A new report studying the impact of aging infrastructure in the process industries indicates that nearly one in five executives plans to spend more than 40 percent of their operating budget on upgrade projects in the next five years.
These leaders are being increasingly challenged to ameliorate decades-old oil and gas, water/wastewater, power plant, and mine structures that are breaking down with increasing regularity.
What’s more, one in three expects to have to up infrastructure spending in the coming years. However, this spending will be devoted to stopgap projects designed to merely minimize failure risks, rather than to true upgrades with innovation technologies that enable growth.
The Economist Intelligence Unit (EIU) report is based on a survey of 366 high-ranking officials around the world in the oil and gas, utilities, chemicals, and natural resource industries conducted last September. Respondents, half of which were C-level executives or board members and the other half vice presidents, directors, or business unit or department heads, were evenly distributed among North America, Western Europe, and Asia-Pacific. The last 10 percent of survey respondents were in Latin America, the Middle East and Africa, and eastern Europe.
Across the globe, process manufacturing organizations continue to push outdated infrastructure that has already exceeded normal life spans, EIU noted. Alarmingly, by 2015, 53 gigawatts of the world’s power-generation capacity will be at least 40 years old — 15 years over expected life. Half of all major maintenance projects on oil and gas fields are devoted to keeping older physical assets running.
The American Society of Civil Engineers’ (ASCE) quadrennial 2013 Report Card for America’s Infrastructure, which EIU cited, estimated that in the United States, there are 240,000 water-main breaks per year, and the 307 major power outages in 2011 were more than three times the number of incidents in 2007. The ASCE gave the U.S. grades of D+, D, and D for energy, drinking water, and wastewater infrastructure, respectively.
It’s no wonder then that more than half of respondents (56 percent) from the utilities industries said they intend to use at least 20 percent of their annual budgets for structural fixes to combat reputational harm on their organizations that comes from mission-critical system failures.
Still, North American attitudes about managing risk pale in comparison to those of process industry executives in Asia-Pacific. In the Far East, where additional challenges arise from population “hypergrowth” in emerging nations, 53 percent of executives said operational risk highly influences their investment decisions, versus 33 percent among their North American counterparts.
There is also a short-term myopia in regard to investments because of limited budgets. Often, it comes down to choosing the low-hanging fruit with fixes, with organizations making lower-cost repairs to buy time with existing assets, EIU’s report indicated.
“There is always pressure to make short-term, small-cap decisions,” Liane Smith, managing director of Wood Group Intetech, a U.K.-based oil-and-gas asset integrity consultant, told EIU, commenting on the short-term versus long-term conundrum. “But if often makes better sense to spend more money on upgrades that will deliver a higher level of integrity for the long term.”
What’s the price of operation failure? Smith said companies pay a “premium” when they have to correct mistakes rather than prevent them from happening. “The cost of responding to a crisis is so much higher than a planned response,” she said.
That was repeated by Ronald Lee, global leader of asset care and reliability at DuPont. “It is a lot easier to maintain a customer than to lose one and win them back,” he said, adding, “if we can detect a problem early on, it costs us 10 times less to fix it than if we wait until it fails.”
“It takes years to build a reputation,” Theo Bergers, chief operating officer of Netherlands’ Oranje-Nassau Energie, told EIU. “But one serious infrastructure failure can destroy it.”
While companies acknowledge the heavy ramifications that come from waiting too long to solve infrastructural defects, other obstacles to proactive planning include stretched resources and the unpredictable economy and thus an unwillingness to commit long-term funding in the hundreds of millions of dollars to multiyear projects that have substantial impact on annual budgets and operational plans.
The brain drain and lack of infrastructure project expertise, as older experts retire, also make up a growing problem. For the nearly two-thirds of executives worldwide who have plans to spend more than 20 percent of their budgets on infrastructure upgrades, access to human resources to run projects is a moderately to highly important plan component — especially in the oil and gas industry.
This is costing companies more money than necessary, as they have to offer higher compensation to attract the limited pool of qualified talent as well as poach personnel from competitors, the EIU report explained.
“Our human resource costs are a major part of the operating budget,” Bergers said. “But without that expertise, the risk to safety is even higher, so it’s worth the investment.”