The Power of Due Diligence: How Adopting a Holistic 3-Step Approach Can Mitigate Capital Expenditure Risk

From Paper to Project: The Journey to Operational Success

When it comes to any asset capital expenditure (CapEx), investors, owners and operators are actively focused on the question of investment risk vs. investment reward. And while CapEx may present well on paper, the journey to operational success can be full of pitfalls, risks and dangers – both seen and unforeseen.

Although Due Diligence plays a vital role in the risk mitigation process, it is all too often isolated and does not integrate across the plan, design, build and operational lifecycle of the asset. In this article, I’ll explore the benefits of taking a holistic 3-step strategy that can help stakeholders mitigate CapEx risk in a more effective way.

A Multi-Layered Approach for Investors, Owners and Operators

I often see clients strive to answer two fundamental questions: 1) How do I substantiate that an idea is viable, and 2) How do I make sure that ROI will hit the target?

These are questions of Risk vs. Reward, and they're not easy to answer—especially when the approval of shareholders and board members hangs in the balance. There are risks at every stage of the plan, design, build, operate and decommission lifecycle, including design risk, regulator risk, manufacturing risk, operational risk and cost risk.

It’s a hugely complex maze to attempt to navigate, and it’s one that ultimately takes a multi-layered approach to solve. There are pressing questions for investors, owners and operators:

• How can we minimize exposure while maximizing profitability?
• How can we chart as smooth a journey as possible to get the desired outcome?
• Will we get the return needed from the current market we operate in?

However, the overarching question is how do all three (investors, owners and operators) integrate to achieve the outcomes they ultimately seek?

Addressing the Value Chain and Stakeholder Needs

Given the sheer scale of an investment of this type, it is crucial to connect all phases of the value chain and understand the needs of all stakeholders by de-risking the planning, design, build, operational and decommissioning stages holistically. The solution lies in developing connected teams across all phases that provide a seamless journey from one stage to the next.

At ABS Group we are increasingly adopting a 3-step model to address these challenges. One of the secrets to our success is the way our global regulatory teams take a synergized approach to de-risking the asset investment at every stage of the process. This enables us to meet the client’s specific needs while providing clarity and consistency throughout the entirety of the project.

In short, they provide a foundation that seamlessly connects money to the asset, and asset to its operational parameters. We also combine this with external expertise in finance, investment, appraisals and specialist advisors, each bringing their unique benefits to the client and in wider cases, the client’s client. It's an approach that adds value, mitigating risk and creating efficiencies across the asset lifecycle.

What does Adopting a Holistic 3-Step Approach to Due Diligence Look Like in Practice?

Let’s say, for example, a client wants to invest in a new asset.

Step 1 – Planning and Feasibility

In this beginning step, clients share their ideas and discuss the market opportunity they are looking to leverage. Based on these preliminary discussions, correlating market intelligence and client status, this conversation can include:

• Feasibility studies
• Market Analysis
• Shipyard review
• Owner/operator capability review
• Design Review and Verification

Financing is also critical at this stage. Considerations and research should include:

• Non-Recourse
• Long Term
• Annuity Based
• Cash Flow Generated from revenue.
• Asset Market Demand

At this intelligence gathering stage, consultation will determine viability and feasibility. A positive outcome will often lead to the design step.

Step 2 – Designing

Just because it looks like a good idea on paper doesn’t mean it is. Therefore, Step 2 concentrates on any issues and investment challenges a client may face in the design phase. The goal is to identify the main risks at different decision gates by reviewing the commercial, technical and project documentation to ensure that a profitable approach has been taken in regard to planned project implementation.

Through this process, we will look at six major components:

1. Asset (specification and technical review)
2. Manufacturer (shipyard)
3. Charterer (potential user or market; charter requirement review)
4. Operator (track record)
5. Project/project team (experience, past project history)
6. Financier (financial records)

At this stage, we act as the focal point and connector for all these major components and each party involved. In my experience, an independent specialist with objective third-party advice is vital to ensuring that the investment is sound. This involves workshops, engineering assessments, analysis reviews, and reports – all developed with supporting evidence that can be fed back to investors, boards and financers to support the decision-making process.

We work to verify the actual goals before moving to the asset and configuration of the service. Oftentimes, the end goal will change throughout this process as we gain information connected to each major component. In short, we take everything we have learned in Step 2 and put it into the asset managing and mitigating risk.

Effectively, we build the asset twice – the first time envisioning the desired result and then testing it. Next, we take that knowledge and build it into the physical asset itself utilizing multi-stakeholder input. Once sanctioned, we will look at the third step in the process.

Step 3 - Construction

The planning and physical build are undertaken through a Construction Monitoring Program – again designed to manage and mitigate risk by planning, reviewing and monitoring throughout the asset construction period. As part of the program, ABS Group verifies compliance with the applicable state/local technical specifications, standards, procedures, governmental regulations and Classification Society rules.

The intensity as well as frequency of the Construction Monitoring Program are dependent on the Project Life Stage as well as the Project Risk Profile – leading to detailed monitoring and frequent visits during critical stages of the project and can cover areas including:

• Completion Risks
• Resource Risks
• Operating Risks
• Currency Risk
• Supply Chain Risk

Throughout this step, our team physically visits the chosen shipyard to act on behalf of the client and their investment, helping to ensure that it is technically sound and that the build is progressing as planned.

At Step 3, having specialist expertise is vital to ensure a clear understanding of where the project is and where it needs to be, as well as identifying any potential issues or risks. We utilize a team of shipping and offshore professionals, former captains, chief engineers, drillers and shipyard professionals who understand the end-to-end process from the first piece of steel cut to commissioning and yard departure.

Investment Risk vs. Investment Reward – A Non-linear Journey

Engineering, Procurement and Construction (EPC) projects are large, complex and capital-intensive, which bring with them a unique set of risks at every stage. Answering the question of investment risk vs. investment reward is a non-linear journey that needs to be navigated cohesively from start to finish through the core project phases.

Through this holistic 3-step approach, stakeholders can gain a much greater understanding of the potential risk profiles inherent across each phase, enabling them to make better decisions and ultimately providing a highly effective way to reduce and mitigate risk, enabling a project to achieve its contractual, regulatory and operational milestones better and more efficiently.