Feature

Challenges in Award and Execution of EPCI Projects in India

Posted on 09 February, 2010 | Tags: Project Management

In other areas of the world, there are countries equally as dependent on imported fuel stock as India. Oil and gas companies are working hard to develop their award process to set the conditions for greater home production levels. It is high time that Indian companies works to address the process too.

India, like most countries in the world, will always be dependent on imported fuel but during these times a fast developing country's aim should be to minimize this dependency.  The price of oil may be low for now, but this is just a blip in the market.  Most producers are now past peak production, but demand is not decreasing.  In India, where the economy is set to grow by 8% at least in the next year, the Tata Nano, the cheapest car in the world, was commercially launched in March, bringing motor transport to the masses in the country.  In other areas of the world, where there are countries equally as dependent on imported fuel stock as India, oil and gas companies are working hard to develop their award process to set the conditions for greater home production levels.  It's time that India work's to address the process too.
ONGC needs to address the issues of increasing the supply of fuel to the economy without recourse to the ups and downs in the market by taking on a long term approach.  It needs to take advantage of current low construction prices, learn to award contracts quickly to the contractor offering the best value, not just the lowest price.  It must also develop an MPOT (Maintain Potential) programme to maintain current capacities with investment.  ONGC needs to act now in a decisive way in order to give India a future based on home grown fuel in a world where fuel production costs will always trend upwards as the resource inevitably depletes.
J. Ray McDermott, as a contractor, believes significant challenges still exist in successfully bidding work from the India Public Sector despite progress in the last three years. Some examples of these challenges are; a poor bidding and award process in the public sector which results in significant problems during project execution and the tax and the duty regimes in India which adversely affect how contractors bid and execute projects in both the public and private sector.  It is the perennial crusade of J. Ray McDermott to try and help itself and the Indian Public oil and gas sector to work smarter, better, faster and cheaper.

The Tender Process
Tendering work for public sector operators and their partners in India can be a lengthy and tedious process.  Although there has been remarkable improvement over the last few years, from bidding to awarding, much more needs to be achieved.  The current situation on ONGC bids is that the bidder is required to undertake concept development, concept certification and price on a lump sum EPIC basis, based on functional specifications.  On a number of occasions bidding time has been insufficient for the minimum amount of front end engineering work to be properly completed and certified.  It is also noted that bidders are only provided bid extensions very late in the bidding process, sometimes at the last minute, a practice that is not beneficial to serious bidders who may have already decided not to bid due to shortage of time prior to extension notification.  In many cases the tendering process is wasteful and results in only the lowest price being considered without any regard to the true cost of the goods or services.
Frequent complaints against the tendering process in India include: poor clarity of client requirements, cancellation or re-tender due to changes in client requirements, short lead times for tendering resulting in a major compression of project schedule resulting in increased schedule risks, overly stringent specifications and limited suppliers, onerous contractual terms, no incentives for innovation and insufficient project budget for tenders resulting in re-bid or cancellation.

Contract Terms and Conditions
ONGC has rationalized the terms and conditions of contracts to a great extent over the past three years.  As a result of these changes contracting companies such as J. Ray McDermott are able to participate as a main contractor.  However, there's still room for improvement if the following are addressed; provision of an overall cap on liability, compensation of unpredictable cost increases on major components such as steel, insurance coverage for major risks, allocation of  risks to the appropriate party and the provision of a payment mechanism that allows for positive cash flow for the project.

Award to the Lowest Bidder
At present contracts are awarded to the lowest bidding entity and this, without a doubt, leads to delays, cost over-runs, claims and counter claims after the project is awarded.  The lowest bid does not always represent the best value to the client.  The emphasis should be on a company's track record, technological competence, long term focus, lead time and resources available to deliver the project on schedule and a trust based on past performance.  J. Ray McDermott has observed trends in awarding FEED studies on the basis of lowest bid. A poor FEED almost always results in a project becoming financially unattractive. For complex development projects, oil companies should spend time developing a quality FEED and evaluate that FEED based on the best technical solution and this should ideally be based on the studies of more than one company.  The result of a poor FEED and an award to the lowest bidder is poor project execution, dramatically increased costs and delays. This is ultimately a recipe for disaster.

