Stage Gate Project Management Process

Posted by on Aug 23, 2012 in Latest News, News, Projects | No Comments

 In order to properly manage a large and complex project, a structured approach toward project management is needed.  A Stage Gate Project Management Process is recommended for this purpose.  It is a process that has been accepted by all of the majors in the oil & gas industry as a way to optimize shareholder value by improving the quality of project decisions and increasing the likelihood for successful projects.  Under a Stage-Gate Project Management Process, the appraisal, development and final operation of a major capital project is broken into “phases”.  Each phase has very specific work programs, budgets and objectives that ends at a pre-determined point where a decision is made either to move the project to the next phase, re-do the phase, or stop the project altogether (see Figure 1 below). The first three of the five phases are focused on value identification and are frequently referred to collectively as “Front End Loading” (FEL).

Figure 1 – Stage Gate PMP Outline

Phase 1 – Feasibility:  The feasibility phase should answer very basic questions such as: a) is the project feasible?, b) what are the key elements that drive value in the project?, c) what are the givens and boundary conditions for the project?, d) which are the key stakeholders for the project?, and e) what are the full-life cycle risk factors?  During this phase, the project team and management also should determine if the project is aligned with the company’s strategic vision.

Phase 2 – Selection:  The goal of the Selection Phase or Phase 2 is to select the best development plan out of a wide range of commercialization concepts.  The determination of “best” requires the evaluation and trade-off of multiple value drivers based on technical, economic, commercial and policy factors.  This phase requires a balanced mixture of creativity and discipline that allows the project team to identify and evaluate alternatives that will lead to the maximum value creation.  At the end of this phase, a preferred development plan is identified that will be the basis of the future project activities.

Phase 3 – Definition:  During Phase 3 or Definition Phase, the selected development alternative is further studied and refined into sufficient detail as required for a Final Investment Decision (FID) to be reached.

The critical importance of appropriate decision making during the Front End Loading phases, especially the Feasibility and Selection Phases, is shown in Figure 2 below.  This diagram schematically portrays the value creation journey of a typical energy project.  Most of a project’s value is created during the first two phases, through a disciplined and creative definition of the project and the assessment of project alternatives.  The difference in value from the two curves shown below (splitting at the end of the Feasibility Phase) corresponds to the value creation generated through the definition of an appropriate project frame versus the destruction of value seen in rushing into a decision which results in an incorrect or inefficient alternative.  Once a development option is selected and defined during Phases 2 and 3, the incremental value created (or destroyed) through execution and operation (the two sub-branches during Phases 4 and 5) is relatively small.

Figure 2 – Value Creation in a Project

Project Framing

Project framing is the front-end of a robust decision making process. It is the most critical step to ensuring quality and clarity of decisions.  Sometimes a project team drives for results so quickly that they miss developing the clarity of purpose, alignment of the project team/stakeholders, the identification of value enhancers and the early identification of critical issues.

The appropriate framing of a project or opportunity is very important.  A frame that is too broad could easily result in a project team being overwhelmed and paralyzed with no effective decisions being generated.  If the frame is too narrow, a project team could miss important aspects or risks of a project, due to these not being considered and evaluated.

By developing a correct frame, the project team and stakeholders build alignment on the principal goals and drivers of the project.  First you have to define the project’s current state (where are you now?), then define the desired state (where do you want to be?), and finally prepare a plan to reach the desired state (how do you get there?) (see Figure 3 below).

Figure 3 – Project Framing Exercise

The development of a project frame should include the following steps:

  • Develop an Opportunity Statement
  • Define the Boundary Conditions
  • Identify the Stakeholders
  • Generate a Definition of Success
  • Develop a Project Roadmap

Each of these items will be addressed in more detail below.

