Commercial/Contracting Strategies for Offshore Projects
Authors: Harris C.T. , Formigli J. , Crager B. , Eggen S. , Reed J. , Khurana S. 
Published: October 2008

Preface

This manuscript is intended to set the stage for a panel discussion on "Commercial/ Contracting Strategies for Offshore Projects" scheduled on May 3, 2004 at the conference. The manuscript is based on the "white-paper" input from participants of this panel discussion. The participants include:C. Tracy Harris, (Keynote Address), Engineering Manager Construction - EP Projects, Shell International Exploration and Production Inc.Jose Formigli, E&P Services General Manager, Petrobras.Bruce Crager, Sr. Vice President, ABB Vetco Gray, Inc.Svein Eggen, President and CEO, Technip Offshore, Inc.Johnny Reed, CEO, Intec Engineering, Inc.Sandeep Khurana, (Moderator), P.E., J P Kenny, Inc.

In recent years, offshore industry contractors have incurred heavy losses on large engineering, procurement, installation, and commissioning (EPIC) contracts, also referred to as lumpsum turnkey (LSTK) contracts. Many of the losses are due to schedule delays, and the contract results often do not meet the operators' and owners' criteria for a successful project. These losses have led to an industrywide debate of whether EPIC or reimbursable contracts should be pursued and what model (or solution) could be mutually beneficial for both contractors and operators.

The commercial arrangements are further complicated by:Technology Issues: Most operators increasingly rely on contractors to provide new technology, especially in deepwater and ultra-deepwater developments. Therefore, the contractors must invest in technology development and propose acceptable commercial models for new technology so that win-win situations are provided for both contractors and operators.International Arena: Many National Oil Companies (NOCs), which operate in countries "open" to the offshore industry's international markets, have stringent commercial terms and expect local content. The distribution of appropriate risks among operator and contractor commensurate with their original roles and eventual rewards would solve this debate.

Introduction

This manuscript provides a comprehensive overview of the market trends and its impact on the offshore industry. It addresses industry's rapidly changing business environment and technological advancements under which operators/owners and contractors are to work with each other. A basic background on contracts as applicable to offshore infrastructure development is provided. Specifically, EPIC contracts are discussed in further detail with focus on its drivers.

The performance of EPIC contracts in the offshore industry is analyzed. The concerns and problems with recent EPIC contracts are outlined. A philosophical solution for resolving recent problems faced in these contracts is put forth. This analysis is followed by panelists' viewpoints, thus reflecting their extensive experience and ongoing commitment to improve the business environment of the offshore industry.

Market Trends and Economics

Large-scale offshore projects have distant timelines, require significant up-front commitments, and pose large potential downside losses. Today, the offshore industry business outlook is characterized by ever-larger but less frequent mega-projects. Furthermore, deepwater developments are technology-driven, continuously evolving, and require a high level of competency from all providers. Capital outlays for deepwater developments are large and consequences of failed projects severe. On the other hand, marginal fields should not be forgotten because new tech