Modern engineering
BASF takes a new approach – is this the end of the road for world-scale projects?

PROCESS spoke with Stefan-Robert Deibel, President of Corporate Engineering at BASF, about his views on where the plant construction industry is going in the medium term. To start with, he sees the need for a paradigm change and for development of new models for world-scale plants and contractor relationships. He would like to see contracts which are more attractive to both sides and which would eliminate the need for irritating claims management.

PROCESS: Dr. Deibel, you have often made critical comments about the claims management practices of Western plant construction firms. Is this criticism still valid? Has BASF taken any action as a result?

Dr. Deibel: When we look at suppliers now, we do not just evaluate whether they have the know-how and capacity to complete a project. We now also review their claims history with us. We believe that the business model of many plant construction firms, which rely on claims to guarantee profitability, needs to be corrected. In my view, this strategy has no future, and we are working on other approaches. All of the colleagues whom I know are tired of sitting down with lawyers and searching through planning folders to determine who said what when. This exercise normally only generates resentment. Any engineering firm that can set up a different business model will be doing itself a favor.

PROCESS: What might that model look like?

Dr. Deibel: We are offering a new contractual model which is positioned between the familiar “cost incurred” and “fixed price” contracts. In concrete terms, this means that the contractor should offer us predicable engineering services at a fixed price. This gives us a basis for agreeing up front how much the customer will have to pay for planning changes. For quality reasons alone, we want to have an influence on everything else including global acquisition. We offer an incentive to the contractors so that they are motivated to optimize costs and schedules. We sit down together with them and define what the plant is expected to cost (target cost). If the contractors complete the project under the target cost, then they benefit by receiving up to 30 percent of the cost savings as a bonus from us. They must, however, make a contribution to cost overruns.

PROCESS: What does that look like in actual practice?

Dr. Deibel: We successfully used this model with Technip on a large project in Asia, and it worked very well. Opportunities and risks are equally distributed on both sides. The only risk for the contractors is the engineering services which they provide. They have the opportunity to significantly increase their profits by using their creativity instead of relying on their legal team. We call this approach Target Performance and Incentive Cost Agreement, and we are now using it to an increasing extent.

PROCESS: The number of complaints voiced by plant construction firms about component quality continues to rise. What is the BASF view on this issue? How do you manage supplier quality problems?

Dr. Deibel: Planning and acquisition for our projects including components and services is done on a global basis. There actually do appear to be quality problems in many areas, and this is why quality control and incoming inspection have become an integral part of our operations. On the other hand, we have the opportunity to work with new suppliers who are relatively unknown. We used equipment in Nanjing, for example, which was sourced in India, and we commissioned a plant in Antwerp which has reactors from Korea. This works if you have proper quality management, and we can ensure compliance with standards worldwide.

PROCESS: Time to market – do you believe that further reductions are achievable in the plant construction business?

Dr. Deibel: That is a never ending story. There are always ways of shortening the time line. But if you do that, you have to accept that you will not fully exploit some optimization potential. It takes time to achieve cost optimization. If you want to put the project on the market as soon as possible (we call this “Sputnik projects”), then we make appropriate changes to our workflow. Optimization loops are shorter, acquisition starts earlier, etc. These projects can run up to 30-35 percent faster.

PROCESS: Well-know competitors offer engineering services to external customers. Some engineering departments were set up as independent companies specifically for that purpose. Is BASF thinking of going down the same road? The company has already done it in the IT business.

Dr. Deibel: We have not developed business with external customers to the same extent as other companies. In the license business, however, we have been working on behalf of external customers for a long time. BASF built plants in Russia more than 30 years ago. We want to selectively expand this business, especially in areas where we can demonstrate clear competitive advantages, for example in the establishment of vertical integration structures. We undoubtedly have special know-how on projects that are based on external project financing or that require regulatory engineering in China.

PROCESS: Do you have the resources to ramp up the external business?

Dr. Deibel: Our organization is flexible enough to handle that business without problems. We have used roughly the same team to complete projects worth up to 3 billion euros in one year and only 500 million euros in the next year. We use external planners to a large extent. In recent years, we have sourced about 55 percent of our engineering services from third parties. We have the largest outsourcing quota in the industry. Naturally you have to ensure a good workflow, for example by using standardized planning tools.

PROCESS: Together with your Chinese partner Sinopec, you are investing $US 2.9 billion in a vertically integrated site with several world-scale plants using leading edge technology. Are world-scale plants the right solution for the future?

Dr. Deibel: No, certainly not. The industry philosophy at the moment is heading in the direction of “bigger and bigger”, especially with a view to achieving cost regression benefits. However, there is a need for a paradigm change. We are already working on new strategies, because the dilemma posed by world-scale plants is obvious. If I build a plant when there is already significant demand in the market, then I am basically entering the market too late. If on the other hand I build the plant at the same time as the competition, then prices will collapse as a result of oversupply. What this means is that we need new plant strategies to serve market needs in a timely fashion. Modular technology and strict standardization will have a role to play. Micro process technology will also
be involved, but its contribution will be
more matter of philosophy than absolute size.