Historical review

1990-1992 Birth of the Seraya Island Projects Singapore

Since its start-up in 1984, the $2 billion Singapore Petrochemical Complex ('Complex I') had established itself as a competitive and reliable petrochemical supplier of high quality, superior grade products in Asian countries with an average turnover of over $ 1.8 billion per year.

Demand for petrochemical products in the Far East, especially China was expected to increase considerably. Singapore, having been a base for Shell for a century, was considered by the chemical division in Shell to be the appropriate bridgehead for the expansion of its chemical business in the region. Compounding factors were the political stability and the economic policy of the Singapore Government and related authorities to actively stimulate the petrochemical business after the refining business had matured.

For Shell Chemicals, not yet having a large manufacturing presence in the Far East, a joint venture with a reputable Asian company was considered desirable. Both Sumitomo and Mitsubishi Chemical had shown their commitment in the first chemical complex. They had invested in the first cracker project, led by Sumitomo, and the downstream Ethylene Oxide project, led by Shell. The second cracker project was led by Sumitomo with a 50% share held by Shell and the downstream Seraya project was led by Shell.

Shell technology, based on its Moerdijk and Pernis experience in The Netherlands, was chosen for the Seraya projects. Therefore, the technology-related

*The views expressed by the authors in this chapter are their own or the personal views of Mr Frans. They do not necessarily represent the views of management in general of any Shell company.

aspects were managed from Holland. Shell Singapore provided not only the project finance, but also a large part of the resources in the widest sense including staff and operator training.

At this stage Phillips Petroleum (USA) was still participating in one of the six projects, together constituting the second petrochemical complex, but later -in July 1993 - pulled out of the project because financial priorities had shifted to upstream activities (They joined again later after the Singapore Government took up 20% share).

1992-1994 Project preparation

Sixty service agreements were put into place to arrange the required legal/services set-up of a new (70%-30%) venture between Shell and Mitsubishi Chemical.

The project specification - fifty volumes, some four meters of books - was developed in Holland with various Shell departments, contractors and input from Shell Singapore and Mitsubishi Chemical.

The other two Japanese-led parts of the development of the island were a year ahead as a result of their different execution strategy. In order to catch up one year in the schedule, it was decided to avoid a bidding step. Chiyoda (Japan) was chosen as main contractor for the execution of the project on a lump sum basis. The lump sum was negotiated in a depressed market allowing the joint venture to benefit from a relatively low capital expenditure. This was in line with Shell's practice to invest counter-cyclically, if justified on a long-term basis. Chiyoda was chosen because of its proven performance for Shell in Singapore as well as its acceptability to Mitsubishi.

1994-1995 Project execution

The project was manned with staff already on board in the preparation phase, staff with roles in the operation phase, staff having particular Singapore and Shell expertise, and Mitsubishi staff.

The detailed engineering was executed in Yokohama, Japan, with help from a Seraya resident team of five persons. Each month an alignment meeting was held in Yokohama with the project and operational management.

Meanwhile, the authority approvals were requested in Singapore, both for the execution of the project on site as well as for the logistic infrastructure, e.g. parking spaces and ferries to reach the Seraya Island.

At the site in Singapore the soil removal and site preparation were executed based on soil investigations by Singaporean and Dutch firms in the preceding phase.

The Seraya joint venture company was registered and structured using the full support of Shell Singapore and its good reputation in Singapore.

Figure 9.1 Map of integrated first and second petrochemical complexes (Seraya Chemicals) 1996-1997 Construction and commission

In 1996 the plant was constructed with completion in 1997. Commissioning and successful start-up took place in May 1997.

A map of the integrated complex is shown in Figure 9.1. Its location with respect to Singapore is given in Figure 9.2. An aerial view is shown in Figure 9.3.

9.2 Project manager's story Appropriateness of the case

The project satisfies to a great extent the main criteria for successful complex design and construction management:

1. High degree of stakeholder satisfaction on most of the achieved levels of performance.

2. Project completed on time and (substantially) below budget.

Figure 9.3 An aerial view of Seraya Chemical complex (Shell Venster, 1994, p.21)
Figure 9.4 Team composition should cover visible as well as invisible stakes

After completion the key elements of these criteria were benchmarked by an independent party (Independent Project Analysis Inc.) and the shareholders Shell and Mitsubishi.

Project management team

The project manager Mr Frans: 'How did I manage the project?'

