Oil and gas project procurement
Oil & Gas industry is highly driven by projects, which imply the construction of hydrocarbon production, transportation, and processing facilities. Projects vary in size, complexity, and costs. Today, a US$500 million project became a norm, and anything above US$1 billion, also called megaprojects, is no longer record-breaking achievements.
A number of various parties involved in the project execution, i.e. Project Owner / Client, Main Contractor, Subcontractors, Suppliers, Manufacturers, Banks, Project management consultancies, Engineering & Design houses and many more. An array of risks involved in the project planning and execution is huge and diverse, hence adopting the right risk management approach is important. As a result, selecting the right procurement strategy/delivery method to suit a particular project is of utmost importance. Very often, a large project would be split into packages (e.g. living platform, pipeline, processing facility, wellhead platforms) to allow a more competitive environment, access to the right technical expertise, fabrications yards, installation equipment, to name a few.
How this is done
Generally, a project consists of several phases, as shown below.
Studies and basic design are done long in advance, to understand if initial assumptions make sense, which then leads to a concept selection, i.e. which technology to use for a project. This stage is also called as front-end loading (FEL) stage and represents the best time during the project lifecycle to make a change that will significantly impact and help to optimize cost, time and resources for the entire project. Hence, this is the phase whereby most attention shall be given to ensure project success.
This is followed by Front End Engineering Design (FEED) (also called basic engineering design) that is used as a basis for tendering. In addition, FEED provides an insight into investment costs and improved visibility study, prior to any further advancement with the project. A well-written FEED can take up to one year to produce and would provide less ambiguity for EPC contractors and result in less execution risk, less scope and price changes. All those factors contribute to better prices obtained during bidding stage. The FEED stage can be done via a competition between engineering houses, or through a preferred technology provider (a particular type of technology that is favored by the project owner).
Execution stage is where the actual work is happening with detailed engineering, procurement, construction and commissioning activities peaking and slowing down depending on the project phase. This is the most challenging and high-risk stage, yet a good FEED will result in more flawless execution. Once the construction is finished, facilities are commissioned, tested and accepted by the project owner.
Defect-correction period is the next step during which any shortcomings during the construction phase are found and resolved. Depending on the commercial arrangements, long-term warranties, facility management services may be provided by the same EPC contractor who delivered facilities.
Project Management is central to ensure projects are executed as planned and there are methodologies how this is achieved. In addition, taking a stage-gate approach is a proven method to manage large projects effectively. The stage-gate philosophy requires having a process with clear and defined milestones and deliverables for every project stage that must be approved and accepted, prior to moving to the next phase.
There are different types of methodologies and models on how to approach project procurement. They are broadly divided into Lump Sum, Cost Reimbursable, Time & Material, Alliance / Relationship. Each of the main approaches would have different contracting strategies, cost and schedule risks, and scope uncertainty. In addition, the degree of involvement of each party varies significantly, from a full project owner involvement to minimum participation. Selecting the right project delivery strategy has a direct impact on the success rate of projects. Analyzing project objectives, project owner capabilities and organizational culture, and assessing available delivery (contracting) options, will tremendously improve project success.