Oil and Gas

Higher Return on Capital Employed (ROCE) in Oil & Gas Downstream Operations-
Part One: Decreasing CapEx

A key challenge facing Oil & Gas executives is how to justify funding of downstream technology modernization projects. Most executives have traditionally only considered outlay of capital for installation and the ongoing cost of maintenance. In fact, an overlooked ratio, Return on Capital Employed (ROCE), provides a more comprehensive and accurate method for calculating efficiency and profitability of a company’s capital investments.

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ROCE represents the percentage return that a company makes over its invested capital, a measure of the profitability and value-creating potential after taking into account the amount of initial capital invested. The ROCE ratio is expressed as Earnings Before Interest and Tax (EBIT) / Capital Employed. Thus, ROCE can serve as a useful metric for calculating efficiency and profitability and can help determine how to squeeze a higher return out of corporate capital investments.

The topic of industrial plant modernization represents a critical success factor for most Oil & Gas enterprises wishing to remain competitive in a rapidly changing marketplace environment. Therefore, justification for investment should be communicated in a manner that translates the functions of new technologies into terms that reflect ROCE business value. More compact, connected, safer, and lower maintenance technologies have to translate into cost reduction, faster turnover, and higher return on investment.

This introductory blog is one of a three- part series that review the impact of technology modernization on CapEx, OpEx and revenue generation. The three together help to paint an overall picture of how ROCE metric elements can be combined to determine the business value of automation technology investments. All three blogs reflect real-life downstream Oil & Gas industry case studies in which Schneider Electric played a key role as technology consultant and provider.

Case study: Decreased CapEx in an LNG facility

Field studies have shown that automation CapEx can be decreased by up to 42% through reductions in project capital cost, fixed assets cost, cash to cash cycle and new engineering design standards and methodologies. A major fuel distributor achieved this level of CAPEX savings by deploying advanced automation solutions and project delivery methodologies to update their LNG facility.

Below are some of their key CapEx cost savings driver highlights:

  • The biggest contributor to savings ($7.12 Million or 18%) involved an initiative to move control, safety, fire, and gas systems I/O from a Remote Instrument Enclosure (RIE) specific building to a remote I/O cabinet in the field. Cost savings resulted from elimination of buildings, equipment, wiring, bulk material, and construction man hours.

 

  • The second biggest contributor ($2.3 Million or 5.8%) involved a new technology that automatically detects, interrogates, configures, enables and documents (a process referred to as DICED) field devices. The technology automatically links databases to instruments in the field thereby reducing labor efforts for commissioning.

 

  • A new generation of PLCs called device integrators represented the third biggest contributor ($2.29 Million or 5.7%) and opened the door to advanced data communications and diagnostics. Compared to traditional approaches, less engineering time is required to configure systems.

Other areas that generated the remaining CapEx savings (a total of $5.44 Million or 13.67%) included Factory Acceptance Testing (FAT) cost reductions resulting from use of a standard LNG design, which was copied for each new LNG train, a new field wiring technique that reduced the need for shipping multi-core cables and marshalling cabinets,  a direct sourcing method that eliminated 3rd party markups, a project methodology (called FLEX) based upon repeatable solutions and minimizing scope change, and some new techniques for enhancing safety and standardizing engineering practices.

Access Return on Capital Employed (ROCE) White Paper

To learn more about how Return on Capital Employed (ROCE), can apply itself to downstream investments in process automation technologies, download the new Schneider Electric white paper “Modern Strategies for Higher Return on Capital Employed (ROCE) in Oil & Gas Downstream Operations.”


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