made, many more than previously required. At early stages of a project, in the concept or scoping stage, resources to provide informed decision-making are generally not involved. As the project matures, it becomes more costly and time consuming to ‘shift gears’ and challenge assumptions.
“In addition, with greater levels of detail being demanded at all project stages, managers’ hands are full dealing with what is currently on their plate,” Rusk said. “The unanticipated consequence of using increased detail to mitigate risk is that the detail leads to complexity, and the complexity leads to increased risk. Add to that a project execution strategy that may have been hatched very early on without thorough review and expert input, and it should be no surprise there is a struggle with control of projects.
“The demand for increased detail to manage risk is unsustainable. It is unlikely that we, as an industry, are going to be able to move back into an environment of advancing projects on less detailed plans. So, to manage the complexity, the only option is to push informed decision-making earlier in projects. Increased engagement in the earliest stages of projects (concept and scoping) will provide the common threads that will allow the management of execution risk when the time comes to deliver.”
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| Construction at Ambatovy, for which SNC-Lavalin received the 2014 Canadian Consulting Engineers Project Management Award. |
SNC-Lavalin’s Clarke told E&MJ that in his opinion, there have definitely been problems with internal planning and project controls. “Part of this can be attributed to the fast-track nature of projects during a hot market—fieldwork and commitments get started before engineering and vendor data validation is far enough advanced,” he said.
“Another part is due to the scale of the projects. Many have been massive, and changes on these mega-projects are very difficult to assess fully because so many things are interconnected, and the variety of indirect impacts from a single change are a challenge to quantify.
“I’ve also seen some owner’s teams with a lack of their own internal discipline to limit changes and manage overall risks. These have all contributed to project cost escalation within the internal control of the project teams—owner plus EPCM contractor,” he added.
From Aecom, Phillips commented that commodity price and development cost volatility continue to impact how companies plan for and optimize capital expenditures. “These external influences make it difficult for companies to exercise strong and accurate estimating intelligence in planning a project. Without a clear understanding of market risks and external pricing, project planning and management will continue to be difficult, with many projects struggling to come in within budget,” he said.
ARE SKILLS SHORTAGES A FACTOR?
E&MJ then asked whether shortages of skilled labor have impacted the scheduling of recent mining-sector projects, and if so, to what extent?
Lawson: “With the very high level of expertise required in the worldwide mining sector, human resources are scarce for all participants—owners, EPCM contractors and construction firms alike—and additional effort needs to be made to ensure that people are properly trained and supported in the safe and effective execution of their duties. Today’s increasing labor cost pressures add to the complexity of planning and executing mining projects.”
Rusk: “Shortages in skilled labor are having an ongoing effect in the mining sector. When schedules cannot be met due to manpower shortages, even if they are relatively small shortages, they can have a significant impact on project execution and cost. Where there is a seasonal effect this is amplified and work may be pushed into a less desirable time of year, resulting in lower productivities.
“On any project, getting out of sequence with execution schedules poses another significant challenge in execution. Manpower availability and suitability is not always easy to predict in advance, especially where particular skills are required. The best approach to combat this issue is early engagement with project experts to forecast and address shortages. For example, engaged experts can recommend modular design or other alternative delivery methods during periods of anticipated labor shortages.”
Aecom’s Phillips added that it is not just trade skills that are difficult to secure. “The current pool of qualified project managers and other skilled positions is aging, and many are reaching retirement age. Younger replacements for this aging workforce are becoming more difficult to identify and secure. This impacts projects in progress, as well as those projects in the planning stages.”
SNC-Lavalin’s Clarke presented a slightly different view. “Labor hasn’t been a significant factor in the scheduling of recent projects (within the past two years),” he explained. “The mining industry has been in a slump and now with oil prices low and some capital spending constraints with oil companies, the heat is coming off the construction labor market generally.
“However, in my experience, it has always been very difficult to predict the full impact of skilled labor availability for projects,” he said. “Craft labor availability is very regional, and very dependent on specific trades. The timing of when these trades are required on one project over another can be quite variable.
“I’ve found that labor supply is usually manageable as long as the major construction companies have visibility of the requirements (engage them early in the project development), and mitigation plans like temporary foreign-worker policies and off-site modularization or pre-assembly schemes are considered where local skilled labor may be in short supply.”
