ICEC CONFERENCE 2004

SASOL TECHNOLOGY PAPERS

ABSTRACT: Controlling the influence of foreign exchange and escalation on capital projects, in the South African context.

Capital projects, especially in the Petro-Chemical environment, pose a daunting challenge in terms of cost & schedule control. This presentation examines two major variables among a myriad of potential impacts to a typical capital project, namely cost escalation and foreign exchange rate variances.

More often than not, capital appropriations are based on estimates which are derived from preliminary Engineering and Design information. This is usually due to strategic business considerations, which invariably impose tremendous time and schedule pressure on the project , to satisfy projected market demands for a given product or range of products. In this environment, estimates are usually prepared with a limited scope definition and only a minor proportion of actual commitments having been made. This leads to a heavy dependence on an estimating database, which should include reliable and appropriate statistics, properly structured estimate paramaters and proven guidelines on future cost escalation and foreign exchange rate trends.

What, however, if extraordinary circumstances wreak havoc on conventional wisdom and render traditional trends useless? Control of cost escalation and exchange rate variances

associated with imported goods & services (and any other impact for that matter) requires that we pro-actively forecast, on a continuous basis, variances from our original estimate, to determine a reliable projected End Of Job Cost (EOJC). The volatility of the SA Rand relative to major foreign currencies such as the US Dollar, Pound Sterling and Euro during the last two years, emphasises the need for very careful econometric modeling (Lifecycle) and vigilant capital cost control, from Project conception to handover. This presentation addresses the risks, estimating and cost control techniques associated with the capital project environment in particular.

SPEAKER PROFILE

Erno Kapp has more than twenty years experience as a Cost Engineer in the Petrochemical Industry. Although mainly active on major capital projects within South Africa, which include the mammoth Sasol Two & Three Plants completed more than two decades ago in Secunda, he has worked on a variety of foreign projects in South America, Australia, USA, Canada and Iran. Erno has had the benefit of serving in the Contractors as well as the Owners environment and took charge of the Cost Engineering function of the R 3, 5 bn SSBAC Project (Sasol Solvents Butanol & Acrylates) at the Sasol Polymers Midland site in Sasolburg, South Africa. He also serves as Cost Control Specialist in a variety of Sasol Business Portfolios . Erno is the founding past President of the Vaal Triangle Branch of the Project Management Institute of SA (PMISA) and also a past Director of the Cost Engineering Association of South Africa (CEASA).