A report from the Economist Intelligence Unit
Executive Summary
Process manufacturing companies in the oil and gas, utilities, chemicals and natural resource industries rely on proprietary infrastructure to run their operations. Much of this infrastructure is rapidly aging, thus increasing the risk of failure. Subsequent disruptions hamstring operations and impede opportunities for growth, with the impact of these interruptions felt worldwide. As a result, executives in these industries must make tough decisions about where, when and how much to invest in infrastructure upgrades.
To control the rising costs and risks related to their infrastructure, many executives advocate a proactive approach to infrastructure upgrades and investment in innovative technologies as the best way forward. Such approaches, they say, will help them get ahead of breakdowns, improve safety and manage their resources more effectively.
This paper, based on a survey of more than 350 global executives in the oil and gas, utilities, chemicals and natural resource industries, explores how aging infrastructure has affected operations in those sectors and the strategies executives are employing to overcome problems.
The research examines:
- the business implications of infrastructure failures;
- key factors executives consider when weighing infrastructure-upgrade decisions; and
- tools and strategies companies plan to use to rein in costs and mitigate risk in the years ahead.
Key findings include:
- Aging infrastructure is a headache for many industries. A substantial majority (87%) of executives report that aging infrastructure has had an impact on their operations in recent years; one in ten say problems related to aging infrastructure have caused severe problems in their operations that they are still trying to address successfully.
- The current infrastructure upgrade spend will rise. Almost 33% of executives say they plan to increase spending on infrastructure in the coming years, while just 8% plan to decrease spending.
- Fully 17% of executives say their companies will spend more than 40% of their operating budget on projects involving ageing infrastructure in the coming five years. That is more than double the percentage of executives who say their companies spent that much of their budget on these projects five years ago.
- New technologies that can identify problems before breakdowns occur are a top priority. Technology will help organizations achieve greater efficiencies, extend the life of assets, reduce the risk of infrastructure failure and improve the ability to meet customer expectations and demands.
- Higher levels of future investment correlate with greater perceived expertise. Executives at firms which are expected to spend the largest portion of their operating budgets on these projects in the future are twice as likely to say that their organizations are more effective at infrastructure maintenance than their peers that are expected to spend the least. This higher-spending group is also the most interested in innovative technologies. Those spending the least are more focused on decreasing the risk of failure.
- Poor project planning, regulatory interference and a lack of resources are the biggest obstacles to meeting schedule and budget goals. Better project management tools and practices may be a solution. Better upfront planning is the top strategy for overcoming obstacles and delivering projects on time and on budget in the next five years.
As opportunities emerge, companies may become more proactive in their infrastructure upgrade endeavors. Their perceptions of adequate infrastructure maintenance may shift from repairing (stopgap) to upgrading (growth enabler) infrastructure.
Introduction
Companies in the oil and gas, utilities, chemicals and natural resource industries are facing an infrastructure crisis. Reliant on proprietary structures such as refineries, plants, oil rigs and mines, as well as power, water and gas networks to run their operations, these industries, in many cases, are working with decades-old structures that are beginning to break down.
Across the US, Europe and the Asia-Pacific region, critical infrastructure assets in these industries are already beyond their expected life span. In developed nations, breakdowns stem from decades-old systems that, even as they were built were using outdated technology and were designed and installed by planners who could not have foreseen the increased demand. In developing nations, a lack of infrastructure project oversight and expertise, compounded by insufficient funding and soaring populations, are pushing already fragile systems beyond their limits.
Governments are paying attention. A 2013 US Department of Energy report warned that the nation’s entire energy system, including networks to deliver fossil, nuclear and existing and emerging renewable energy sources, is vulnerable. The outlook is equally grim around the world. Statistics indicate that, globally, approximately 53GW of power-generation capacity (of which 37GW are in Asia) will cross the 40-year mark by 2015. Power plants have an anticipated useful life of approximately 25-35 years.
Kevin Dunn, director of engineering for Missouri American Water, in St. Louis, Missouri, is in the midst of his own utility’s aging infrastructure challenge. “Some of our system was designed 100 years ago, with pipes that are too small to meet today’s standards,” he says. His team has aggressively replaced and upgraded the company’s 4,200 miles (6,760 km) of water pipe infrastructure in recent years to prevent outages and to maintain operations. But it is a constant battle. “There is always a bigger need than the funds available,” he says.
Companies across these process manufacturing industries are experiencing similar issues. Nearly all (87%) of the executives surveyed for this research say aging infrastructure has had some impact on their operations in the past 3-5 years. More than one in ten report that these issues have resulted in severe consequences that they are still trying to fix.