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| Amec Foster Wheeler is providing EPC services at Newmont’s Leeville gold mine in Nevada. |
IMPROVING PROJECT COST CONTROL
Usually having wider experience in a greater range of projects, EPCM contractors may well have a different perspective from their clients on how things should be done. E&MJ asked what client companies should do better in order to bring development or expansion projects in on budget.
According to AFW’s Lawson, a challenge for all providers in any market is to clearly define and communicate the scope and objectives to all project participants, and to build a cooperative, well-functioning team. “This is critical to managing the complexity and multiple interfaces of any sizeable project,” he said. “Managing a safe and environmentally sound work site continues to be a paramount objective that requires active participation and the attention of all contractors and their employees.”
Clarke: “First, I would clarify that SNC-Lavalin is not an ‘EPCM company,’ and that is one of the changes that has come into effect over the past few years. We are a project delivery company, and EPCM is still one of the models we use. But we have seen a significant shift to fixed-price EPC projects with smaller scales and capital costs in an effort to have more predictable costs.
“Second, the best way to bring a project in under budget is to have a high budget. Client companies should be realistic with the costs associated with the multitude of risks on major projects, and take the time to estimate these and apply appropriate mitigation or consequential risk money against them.
“Also, labor productivity has eroded significantly in many regions globally,” he said. “It is a dangerous combination to fix an aggressive project schedule with uncertain or too optimistic labor productivity estimates. When productivity declines, more and more labor needs to be brought on to meet the schedule, thus driving up costs. It is better to have a longer schedule for projects, get the engineering completed, understand the risks with labor productivity, and plan accordingly.”
Phillips: “Companies will need to invest in training programs that are in alignment with new technologies employed by organizations, and that motivate and engage current employees while drawing new candidates to the industry. And they must sharpen their forecasting and estimating skills with an understanding of factors driving the volatility of the mining industry.”
THE COMPANIES LOOK AHEAD
Finally, E&MJ asked the companies to dust off their crystal balls and provide some foresight on how they see the market for EPCM services developing over the coming five years. Their responses are both positive and pragmatic.
Lawson: “As we have seen in previous downturns, we expect to see a period of consolidation from mine owners and service providers as the market retunes to achieve greater capital efficiency and productivity. We expect to see more emphasis on productivity improvement and brownfield expansions.
“Projects with the strongest economics will move into development quicker than marginal ones. As a project delivery company, our role is to continue delivering value throughout the project.”
Clarke: Mining will pick up and most predictions are that we will have commodity supply shortages within the next few years. Those of us who have been in the industry for many years have not seen the extent of the lack of new mining projects that has occurred over the last three years in our lifetimes. The capital projects tap cannot be shut off for so long without shortages eventually creeping back into the market.
“Mines have finite lives and companies need to replenish the extraction of their reserves if they are to grow. The demand for minerals and raw materials is going to always be there with a growing, consuming population. I believe the mining industry will bounce back and be quite healthy five years out, but I also believe we still have a year or more of slow times in the short term.”
Phillips: “Lower commodity demand by China and India will impact how companies apply capital expenditures for the development or expansion of projects—investors and mining companies are looking to maximize efficiencies at current operations before spending on new projects. Government environmental regulations and the demand for increasing social commitments will continue to negatively impact mining industry growth.”
Rusk: “Project financing is the number one challenge we see for mining projects today. There is still significant consumption of resources from a historical perspective so supply and demand pressures will continue to be key to commodity pricing.
“With project complexity and execution uncertainty increasing, something has to change. We, as an industry, have to change our outlook on projects. We have to better understand the project life cycle, and have to develop and implement new strategies that address project execution realities.”
PROJECTS…
The four companies that provided responses to E&MJ’s questions are all well-established as mining project contractors worldwide. Last August, SNC-Lavalin spent C$2.1 billion on acquiring Kentz Corp., which means, Clarke said, that it can now offer full EPC mandates internally.
One of the company’s major recent projects has been at Ambatovy in Madagascar, where it provided EPCM services for the nickel ore preparation plant, slurry transfer pumping plant, 220-km-long slurry pipeline, process plant and refinery, tailings management facilities, access infrastructure, and port facility upgrades. Because of the size and location of the project, the company used a sophisticated database to coordinate staff and resources from the client, contractors and suppliers, as well as ensuring as much local participation as possible through its training and procurement systems.
Other recent projects have included the expansion of the Cerrejón coal export facility from 32 to 40 million mt/y, and renovation of the copper smelter at Bor in Serbia. This EPC contract included installing a new flash furnace together with an acid plant and its associated infrastructure.
