Operator practices

However, it need not be all doom and gloom for the oil and gas industry. "Nothing is permanent in this wicked world, not even our troubles," Charles Chaplin once said.

A crisis can be a great opportunity to optimize efficiency and control costs to offer better results for operators as well as Engineering, Procurement, Construction and Installation (EPCI) contractors.

All offshore oil and gas production projects begin and end with the operator, they are at the top of the petroleum industry hierarchical model and reap the benefits of first oil/gas at every stage including from the ultimate end user.

A paradigm shift in the practices of operators is needed. Operators need to bear more responsibility, particularly when it comes to the risks associated with offshore projects as EPCI contractors do not have balance sheets that can withstand the risk profile of these projects.

The author proposes that oil and gas operators optimize and re-organize resources by examining their main cost drivers to provide consistent cost certainty.

Oil and gas companies need to focus on the areas outlined below prior to issuing the Invitation to Tender/Bid for the supply of goods and services to provide the strength and resilience to weather a low price environment and position themselves for even greater success when prices rebound.

Standardization of commercial/compensation arrangements

Standardization is the new revolution. The players in the oil and gas industry are burdened with the responsibility of developing efficient projects.

Standardization of commercial bid forms is an important step in order to generate cost savings, maintain parity between untamed competitive bidders and help make the bid analysis process quicker and more effective.

Oil and gas companies should utilize estimating metrics to re-engineer their pricing models to ensure that they are in line with the same metrics from similar projects, such as:

Fuel

It is often the case that the tender does not categorically request specific fuel cost/mT value, to use for bidding purposes. As a result, the EPCI contractor is obliged to qualify the fuel cost/mT value. It would be prudent if the operator were to request the contractor to provide the total fuel consumption foreseen on the project by activity and to include a mechanism in the contract to compensate the contractor for such variable costs, should the fuel price be higher or lower than the stated value, at the start of vessel mobilization and completion of demobilization of the vessel.

Escalation

Another aspect would be inclusion of an escalation clause in the agreement or purchase orders providing for an automatic price adjustment (continuing price level changes over time) based on changes in specified indices. This would provide clarity in relation to prevalent market conditions and planning for future developments.

Exchange rates

Operators and EPCI contractors may become exposed to the risk that comes with unpredictable and fluctuating foreign exchange (FX) rates. These uncertainties may make it difficult to manage current cash flows, plan future expenditure and succeed in a competitive market environment. Bid forms should seek a split in cost/price by native currency to limit FX risk exposure beneficial to both parties. This would go a long way in mitigating risks associated with currency trading.

Incentives for contractor

In the current environment, it is more critical than ever to deliver capital projects on time and within budget. Typically, a penalty for each day of delay in completion or exceeding the specified budget, up to a maximum either way, referred to as liquidated damages, is most often employed to safeguard the operator's interest.

Similarly, if the operators were to include a special contractual arrangement wherein the contractor is guaranteed a bonus for each day the project is completed ahead of a specified schedule and/or below a specified cost, it would incentivize the contractor to provide the deliverables on time and within budget, and would work in favor of both the operator and the EPCI contractor.

Supply chain management

Logistical problems thrive in the lengthy supply chain process. Oil and gas companies can develop methods to apply leverage in the sourcing process to achieve dramatic savings in time and cost by virtue of volume discounts, economies of scale and by appointing suppliers/sub-suppliers on a framework agreement in order to achieve positions of parity and standardization of costs.

Collaboration and cooperation for success

Operators should collaborate and cooperate more to align their activities and optimize their resources. Every producer should be involved in a collaborative setting and devise a roadmap for collaboration in future projects. This process would be beneficial to the operator and would also reduce the environmental impact of oil and gas production.

Contract strategy

Legal agreements that clearly set out the aims and objects of the contract, such as the types enumerated below, may reduce uncertainties in cost estimation, especially when the scope of services to be provided is not well defined.

Cost plus Fixed Fee contracts whereby the client pays actual costs as defined in the contract document. A fixed amount is also paid as the contractor's fee.

Cost plus Percentage Fee contracts whereby the client pays all costs plus a percentage for the use of the contractor's organization.

National content requirements

Operators are able to gain entry into new regions by offering large scale benefits to the region in terms of economic opportunities for local nationals and local suppliers. However, the onus of maximizing the national content requirements within the context of the efficient development and operation of the project is usually shifted to the EPCI contractor.

This methodology is counter-productive since the benefits of national content requirements are oriented towards the NOCs and IOCs. National content requirements are motivated by funding from international lenders, facilitating Financial Investment Decision(s) (FID) and political climates to leverage execution of the project scope under the pretense of building the foundations of a competitive and sustainable pool of local skills and supplier capabilities for services and goods able to support the petroleum sector in the region.

In this scenario, it should be the sole responsibility of the operators to deliver the national content requirements and these should not be constraints within which the EPCI contractor should have to deliver projects as they do not provide any economic advantages to the contractor.

No one knows how long the conditions we see today will prevail in an industry with a long history of booms and busts. Operators that seek long term efficiency and resilience against uncertainty are required to be savvy and embrace change in order to revolutionize the industry going forward. Taking the necessary steps today will enable operators to reliably evaluate market conditions of the future and prevent them from compromising on the accuracy of estimates for future challenging projects.

ABOUT THE AUTHOR

Dinesh Paranjpe has more than 12 years of estimating and design engineering experience. Paranjpe holds a BEng (Hons) degree in Computer & Communication Systems Engineering from the University of Birmingham and two MSc degrees (with Merit) in Services Engineering from Heriot-Watt University & Cost Management from the University of Reading in the UK.

Disclaimer: The views and opinions expressed in this article are those of the author only.