Develop an Opportunity Statement:  The first step in developing an opportunity statement for a project is to assess the project’s alignment with the vision and strategic goals of the country/company.  An example Opportunity Statement is shown below:

Figure 4 – Opportunity Statement for an LNG Project

As can be seen from the following points, the LNG Project is in direct alignment with the Government’s strategic vision:

  • The introduction of natural gas i allows for the diversification of energy supplies, the use of more efficient power generation technology, a decrease in harmful emissions and an increase in the competitiveness of the Jamaican economy.
  • LNG appears to be the most viable option for natural gas delivery
  • LNG Suppliers are interested in the local market due to the size of the market demand and the credibility of the key offtakers.
  • The country’s location, in close proximity to the US Gulf Coast, presents the LNG Suppliers with a viable market for potential exports of LNG from the USA.

Therefore, an appropriate Opportunity Statement for the LNG Project is:

Figure 5 –LNG Project Opportunity Statement

Define the Boundary Conditions:  The next step in developing a project frame is to define boundary conditions for the project.  Boundary conditions apply to the current phase of the project and should be revisited at the beginning of each subsequent phase.  Boundary conditions limit or define the scope of the work the project team will do during this particular development phase, which for the LNG Project is Phase 2 (Alternative Selection).  Boundary conditions can be separated into three categories:

In the Frame:  These are the “givens” and items which are within the project’s scope

On the Frame:  These are items which may need further clarification and evaluation

Off the Frame:  These are items which are currently excluded from the project’s scope

The boundary conditions for the LNG Project are shown in Figure 6 below:

 

Figure 6 –LNG Project Boundary Conditions

 

As can be seen from this example, Henry Hub indexation/pricing is “in the frame” as it meets the requirements of lowering energy costs and reducing energy pricing volatility.  On the other hand, Asian/Pacific oil-parity pricing (similar to how LNG is priced into the Japanese, Singapore and South Korean markets) is “off the frame” as it is much higher cost than the US-based Henry Hub pricing and has the same volatility associated with crude oil pricing.  As a result, oil-parity pricing/indexation is not considered an acceptable alternative by the Government or the key offtakers, such as the mining sector.

Identify the Stakeholders:  One of the most important steps in the successful development of a project is to identify the stakeholders and their role/impact in project decisions.  The following table captures the key stakeholders, with their perceived level of influence and support (see Figure 7 below).

Figure 7 –LNG Project Stakeholders

As can be seen in the table above, the stakeholders do not all have the same level of influence or support for the project.  The next step in the stakeholder analysis is to identify the main drivers for each stakeholder and determine how each stakeholder can be engaged so their support for the project can be increased.  Effective communication and working with the stakeholders is essential in the successful development of the LNG Project.

Generate a Definition of Success:  The next ingredient to a successful project framing exercise is to generate a definition of success.  The definition of success should include a vision of what success should look like, including success factors and metrics to help identify when success is achieved.  This simple exercise brings alignment between the project team and stakeholders and assists the project team to focus only on the work which contributes to the agreed-upon definition of success.  The definition of success for the Jamaica LNG Project is shown in Figure 8 below:

Figure 8 – Definition of Success

Develop a Project Roadmap:  The previous steps in project framing described above are prerequisites to the development of a project roadmap.  A project roadmap provides a guide for the management and project team to navigate through all of the details and priorities of a very complex project.

A project roadmap should include the following sections:

Questions to Answer:  These are key questions that need to be answered during each development phase of a project.

Key Deliverables: These are the significant activities and deliverables needed to be completed during each phase in order to answer the key questions outlined above.  The key deliverables are documented in a comprehensive Decision Support Package at the end of each phase.

Costs:  What are the estimated costs for completing the work items identified in the Key Deliverables section for each phase?

Schedule:  What is the estimated time required to complete the work items for each phase?

Resources Required:  This section identifies the core project team and third party resources required for carrying out the work items identified above.

Actions:  This identifies the key decisions that are needed from the Decision Review Board at the end of each phase.

A benefit of developing a project roadmap is the ability to communicate more effectively with decision makers.  The decision makers can see where the project team is taking the project, what their interactions will be and when they will need to interact with the team.  The roadmap provides an opportunity for those involved to see the entire plan from start to finish and resolve questions in a timely and effective manner.

The project roadmap that has been developed for the LNG Project is shown in Figure 9 below:

 

Figure 9 – Project Roadmap