Lack of Alliances
Forming an alliance and involving a contracting partner on a full-field development concept from day one, on a risk-reward basis, will benefit the public sector tendering process.  A strong alliance advocates incentives for improved project schedules and innovative and cost effect solutions, which would result in improved investment returns for field operators, especially for complicated deepwater developments where risks can be high and rewards can be great.
There are many factors that influence the process of choosing the right partner.  Oil companies should establish an Evaluation Criteria by which EPIC contractors will be measured, prepare and issue a questionnaire to selected international and national companies, evaluate responses to questionnaires in accordance with the Evaluation Criteria, select the highest scoring prospective partner and should have the selection process accepted by the Board of Public Sector Enterprises under the Indian Ministry of Petroleum.
After completing the selection process, the Agreement Structure for the partnering scheme should be implemented along the following lines. Terms and Conditions of the contract based on recent model contracts executed with the operator, Scope definition with the principles based on working together in the spirit of openness and co-operation to allow partners to be innovative whilst delivering the lowest possible cost solution, project definition where the partners clearly define the scope of work and a compensation basis with a combination of any of the following options-negotiated lump sum price, reimbursable based on cost plus at agreed profit margins, negotiated unit rates based on current projects and target price with agreed risk-reward sharing mechanism with the target cost established based upon an agreed set of criteria.
J. Ray McDermott throughout the world has been involved in a many of the significant alliance/partnering contracts that have been awarded in the offshore oil and gas industry in the past ten years. Our integrated teams have worked in a combination of target man-hours and marine operation productivity projects which has resulted in the successful execution of challenging projects to tight project schedules. This approach has been successful in North America, North Sea, Arabian Gulf, India and the Caspian for clients such as BP, Exxon, Shell, Elf, Conoco Phillips, Cairn Energy, and Reliance Industries.
The mutual benefits of partnering are clear.  The Client needs only to manage minimum project supervision. This allows the Client to focus on their core-business as well as strategy issues. The alliance leads to reduced operational costs for the Client.  The Contractor can plan ahead for utilization of resources to ensure availability for Client projects. Working as a single team with the Client, allows for less confrontation and more cooperation between Client/Contractor integrated team members.  The Mutual Benefits of the alliance sow's the seed for a long term business relationship between Client and contractor and this establishes an interface that results in minimal confrontation. Integrated team efforts result in improved standards in quality and safety and ultimately the shared knowledge base that the teams bring to the project is a huge benefit. Working together in an alliance partnership will deliver improved results.

Local Barriers
Local barriers still persist to insulate the Indian oil and gas industry.  Customs duty can be as much as 40.4% of the CIF value of goods and the unclear definition on its applicability has resulted in application of varying and unpredictable tax for the import of goods for the same reservoir.  The price preference facility given only to Indian companies was primarily set up to protect local Indian companies. This preference should now be rendered obsolete to allow for a truly open and competitive market.  A harsh fiscal regime of added taxes all borne and applicability assessed by the contractor results in large financial costs that only add to the final sell value of a project--corporate tax, sales tax, works contract tax, and service tax, when in reality only a single tax figure should be applied, rather than many taxes that increase the contract costs significantly.

Achieving a Balanced Relationship
A more balanced relationship between contractors and oil companies in the Indian offshore oil and gas industry can be achieved by working together to change the way business is carried out today for a brighter future tomorrow.  The imbalance between the oil and gas companies and contractors must be addressed and improvements must be made. Perennial issues need to be addressed including streamlining the tendering process and moving away from the traditional tendering process whereby "the best price on the day" wins.  Terms and conditions should be improved. There should be caps on overall liability, input cost compensations to compensate for global phenomena beyond contractors control or prediction, providence of major risk insurance and allocation of risks to the right party.  The world has a limited pool of capable contractors and the current practices are viewed as high risk and will either turn them away or they will apply an uncompetitive amount of contingency to bids.  Contracts should not be awarded solely on the basis that they are the lowest bidder as this ultimately leads to delays, cost over runs, claims and counter claims post project award.  Focus should be on track record, technology competence long term partnerships, lead time, resources and performance based trust.  Customs duties should be more clearly defined and set at one unvarying value.  Finally, Indian oil companies need to move away from overall reliance on competitive tendering processes, and instead, select a reduced number of providers by their competence.  These factors alone will provide the win-win relationship that everyone is looking for.
In other areas of the world, oil companies have worked hard to re-address the client contractor imbalance and to set fairer stakes in project developments.  It is time that India work to address the process too.

Arunabha Sen, India Country Manager, J. Ray McDermott Middle East and India
E-mail: ASen@mcdermott.com