First of all, I did not manage it alone. The project was actually managed by a duo of Arjen, the designated plant manager, and myself. Arjen had been involved from 1990. I joined in mid 1992. We were complementary not only in personal capabilities, but also in our relationships with essential stakeholders (Table 8.1).

It should be noted that the relevance of various stakeholders changes over time. Relationships with stakeholders should preferably be established well before the stakeholder concerned becomes relevant to the project.

Arjen was the process co-ordinator, because he came from Chemicals. After completion of the project he would become the plant manager, so we had the future user in the team. In view of our different roles, we agreed to emphasise that difference in the last year before hand-over and start-up.

Diversity in the team and relationships with stakeholders were not only criteria for selection of the leaders of the team, but also for choosing other team members (Fig 9.4).

Origin of the project

After the Second World War, Shell had made great efforts to diversify downstream, i.e. in the petrochemical business, but the financial results had al-

Table 9.1 Relationships of project managers with stakeholders

Dutch connection

Arjen Frans

Shell:

• Operations

• Technology

• Moerdijk/Pernis

• Staff chemicals

Shell top management:

Oil and Gas:

Marketing:

Japan connection

• Mitsubishi Corporation

• Mitsubishi Chemical

• Chiyoda (contractor)

• Yokogawa (contractor)

Singapore connection

• Shell management Singapore

• Chinese community in general

Table 9.2 Scores on cultural dimensions of some countries according to Hofstede (1980,1994)

PDI

UAI

IDV

MAS

LTO

Singapore

74

8

20

48

48

The Netherlands

38

53

80

14

44

Great Britain

35

35

89

66

25

Japan

54

92

46

95

80

Hong Kong

68

29

25

57

96

United States

40

46

91

62

29

India

77

40

48

56

61

China

118

Mean

52

64

50

50

Standard deviation

20

24

25

20

ways been rather disappointing. So, there was a need for a big project in Shell Chemicals, which could bring the result so long hoped for. Where should it be? From strategic planning, Singapore finally emerged as the logical choice, mainly because of three reasons:

1. Long term corporate strategy to expand in the Far East;

2. Local business practices were in line with Shell's Business Principles;

3. Entrepreneurial climate.

The latter becomes apparent from Hofstede's work on the culture of various countries.

Hofstede (1980,1994) describes the culture of a country in five dimensions:

1. Power distance acceptance, PDI;

2. Uncertainty avoidance, UAI;

3. Individualism, IDV;

4. Masculinity, MAS;

5. Long term orientation, LTO (Confucian dynamism).

Originally, only the first four dimensions were included. The dimension of long term orientation or Confucian dynamism, was later added to account for this characteristic feature of eastern countries which largely explains their successful economic growth over the past decades.

Scores for some relevant countries are given in Table 9.2 (Hofstede, 1980, 1994).

The relevance to the project of some particular scores is listed in Table 9.3.

Table 9.3 Relevance to the project of some scores on cultural dimensions Relevance to the project of scores in italics in Table 9.2

1. Singapore low UAI:

• Entrepreneurial government

• Flexibility in day-to-day decision-making on site

2. Singapore and India (a large part of the work force was from India) high PDI:

• Acceptance of top-down decision-making

3. Netherlands low versus Japan high MAS:

• Requires special approach in safety issues

4. USA and Great Britain low LTO:

• Brings along opportunistic decision-making (f.i. Phillips Petroleum pulling out)

5. Japan high UAI and high LTO:

• Natural emphasis on being a reliable and long-term partner

6. Hong Kong, typical for Chinese business community, high LTO:

_• Long term relationship is sine-qua-non_

In regard to Uncertainty Avoidance, Singapore scores lowest of all investigated countries! Accordingly, the Singapore Government operates in an entrepreneurial manner. After the successful investments in crackers, the government wished to get a petrochemical business off the ground which suited well with Shell's desire for the same. Another advantage of Singapore's low Uncertainty Avoidance score is that it provides flexibility in day to day decision making on the site. Initially, there was a lot of reluctance to go ahead with the Singapore-option. The prevailing prejudice was: those Singapore Chinese know everything better. You know what? They do indeed know better!

I was sent to Singapore by Shell Senior Management, who had confidence in me because of previous experience, on a two month mission to reconcile conflicting positions on the division of work between Singapore and Holland and on the contracting strategy.

At that time I formulated the contractors' philosophy, i.e. determining who does what. This is what shareholder stakeholders are always primarily interested in. For example, the choice of Chiyoda as main contractor was a must. They already belonged to the Mitsubishi family and had done big projects in the Bukom area before and they were capable of catching up on the time schedule for the development of the island.

