By OGJ editors
HOUSTON, Oct. 12 -- Oil and gas companies could improve the efficiency of their dealings with engineering and construction contractors, which would create cost savings for both project owners and contractors, said speakers at a Global Engineering & Construction Forum Tuesday at Rice University in Houston.
"What is needed at this time is a positive attitude by the majors and supermajors in order to restore some common sense in their dealings with contractors," said Daniel Valot, chairman and CEO of Technip SA.
For instance, contracting strategy could use clarification and stabilization of common procedures, he said. In addition, oil companies might consider how the risks and costs associated with a project are being allocated, he said. "Some contractor associations are currently trying to redefine what could be the best practices in oil and gas contracting."
Contractor problems
Valot called for "more common sense toward a new behavior" in contracting terms. For instance, a project owner should provide a neutral, if not positive cash flow to the contractor. The project owners typically are major oil companies having better access to capital than do the contractors, he noted.
"Providing to contractors negative cash flows on projects, limited insurance coverage, and single currency contracts is economic nonsense," Valot said. "Oil companies should realize that additional burdens on contractors mean—one way or another—additional costs and risks on projects."
In addition, contractors would rather deal with people working directly for the oil company involved in the project rather than with outside consultants and lawyers serving as the representatives for that company, Valot said.
Oil companies should "forget short termism and focus on long-term partnerships" with contractors, Valot said.
Communication
Maria Antonietta Solinas of ENI SPA acknowledged "the deteriorating owner-contractor relationships" saying that better communication is needed between oil companies and their contractors. She is ENI's manager of strategic planning, petrochemicals.
A previous wave of oil industry mergers and acquisitions changed the number and size of the oil companies, which have in turn used bargaining superiority to force down prices and introduce difficult contractual terms, Solinas said.
"Consequently, in recent years, many contractors have disappeared or are financially sick," Solinas said. Contractors have experienced falling operating margins, falling profit margins, falling returns on capital, and bankruptcies.
"The current status of relationships between [project] owners and contractors is unsustainable in the long term," she said.
Meanwhile, some oil companies have developed a framework for standardized contracts with their preferred engineering contractors, Solinas noted.
"While no set policy exists, there is definitely a tendency to develop a close relationship with a limited number of preferred large-size contractors," she said. "Consciousness is starting to grow within owners that there are problems with owner-contractor relationships. Some owners designate key executives to monitor and tackle the problem."
