Owner’s EPCI Contract Management for Oil and Gas Development Projects: A Case Study of the Vietnam Oil and Gas Project

EPCI contracts for the construction of oil and gas facilities have has a poor track record recently. As owners, Oil and Gas Companies want facilities delivered on time, on budget, and with high quality. For various reasons, contractors rarely reach performance goals set by the owner.

The Oil and Gas industry as a whole has seen a dismal failure of large EPC projects over the last decade. Reasons range from aggressive appraisal strategy by operators leading to poor definition of the project to sloppy performance by contractors whose focus is only on protecting profits and avoiding penalties.

Many owners have experienced massive losses due to time and cost overruns in their EPCI contracts, which in turn has made their profits less significant in the light of a discounted cash flow analysis.

Mr. Tran Dang Thuyet made a study which main goal is to learn owner’s EPCI Contract Management for Oil and Gas development project and to develop a guideline for Oil and Gas owner to perform EPCI Contract Management successfully and effectively.

Conclusion

1. Based on the result, the EPCI Project Contract Management of Owner is considered performing effectively if the following conditions are met:
a. Minimizing delay of the project
b. Minimizing overrun cost
c. The quality of facility met the requirement for the purpose of procurement
d. Build a good relationship between the owner and the contractor

2. However, minimizing the delay and overrun cost are difficult tasks which were rarely reached by almost owner of the projects, especially by Vietnam Oil and Gas project’s owner. And the Owner in this studied case was also not able to manage the contract effectively and successfully in order to minimize delay and overrun cost.

3. A key point is that business risk can never be transferred to the provider. Although the provider may be under severe financial pressure for non-fulfillment, this will not compensate the department for failing to fulfill its obligations and deliver key outcomes. Therefore selection of the right contractor and placement of right contract is very important, this is critical factor decide the success of overall contract management.

4. Installation barge for offshore project is a critical factor for success of an offshore development project. Selecting an appropriate contractor for an EPCI contract for Oil and Gas must base on their availability of the installation barge.

5. One fact that the cap of penalty of delivery liquidated damage as per Vietnam Construction Law which does not exceed 10% of the contract price normally does not cover the cost impact to the owner and the lost business interest causing by the delay.
Recommendations

1. Recommendations to Owner of the studied EPCI Project for the Improvement of Contract Management Process:

i) Select right provider (bidder):
• Bidder Pre-qualification and Bidder Qualification should be considered as important activities of contract management process.
• For the offshore development project, the availability of installation barge must be considered as a critical factor to select bidder.

ii) Place right contract:
• Risk: Analysis and allocate risks properly in the EPCI contract, for example: If the project delay cause by contractor side, all contractor’s claims relating to weather standby or company force account during the extension period will be rejected.
• Contract Form: Should develop flexibly standard EPCI contract form based on the experience of past projects.
• Clause and Conditions:
• Clauses and Conditions should be drawn basing on win-win negotiation strategy with involvement of experts in all disciplines.
• DLD should be increased to reasonable level (higher than 10 % of Contract price) to force contractor focus to the contract performance, especially to force contractor to provide the dedicated installation barge for the offshore development project.

iii) Maintain data record of completed project: The lesson learnt and project
data record should be recorded properly for future project.

2) Recommendation for Project Organization Improvement:

• Develop and reorganize the EPCI project organization.
• Get personnel to be trained properly.
• Use outside manpower resource (consultant service) if need.

3) Recommendations for Improvement of Procurement Systems

• Develop the procurement procedures and standard forms properly.
• Use consultant service in preparing procurement documents if need.
• Develop Procurement Data Record for each project.
• Develop and implement Lesson Learn after each project.
• Create, develop and apply the tool and techniques in selection sellers properly.
• Propose to the Government Office/Authorization to change and the bid evaluation laws and cap of penalty of Liquidated Damage which cause disadvantages to the owner (owner) of project (contract).

Recommendations to all Owners of Vietnam Oil and Gas EPCI Projects

i) The Owners of Oil and Gas EPCI project should get lesson learn from their previous projects as well as from other owner’s project.

ii) Create and develop their own procurement system, procurement documents and organization properly.

iii) For the owners who do not experience in EPCI project should use EPCI Management service.

iv) Study guidelines, standards, regulations and laws issued by Government to find out disadvantages causing to the owner of project to propose changes to these guidelines, standards, regulations and laws to the Government Office.

His thesis abstract is copied and posted.

Abstract

The primary consideration in the procurement of Oil and Gas Development projects is the need to obtain best value for money in the whole life of the service or facility. The design and operation of the facility should maximize the delivery of effective required services; this is most likely to be achieved through integration of the design, construction, operation and ongoing maintenance.

Engineering, Procurement and Construction, Installation (EPCI) Contracts are a common form of contract used to undertake construction works by the private sector on large scale and complex oil and gas projects. Under an EPCI Contract a contractor is obliged to deliver a complete facility to a developer who need only 'turn a key' to start operating the facility, hence EPCI Contracts are sometimes called turnkey construction contracts. In addition to delivering a complete facility, the contractor must deliver that facility for a guaranteed price by a guaranteed date and it must perform to the specified level. Failure to comply with any requirements will usually result in the contractor incurring monetary liabilities.

However, EPCI contracts for Oil and Gas Development project have has a poor track record recently. As owners, Oil and Gas Companies want facilities delivered on time, on budget, with high quality. For various reasons, contractors rarely reach performance goals set by the owner.

It is timely to examine EPCI Contracts and their use on oil and gas Projects and the problems impact to the Owner of the contract. In this study, the author focus on Owner’s EPCI Contract Management in order to find out the causes of problems occur and impact to the Owner Contract Management and also to find out the factors causing un-success and inefficiency of the owner’s EPCI Contract Management and through that, propose recommendations of solutions enabling the Owners of Oil and Gas project perform their EPCI Contract Management more effectively and successfully.