The adage that cash is king has never been far from the front of executives’ minds since the onset of the financial crisis nearly seven years ago. Investors were understandably jittery about debt, while liquidity was crucial to help businesses steer clear of the tempest.
That was paralleled in the public sector by austerity measures and a heightened awareness of value-for-money considerations.
This pressure on capital expenditure, according to John Woodhouse of The Woodhouse Partnership, means there is a log jam of overdue renewal projects. Some £338 billion needs to be spent on economic infrastructure up to 2015, according to the Treasury.
Against a backdrop of constrained resources and tight budgets, dealing with ageing assets demands a more rigorous approach, says Mr Woodhouse.
In the past, both private and public sector organisations have tended to take decisions on the basis of “he who shouts loudest”. “We’re at a stage where there is an awareness of the deficiencies of this approach. There’s a great deal of short-term, silo-based behaviour, with conflicting agendas that need to be resolved. But there’s an increasing awareness that that is no longer satisfactory,” he says.
The bottleneck of assets in need of replacement or renewal means that some tough choices must be made. Organisations typically have a simplistic ranking of importance for prioritising investment – an approach that Mr Woodhouse says misses a key nuance.
“The rate of change in the risks or costs is important. It’s the slope that matters, not just the height. In other words, it isn’t just about the size of the headache – it’s a question of how fast it’s going to get worse,” he says.
An added complication is that ageing is a relative concept. “Ageing doesn’t necessarily mean old – it can be with respect to changing demands,” says Mr Woodhouse. This could be as a result of a change changing supply chain or volatility in the ultimate marketplace for a facility’s goods.
Executives do not respond consistently or rationally to such shifts, research by The Woodhouse Partnership suggests.
“The attitude at main board level to capital investment was notably different between infrastructure investments to meet new demand or new technology, which is given plenty of air time, versus replacement of existing infrastructure, which is given significantly less attention, partly because it’s not sexy,” he says.
The decision to upgrade or replace existing assets tends to be deferred for too long, which can lead to hurried and often sub-optimal choices. The opportunity to extend an asset’s life can be overlooked or a botched upgrade can lead to companies being forced to pay twice for the work.
The recession was not the only force exacerbating the challenge posed by generations of ageing assets. The North Sea oil industry has been relatively immune from the slowdown, because of high prices in recent years. The price of oil has consistently been above $100 a barrel for the last three years, compared with less than $20 for much of the late-1990s.
A sea change is taking place in the understanding of how maintenance adds value to an asset by protecting or increasing its lifespan
Conversely, this has put pressure on ageing assets because it is viable to extend the lives of oilrigs or onshore facilities that would have been due to be decommissioned. As technical improvements and the higher price of oil have allowed smaller resources to be exploited, more pressure is put on existing main pipelines.
The Health and Safety Executive estimates that half of fixed platforms in the British North Sea had exceeded their original design life and that 28 per cent of accidental spills are because of ageing infrastructure.
Tim Walsh, senior vice president of asset integrity services for Lloyd’s Register, says dealing with ageing assets is the “dominant issue” that he sees in his work around upstream oil and gas production.
“The quid pro quo [of increased oil recovery] is that infrastructure goes way beyond its intended life and needs to be maintained in such a way that it can support ongoing development,” says Mr Walsh. “If the UK is to continue to be productive we have to manage the infrastructure that supports that productivity.”
The Wood Review into North Sea oil earlier this year called for greater co-operation between operators to share infrastructure, such as pipelines, and co-ordinate development of remaining fields.
Mr Walsh says there is a growing awareness in the industry about the role of maintenance in protecting asset value. “The challenge is connecting integrity maintenance with the life of an asset,” he says. “Where we have had issues is because the assumed production life of an asset is much less than it turned out to be. An owner may only have a two-year time horizon, therefore it wouldn’t be profitable for them to invest.”
The stakes are high in the upstream oil industry, but the difficulties it faces are widely shared. High-profile examples of ageing assets being replaced include the Eurofighter and F-35 fighter jets replacing the RAF’s Tornado and Harrier respectively, and the life extension of Britain and France’s nuclear power stations.
“Most of our industrial footprint was built after the Second Wold War in the 1950s or 60s,” says Mark Haarman, a co-founder of the Dutch consultancy Mainnovation. “On average technical assets have a lifetime of about 40 years, which means many assets have reached the end of their lives.”
Data and condition-monitoring take on increasing importance in the management of ageing assets, which itself is a problematic because they will not have the sensors that more recent models will have built in.
Perhaps surprisingly, Mr Haarman believes the recession has actually provided a spur for asset managers. A sea change is taking place in the understanding of how maintenance adds value to an asset by protecting or increasing its lifespan.
“A lot of maintenance and asset management departments have been asked to extend the life of assets,” he says. “As a matter of fact, when we really analysed it, from an economic point of view it’s often more valuable to do this than to replace them. What we found was there is no ‘life of asset’ anymore – you can continuously extend life by replacing critical components, but using the same infrastructure or framework.”
The introduction of ISO 55000, an international standard for asset management, has also served to elevate the status of asset management in the boardroom, he argues.
“It’s said a lot that maintenance managers aren’t able to communicate the real value of maintenance to top management. The maintenance community speaks another language – they talk about technical stuff and top management talk about value-added,” says Mr Haarman.
“Financial language has become more and more dominant in organisations from the shopfloor to the top floor, so maintenance managers are forced to speak the language of finance. Things are changing. More and more companies are looking not just at the bottom line, but at creating value.”
CASE STUDY
BREATHING NEW LIFE INTO GAS PLANT
Sasol, South Africa’s former state petrochemicals company, opened its Sasol Two plant at the new town of Secunda in 1980. Secunda is now the world’s largest coal liquefication plant, transforming coal into gas.
As the plant approached its 30-year anniversary, it faced the obsolescence of some of its most important components – the distributed control systems that behave as the facility’s brain.
The control systems used at the plant – Honeywell’s TDC2000 – had been taken off the market in the mid-1980s and concerns over the manufacturer withdrawing technical support had encouraged a growing belief in Sasol that it should invest in new control systems as soon as possible.
By securing a longer life from assets, by an average of ten years, Sasol saved £18 million
The problem was addressed using a process adapted by the Salvo Project for the optimisation of ageing assets. Salvo is a partnership of asset managers and owners, including The Wood Partnership, National Grid, London Underground, Sasol and Scottish Water.
However, the Salvo approach revealed that immediately moving away from the existing control systems would involve unnecessary investment.
A risk analysis showed that at least eight years’ additional life was achievable – a revelation that enabled Sasol to secure a new service and spares agreement with Honeywell.
“We gained support by showing vendors what the impact would be if we changed out immediately rather than doing a staged approach over a period of time,” says Christine Pretorius, Sasol’s industrial engineering leader.
By securing a longer life from assets, by an average of ten years, Sasol saved £18 million, by avoiding capital investment, and lowering costs and risks over the whole life cycle of the equipment. That represents 60 per cent of the original capital cost.
However, life extension is not always possible or desirable. The National Audit Office found in 2011 that the NHS needed to spend about £450 million on high-value capital equipment, such as MRI and CT scanners, over three years because of obsolescence and a rising clinical need.
According to the Association of Healthcare Technology Providers for Imaging, Radiotherapy and Care, the number CT scanners dropped by a third between 2010 and 2012, with the number of digital X-ray rooms falling by half. The association argues this will store up future problems and have knock-on consequences elsewhere in the system, as ageing and increasingly unreliable equipment is relied on for more work.