Stantec told E&MJ that, from front-end studies to mine closure and reclamation, its mining team has experience working with a wide variety of commodities in diverse work locations spanning over 20 countries, from Mexico to Mongolia. It has more than 600 personnel committed to the safe and responsible delivery of mining projects, including mine design, procurement and construction management.
Currently, Stantec is performing a full range of EPCM services for one of the most significant potash projects in the world, BHP Billiton at Jansen in Saskatchewan. In addition, it is continuing to carry out detail design and procurement support for two of the largest proposed underground mines in the world, at PT Freeport’s Grasberg Block Cave and DMLZ operations in Indonesia.
Amec Foster Wheeler only came into existence last November, with the $7.5 billion merger between the two companies. It is currently working on the engineering and detailed design for the process plant and port for the Roy Hill iron-ore project in Western Australia. The company also advised its client, Samsung, during the tendering process, and through process design changes achieved significant savings in capex, opex and maintenance costs.
Amec Foster Wheeler has also been providing EPCM services to Swakop Uranium since 2012 in a joint venture with Tenova, for the development of the Husab uranium mine in Namibia. Having delivered the feasibility study on the project in 2011, the company is focusing on project management and engineering within the joint venture.
With mining-sector involvement stretching back more than 120 years, Aecom recently completed the Nammuldi Below Water Table (NBWT) project in Western Australia, providing EPCM services, mine development and off-site infrastructure to increase the annual production of iron ore from 6 to 21 million mt. All critical milestones of the project were achieved ahead of schedule and were significantly under budget, the company told E&MJ.
…CONTRACTS…
Bechtel provides engineering, project management and construction services for civil infrastructure; the power sector; mining and metals; oil, gas, and chemicals; and government services. Its world headquarters for its mining and metals business is in Brisbane, Australia.
The company told E&MJ that it has undertaken more than 400 major mining and metals projects on seven continents, including 43 major copper projects, 20 aluminum smelters, 200 million mt/y of installed iron ore production, and 27 major coal projects.
In the coal sector, Bechtel provided EPCM services for the Daunia and Caval Ridge mines, and for expanding the Hay Point export terminal in Queensland, while in Chile it has a US$3 billion EPC contract for Escondida’s second desalination plant.
Global engineering and construction firm, Fluor Corp., offers engineering, procurement, fabrication, construction, maintenance and project management services to client companies in the mining, power, energy, chemicals and other sectors. Last year, the company won a $1.3 billion contract for engineering, procurement, fabrication and construction at the 180,000-bbl/d Fort Hills oil-sands mining project in northern Alberta.
With its headquarters in Australia, Ausenco claims extensive experience in delivering large EPC and EPCM projects, being able to manage its clients’ projects on time and within budget. Recent projects have included participation in the Lumwana copper concentrator and associated infrastructure in Zambia under a lump sum EPC agreement. The company has built on this experience, and earlier at Phu Kham in Laos, and is currently providing EPCM services to Hudbay over the construction of the 25-million-mt/y copper-moly concentrator at Constancia in Peru.
Ausenco has also been involved in a number of pipeline projects for handling concentrates and tailings. One of these involved EPCM services for the pipeline that carries slurried bauxite from Hydro and Vale’s Paragominas mine 244 km to the alumina refinery at Barcarena.
…AND ACHIEVEMENTS
Following their involvement with Rio Tinto Alcan’s new AP60 aluminum plant at Jonquière, Québec, SNC-Lavalin and Hatch received the Project Management Institute’s Project of the Year award in October last year. Working in joint venture, the two companies delivered the C$1.3 billion project through an EPCM agreement, within budget and one month ahead of schedule. In addition, the project set a world-class standard for health and safety, with an injury rate 99% lower than the local average.
“Building an aluminum plant to operate the most advanced technology in the world was an enormous and exciting challenge,” said Hatch’s André Noël, the AP60 project manager. “In the midst of the global financial crisis, the team was challenged with the task of reducing the project costs to an acceptable level without impacting net present value. An exhaustive value-improvement exercise resulted in savings of about C$280 million in capital expenditure without compromising operating costs.”
Michel Charron, project director for Rio Tinto Alcan, extolled the achievement. “Project management—it’s all about how good you are at detailing a plan, presenting a plan, executing the plan, and delivering the result,” he said. “And that’s what they did so well. They were the best.”
