Investment analysis for project and engineering managers

In the first in his series on Investment Analysis, Tim Podesta opens with an introduction to the subject based on a series of three seminars for the UK Chapter PMI during 2018 and 2019.

Imagine you are leading a project and your instinct tells you there is a flaw in the business case; is there something missing in the investment analysis.  What do you do? 

Petrochemical projectBack in the mid 1990’s , I was part of a project negotiating team looking to do a deal between my company and a National Oil Company. 

 Involved were representatives of the National Oil Company – local sheikh’s ; their advisors and from my company senior business and project executives.  We were in a grand house in Hill Street in London, near Berkley Square.  This was the house that senior executives like Lord Browne and Tony Hayward would use for big meetings – they even had a butler and chef in the kitchen.

 I was relatively inexperienced and responsible for the project analysis and business case. One of the first things I learnt about investment analysis which is fundamental is the importance of the assumptions that are being made. My analysis included data and assumptions on all the key variables and showed that one of the biggest uncertainties was the logistic cost of moving the finished product.  Would there be a fixed tariff – $/tonne or would further investment $m be required in port facilities for distributing the product.

 I could see that a high freight cost or significant additional capital cost would make the project much less economic.  I pointed this out to my senior company executive and he asked me to present the economic case and draw attention to the key assumptions including the logistics uncertainties.

 I remember being in the oak panelled board room sitting at a large oval table, with the smell of fine wood panelling .  Round the able there were the sheiks, their expert advisors and the BP executives.  The discussions were intense and it came to the shared economic model that I had prepared.  I felt nervous because I had big news to present – and maybe a deal breaker.

 Our chief business executive, a gnarly, grizzly sort of character turned to me and said, ‘Tim, please present the project economics’. 

 Everyone went quiet – I outlined the economics – then I highlighted the impact of the uncertainty on the logistics assumptions – the consequence on the project value of a significant $/tonne charge and/or a multi $m investment cost for jetties and loading facilities.  I sensed the interest and tension in the room – I paused and looked at my boss and he said very firmly ‘carry on Tim’  – the stage was truly mine and I was away – the adrenaline flowing.   I was then chairing a discussion of the project value and the key drivers –  there was a lot of heated debate about the facts – AND the logistic costs were accepted as a key variable –  to manage the uncertainty there was an undertaking from the National Oil Company that these would not impact the project economics – they would cover these arrangements. 

 And later that day the deal was done,,,,,

 The learning for me was that having a shared understanding and clarity on the project assumptions – the facts – helped drive a good deal.  For me all projects need that clarity up front and the PM or EM would do well to have that understanding as well. 

 Having been given the stage by a senior BP executive my career never looked back – It was an opportunity to lead that I grasped and become a company subject matter expert in the matter of investment analysis – and here I am today to share that expertise with you.

 I have discussed the subject of Investment Analysis with many Project Managers and Engineers and there is a view that the project economics are not normally the responsibility of the Project Manager or Engineering Manager; but I would argue that it would be helpful for PM’s and EM’s to understand the drivers of value that underpin a project.

Over the four weeks of this blog my aim is to give you a greater awareness of the key factors affecting the business case and give you greater confidence in questioning and challenging the decisions that have the biggest impact on the business case both before the project is sanctioned and when the project is in flight.

Read blog number two in Tim’s Investment Appraisal series

About Tim Podesta

I am passionate about the art and science of Investment Analysis for Projects.

I celebrated 35 years with BP and completed my time with the company as an engineer, commercial manager and programme director in 2016.  I am now an independent consultant working on a portfolio of assignments with a focus on professional development – of myself and others.  My natural areas of subject matter expertise are Benchmarking, Investment Analysis and Front-End Planning for Projects based on my extensive industry experience which I continue to develop.

I have a passion for professional development, of myself and others;  I have been mentoring several young project managers through PMI Toastmasters which meets in London twice a month on a Wednesday evening.

Read Tim’s June 2019 series on Benchmarking

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