Engineering, Procurement and Construction (EPC) Contracts Performance in Oil and Gas Industry: A Case Study of Delay in Commissioning Activity of EPC

Oil & gas prices fluctuated in 2007 to 2009 due to global financial crisis. This crisis affects almost all countries both in economic and social aspects. In turn, every economic fluctuation strongly affects oil and gas prices. The demand for oil and gas is increasingly growing despite of having some economic crisis. Some emerging countries would like to explore and exploit activities in nations where potentials for oil and gas are found.

Today oil and gas companies prefer to sign the EPC contracts than other forms of contracts so that they will be able to avoid and reduce any conflicts in execution of contracts due to interfaces and risks between project companies and contractors and easy to control the projects in every aspects.

Mr. Hoang Huu Cam made a study which focused on the delay for commissioning of GDC project that had occurred during the execution of EPC contract of Phu My GDC project in Ba Ria Vung Tau province, Viet Nam. His study also focused in the following topics:

1. An agreement signed by and between Petrovietnam (PVN) and Electricity of Viet Nam (EVN) had been executed instead of off-take agreement signed between PVGC (the Owner) and Phu My Fertilizers Plant, Phu My Power Plant 1 and Phu My Power Plant 2.2 (the customers of the Owner).

2. When the construction of GDC project was completed on time as planned schedule and ready for commissioning, but three above projects had been under construction. As a result of this, GDC project had no customers to supply gas to do the commissioning activity at that time and had to wait for six months.

3. The owner had to give an extension of time to the EPC contractor who suffered from the delay to take standby time of 6 months for commissioning.

4. The Owner had to compensate a standby charge as a Change Order to EPC contractor.

5. The Owner had to make compensation as a standby charge to Certifying Agent, Germanischer Lloyd.

6. A Gas Supply Agreement signed between PVGC and BP was on the take or pay basis, therefore PVGC had to pay an amount of money for BP within 6 months of standby time.

EPC contracts are often used in medium and large scale oil and gas projects in Viet Nam since 1990s. According to international practices, in case of any disputes or problems happened in the execution of EPC contracts, those problems and disputes shall be referred to clauses of EPC contracts and settled by arbitration in accordance with the signed contractual clauses and conditions. In Vietnam, some projects are usually built to meet the socio-economic issues and often guided by the Government. So it has a bit difference between the Vietnamese and international practice. The aim of Mr. Cam’s study focused on the following issues with regard to GDC Project’s EPC contract:

1. Delay in commissioning activity.
2. Consequences of the delay.
a) Extension of Time for Completion to EPC Contractor.
b) Compensation for EPC Contractor.
c) Compensation for Certifying Agent.
d) Compensation for BP.

Conclusion

The successful factors of the Project

There were two factors resulted in success of the GDC project. The most important factor was tendering process and selecting the right EPC Contractor for the right works. The EPC Contractor, DWE, has much experience in engineering, procurement and construction. Besides, the Sub-contractor, Petrovietnam Engineering & Construction Company (PVECC) is one of the leading contractors in oil and gas industry of Vietnam.

Another factor was that the project management was very good during construction period. The EPC Contractor applied the latest project management knowledge for the project at that time and the Project Company was very satisfactory to this matter. Through this project, with the purpose of “on-job-training” both Subcontractor’s and the Project Company personnel obtained much experience and project management knowledge from EPC Contractor.

Adversely Impacted Factors on GDC Project

The first thing PVGC faced with was that it had less authority to control the relationships between the project’s stakeholders as well as responsibilities between them. This happened because a substantial part was mechanism in economic and business activities in Vietnam. Over 20 years of “Doi Moi” process, Vietnam has pursued a Socialist Oriented Market Economy which is a model that has no existence in the world so far. Vietnam has been seeking its own way on the road of development and protection of the country. Hence Vietnam has a lot of things to do in the process of global economy integration. Vietnam also became a member of World Trade Organization in 2006 and it needs time to change its existing legal system and business environment. These changes will create an equal and fair business environment for every enterprise including all businesses in all economic sectors.

Recommendations

Today although EPC Contracts are popularly used for medium and large projects in infrastructure and in oil and gas sector, but the success of applying the form of EPC Contracts are still dependent on both jurisdictions and practices where they are used for. In countries where jurisdictions are very stable and stringent, the application of EPC Contracts is easier and more advantageous than that in countries where jurisdictions and legal systems are less stable and tight.

Recommendations based on the case study and analysis

For the project company, PVGC:

- PVGC must have a program summarizing all projects that have been done and analyzing its adverse factors in order to prevent similar situations occurred in future projects.

- PVGC should make a proposal submitted to PVN and EVN to ask them to speed up their gas customers to catch up with the construction schedules planned during GDC construction period.

- PVGC should set up a risk management program for each project from the beginning up to the completion of the project.

- In order to minimizing any loss which may be incurred in the future projects when having a participation of any foreign company as stakeholder, PVGC should have a closer relationship with its customers and have some agreement like off-take agreement.

For the EPC Contractor, DWE:

Because the DWE was the foreign EPC Contractor, therefore the EPC Contractor had to scrutinize the local legal system, practices and the economic mechanism in order to evaluate and foresee any situation it may face within the construction period. The following issues needed to be taken before signing the EPC contract, these are sometimes called contract signing checklist.

1. Review your Bid: DWE should review its Bid carefully before starting the signing of EPC contract.
2. Review complete plan: Before signing EPC contract; DWE should review all plans including sub-contractor’s plan, and the plans of other parties involved in the project.
3. Another aspect the EPC Contractor should study laws, regulations and other statutory documents that may affect the EPC Contractor during its execution of EPC Contract.

His thesis abstract is copied and posted.

Abstract

Engineering, Procurement and Construction (EPC) Contract is widely used today in the world in general and in Vietnam in particular. Especially in oil and gas industry EPC contract is getting more and more popular and is often involved in medium and large scale oil & gas projects. According to an EPC Contract a contractor has obligation to hand over a complete facility or complex to a Owner (or client) who needs 'turn a key' to begin operating the facility, therefore EPC Contract is now and then called “turnkey contract. Besides delivering a complete facility or complex, the contractor shall deliver that facility or the complex at a guaranteed price until a guaranteed date and he has to undertake the construction work to satisfy designated specifications, requirements or to the specified level. Any failure of his obligations to comply with any specifications or requirements will often bring the contractor to bear monetary loss and liability.

Vietnam Oil & Gas Group had an early stage to get an application of EPC Contract forms in 1990s when Vietnam had suffered the United States of America’s economic trade embargo against all of its social and economic aspects. All EPC contracts that were used in oil and gas projects in Vietnam at that time always had foreign participations or involvement on those projects and most EPC contractors who undertook the projects were foreigners. After United States of America lifting its economic and trade embargo against Vietnam to date, the use of EPC contracts has been spreading to various industries and sectors, especially for ODA (Official Development Assistance) projects such as infrastructure projects where capital had been funded by foreign countries, regional and international financial institutions. The uses of EPC contracts are very common in energy projects like power generation plants in recent years in Vietnam.

However, there is still debate on the use of EPC contracts in Vietnam, because of Vietnam’s legal system, practices in construction industry and other matters.
This study will only be focusing on the use of one of EPC Contracts in the oil and gas sector in Vietnam – Phu My Gas Distribution Center (hereinafter referred to as GDC) and state the advantages, disadvantages and problems of EPC contracts applicable in oil & gas projects in Vietnam. How to resolve the problems in exercising EPC contracts and measures to be taken to prevent the problems will also be raised in this study.