Although acquisitions are a quick way to expand midstream operations, midstream companies are also presented with opportunities to grow organically. Organic growth requires disciplined engineering, construction project management, commercial operations, and processes. The glue that ties the process together is a disciplined Authorization for Expenditure (AFE) process. The commercial modeling of projected revenue from producers, engineering estimates for construction, and project management must be linked throughout the AFE process.
The ultimate goal of the AFE process is to minimize the variation between the budget and actual value-add curve. Create a disciplined and streamlined AFE process to minimize value-add variation:
The AFE should not be viewed as merely the document used to obtain approval for beginning the planning and construction process. The AFE should extend across the budget, forecast, commitments, and spend. The AFE should be connected to the GIS, land, accounting, procurement, and forecasting systems. For example, we helped a client build an AFE process linked to each of these systems. Any recorded changes to the land right-of-way (ROW) and GIS data are connected to the AFE. Purchase commitments, forecasts, and actual spend is recorded against the appropriate AFE line items. The AFE system is part of a hub that provides one place for reporting and analysis of midstream value-add projects.
The initial assumptions used to budget the construction project should be captured and recorded as a part of the AFE. Key considerations such as ROW costs, pipe cost per foot, and compression requirements should be documented. Inevitably, a variation will occur. The ability to look back at engineering assumptions to improve projections over time is key to continuous process improvement. When the project is complete, you will have information to perform a thorough analysis of budget versus actual assumptions.
Project managers leading a construction process are accountable for completing the project on time and within budget, and managing cash flow requirements is vital to maintaining investor confidence. Therefore, project managers should be accountable for accurately projecting cash flow requirements. The projection of cash commitment timing and estimated cost to complete should be tied into the AFE forecast and possibly an updated budget. One of our midstream clients monitored their project managers’ forecasting accuracy on a sliding scale. Forecasting accuracy expectations were set at certain thresholds based upon time horizons.
The project manager should be assigned as soon as a commercial opportunity is identified. Often, commercial terms are set based upon expectations of the project manager’s ability to meet cost, quality, and time commitments. The project manager should be a part of these discussions and provide input to the terms of the agreements with producers. For example, the project managers have intimate knowledge of availability of materials, labor, and equipment. A labor shortage in a particular basin will impact delivery and cut overtime.
Trenegy encourages our clients to use the AFE process as a mechanism for ensuring cost, quality and time targets are met for all construction projects. Trenegy specializes in helping companies design and implement AFE solutions to manage the entire construction lifecycle.
