1. APPLYING LESSONS LEARNED ON MEGA PROJECTS Roger Mapp Bantrel Co. April 26, 2007

2. AGENDA  COST CONTROL IN VOLATILE TIMES  MEETING PROJECT SCHEDULES

3. AGENDA  COST CONTROL IN VOLATILE TIMES  MEETING PROJECT SCHEDULES

4. Controlling Costs – What’s New  Project size is up  Project duration is longer  Prices are (very) volatile  All the usual uncertainties still exist Escalation is “Suddenly” a Big Issue Result

5. Controlling Costs – The Ideal World Year 1 Year 2Year 3Year 4Year 5 FEL 2 Base Cost Estimate FEL 3 App. Estimate

6. Controlling Costs – The Ideal World Year 1 Year 2Year 3Year 4Year 5 FEL 2 Base Cost Estimate FEL 3 App. Estimate Escalation Plan (No Escalation)

7. Controlling Costs – The Ideal World Year 1 Year 2Year 3Year 4Year 5 FEL 2 Base Cost Estimate FEL 3 App. Estimate Escalation Plan (No Escalation) FEL 2 $ Millions Cost Estimate Equipment150 Bulk Materials200 Construction350 Engineering/ Owners Cost 150 Contingency150 1000 Escalation0 Total Project1000

8. Controlling Costs – The Ideal World Year 1 Year 2Year 3Year 4Year 5 FEL 2 Base Cost Estimate FEL 3 App. Estimate Escalation Plan (No Escalation) FEL 2 $ Millions FEL 3 $ Millions Cost Estimate Equipment150 Bulk Materials 200220 Construction350370 Engineering/ Owners Cost 150 Contingency150110 1000 Escalation00 Total Project1000

9. Controlling Costs – The Ideal World Year 1 Year 2Year 3Year 4Year 5 FEL 2 Base Cost Estimate FEL 3 App. Estimate Escalation Plan (No Escalation) FEL 2 $ Millions FEL 3 $ Millions What Changed? Cost Estimate Equipment150 0 Bulk Materials 200220+20Small Quantity Constructio n 350370+20Increase Engineering/ Owners Cost 150 0 Contingency150110-40Reduced Risk 1000 0 Escalation000No Change in Prices Total Project1000 0 

10. Controlling Costs – The Recent History Year 1Year 2Year 3Year 4Year 5 FEL 2 Base Cost Estimate FEL 3 App. Estimate Escalation Plan 4% P.A. 4 8 12 16

11. Controlling Costs – The Recent History Year 1 Year 2Year 3Year 4Year 5 FEL 2 Base Cost Estimate FEL 3 App. Estimate FEL 2 $ Millions FEL 3 $ Millions What Changed? Cost Estimate Equipment150153+3Predicted Price Increase Bulk Materials 200235+35Quantity+Price Increase Construction350380+30Quantity+Price Increase Engineering/ Owners Cost 150156+6Predicted Price Increase Contingency150110-40 10001034+34 Escalation10080-20Less Future Escalation Total Project11001114+14

12. Controlling Costs – The Now Year 1 Year 2Year 3Year 4Year 5 FEL 2 Base Cost Estimate FEL 3 App. Estimate Escalation Plan Escalation Forecast 4 8 16 20 24 28 32 12

13. Controlling Costs – The Now Year 1 Year 2Year 3Year 4Year 5 FEL 2 Base Cost Estimate FEL 3 App. Estimate FEL 2 $ Millions FEL 3 $ Millions What Changed? Cost Estimate Equipment150165+15? Bulk Materials 200243+43? Construction350394+44? Engineering/ Owners Cost 150162+12? Contingency150110(40)Reduced Risk 1,0001,074+74? Escalation100120+20Increased Escalation Total Project1,1001,194+94?

14. CONTROLLING COSTS – THE SOLUTION  Track prices from one estimate to the next  Track “As Spent” prices by individual commodity  Present estimate pricing changes separately  Look for price-driven execution plan changes  Don’t cut scope to pay for unavoidable price increases  Let the market dictate

15. AGENDA  COST CONTROL IN VOLATILE MARKET  MEETING PROJECT SCHEDULES

16. THE IDEAL CAPITAL PROJECT Project Development 6 Years FEL 1,2,3 Phase Project Approval Detailed Engineering Phase Procurement Phase Construction Phase Project Operations 25 Years Operation Phase 6 Years 25 Years

17. WHY IS THIS IDEAL?  Each Phase completes before the next phase starts  Each phase fully planned before it starts.  Follows project execution “Best Practices” _____________________________  The duration for project development can be varied (elongated) to minimize capital cost Result Minimum Capital Cost (In Terms of Net Present Value)

18. PROJECT ECONOMICS ($100 Million Project) Project Development NPV (Cost - 0% ROI) = $100 Million 6 Years 25 Years Cost $100 Million Project Operations NPV (Revenue – 0% ROI) = $1,750 Million Total Project NPV (Project) = $1,650 Million Revenue =$70 Million Per Year x 25Years = $1,750 Million Total Project

19. PROJECT ECONOMICS ($100 Million Project) Project Development NPV (Cost - 0% ROI) = $100 Million NPV (Cost – 25% ROI) = $55 Million 6 Years 25 Years Cost $100 Million Project Operations NPV (Revenue – 0% ROI) = $1,750 Million NPV (Revenue – 25% ROI = $56 Million Total Project NPV (Project) = $1,650 Million NPV (Project) = $1 Million Revenue =$70 Million Per Year x 25Years = $1,750 Million Total Project

20. PROJECT ECONOMICS ($100 Million Project) Project Development NPV (Cost - 0% ROI) = $100 Million NPV (Cost – 25% ROI) = $55 Million NPV (Cost – 25% ROI) = $68 Million 6 Years 25 Years Cost $100 Million Project Operations NPV (Revenue – 0% ROI) = $1,750 Million NPV (Revenue – 25% ROI = $56 Million NPV (Revenue – 25% ROI) = $84 Million Total Project NPV (Project) = $1,650 Million NPV (Project) = $1 Million NPV (Project) = $114 Million 4 Years 25 Years Revenue =$70 Million Per Year x 25Years = $1,750 Million Total Project

21. THE PRACTICAL CAPITAL PROJECT Project Development 6 Years FEL 1,2,3 Phase Project Approval Detailed Engineering Phase Procurement Phase Construction Phase Project Operations 25 Years Operation Phase 4 Years 25 Years

22. EXAMPLE OF THE “PRACTICALITY”  Compression of FEL activities  Applied to a $100 Million project  Applied to a $ Mega Project

23. FEL EXECUTION Define Process Facility #1 Define Process Facility #2 Define Process Facility #3 Define Process Facility #4 Define Utility & Offplot (Support) Facilities Prepare Project Execution Plan and Cost Estimate Best Practice FEL 3 Completion “Best Practice”

24. FEL EXECUTION Define Process Facility #1 Define Process Facility #2 Define Process Facility #3 Define Process Facility #4 Define Utility & Offplots (Support) Facilities Prepare Project Execution Plan and Cost Estimate Tempting Alternative Best Practice FEL 3 Completion FEL 3 Completion “In Practice” Start Execution

25. MEETING SCHEDULES – THE SOLUTION  Accept that Project phases will “Overlap”  Plan for Intermediate Cost Estimates (Quarterly?)  Expect large cash outlays ahead of Project “Sanction”  Expect “Unorthodox” Project Execution to meet schedule requirements.