To summarise, Shell was in need of a big petrochemical project, there was a dormant project in Singapore, I came along and was, with Arjen, trusted by some key managers in this process to solve two major issues:

1. Division of work: should the project be run from Holland or from Singapore?

2. Contracting strategy: which contractors to involve to make it possible to catch up a year's delay as compared to other investments on the island by the Japanese companies Sumitomo and Mitsubishi?

The contracting strategy was established mid 1992. Comprimo was chosen for the engineering design. They started in September 1992. I had required that as from January 1, 1992 Chiyoda would be present in the Comprimo offices in Amsterdam. Such involvement before contract is exceptional and was only possible because we could build on the results of our objectives meeting in which we had identified our common interests. The Chiyoda executives in the Comprimo offices - some twenty people - would only pick up information already available. They were not allowed to ask for information that would require extra engineering hours.

The twenty Chiyoda people wired all their information to their headquarters in Japan. This went on during six months. The ITB (Invitation To Bid) went out in April, so also in the period that we were still engaged in basic design.

I wanted to reach agreement on 01-07-1993 based on a bid from 01-06-1993. This was only possible because the form of their bid was such that we could analyse it and make comparisons with our computer programs in a fortnight. Everything was presented in formats convenient for us. When I then went to Japan - as always first to Mitsubishi and subsequently to Chiyoda - we did not reach agreement on the price. Their price was some twenty percent higher than ours, probably due to Chiyoda's belief that we had no other options. And then Phillips Petroleum (USA) pulled out putting the whole project on ice. All of a sudden we were not in a hurry anymore. Chiyoda, eager to get the ball rolling again, made concessions and on 03-09-1993 we reached agreement.

We had a fixed price well below the Shell estimate. This provided financial margin to get the project financed with the help of EDB - Singapore's Economic Development Board - as a temporary substitute for the investment of Phillips. Singapore was very interested in the project in view of its effect on the long-term development of the country.

In January 1994, Singapore's ambassador in Brussels asked Shell's president one question: 'Give me the reason why you would not approve the project'. Just one question. If the answer is: 'I am going to approve', she would have done her job. If a reason for not approving were given, her answer would be: 'We'll solve that for you'. There could always have been a hidden reason for not approving. Why did the president approve? Shell had obligations towards the Singapore government, towards Sumitomo, and towards Shell Chemicals who had their homework in order. Mitsubishi was on board as a partner. There was no reason for not approving, so it was approved on 25-02-1994.

At this stage, I learned that the Dutch connection can also be a disadvantage. Comprimo was excluded from the execution at a very late stage. Why? The Chinese in Singapore had historically been dominated by English and Dutch expatriates. By the English in regard to marketing and sales and by the Dutch in regard to technology. Nowadays there is no inferiority anymore in either of these, but the grudge from the past is still there. If something went wrong, the Comprimo Singapore residents tended to turn to their headquarters in Amsterdam and complain about their Singapore counterparts whom they had to collaborate with. I consider that to be a deadly sin, but I did not listen well enough to some people who warned me when I tried to involve Comprimo in the execution as well.

In November 1992 a decision had to be made on the form of contract -lump sum/turn key or reimbursable plus incentives*. The latter would be in line with previous experience in Pernis (The Netherlands) but the question was if that would be possible with Japanese contractors in Singapore. A two day meeting was arranged with two Japanese main contractors - Chiyoda and JGC. Their view was politely communicated to me: In Singapore there is only one possibility: lump sum /turn key. This later turned out to be a blessing. Once the contract is signed, there is for three years no quarrelling about money. The contract gives a financial boundary within which management can manoeuvre. There is rest and focus on collectively achieving results, in particular through mutual aid, helping each other where possible. This is an enormous advantage.

Disadvantages of the lump sum contract were that we did not have the upperhand in the management control and vulnarability of scope changes. In general, Chiyoda has not misused the contract form. Only in a few cases delay had to grow significantly before we could get them act.

We had four objectives meetings with Chiyoda to establish what our common interests were and what our conflicting interests were. It turned out that our only conflicting interest was money. That issue was settled by the lump sum/turn key contract and a strict and formal change order procedure. After signing we could fully concentrate on our common interests: safety, efficient working procedures, etc.

*Lump sum/turn key means that a fixed price is agreed for a well-defined end result. Reimbursable plus incentives means that efforts, i.e. man hours and costs, are paid along with bonuses for specific results. The problem of lump sum/turn key is that it is often impossible to describe the required end result in detail at an early stage.

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