Beyond Engineering: Lessons learnt from a Lenders’

Technical AdvisorEuropean Contractors’ Conference

103rd Conference - Paris, France

May 26th 2016

Sailesh Patel

Presentation Objectives• Bridge Financing, Engineering, and Project Execution.. for mutual

benefit

• Identify, mitigate, and reduce Project stakeholders’ risks during development, implementation, and execution (whether financed or not)

• Understand and relate Project technical risks from a Lender perspective

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Introducing BlueTech Advisors• Investor-oriented technical and environmental risk advisory, launched Mar ‘16

• Cover Process and Power projects, including renewables

• Chris Sanderson• 40 years experience: 25 in PF, advised on over $200 bn in project capital value inc.,but

not limited to, all Qatari LNG, APLNG, Ichthys LNG, Cameron LNG, Mozambique LNG, numerous LNG terminals and Regasification, Refinery expansion, Pipelines inc Nord Stream, etc

• Sailesh Patel• 15 years experience: 5 in PF, advised nearly $30 bn in PF capital value inc. Cameron

LNG Expansion, Nord Stream, Barzan Gas, Yemen LNG, refinery upgrades, LNG and gas to power, and petchem

• Experienced Associates• bluetechadvisors.com

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Lenders’ Technical Advisor role

• Help Lenders (and effectively, Sponsors) identify and mitigate ‘material’ investment risks. i.e. gaps against Lender requirements and expectations• Pre-EPC Due Diligence -> FEED/FEL, contract execution, and early works

• EPC Construction Monitoring -> Project execution

• Project (Lenders’) Completion Support -> Lenders’ Test etc, outside EPC scope

• Operations Monitoring -> outside EPC scope

• Interface with Lenders’ other advisors (typically Financial, Insurance, Shipping, and Legal) during financing process

• NOT an Engineering Advisor or Auditor!

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• Engaged during financing, through construction and operations up to Lender exit

Pre-EPC Due Diligence objectives• To achieve Lenders’ financing requirements, considers:• Technology, engineering and design – identify use of untried / untested and assess risk exposure

• Third party interfaces - feed supply, utilities, Contractor and product offtake• Execution and construction strategy • Geography and logistics

• Commercial and contractual gaps – EPC, Licensing, PMC, SPAs, OMAs• Permitting, regulatory and fiscal requirements • Environmental and social impacts

• Operations strategy• Performance• Schedules and Economics – inc. benchmarking

• Financial Model – EPC drawdown, sensitivities, O&M costs

• Objective is to identify and differentiate between typical, normal industry risks and project specific risks

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Pre-EPC lessons learnt (1/2)• Technology and design risks are understood

EPC Risk: frequently technologies considered ‘low risk’ within overall execution strategy, technology risks inadequately recognisedEPC Mitigation: technology risks assessed, risk mitigations demonstrated (e.g. comparable design and operating references), implementation risks assessed for cost, schedule, reliance on third-party workload and quality

• Execution and contracting strategy with responsibilities and possible cost and schedule overruns recognised

EPC Risk: over-optimistic client requirements, forecasting, and contract commitment, esp. in downturn environment (though applies also in upturn)EPC Mitigation: recognise potential skills and resourcing shortages, possible impact of dependence on subcontractors similarly affected by downturn/upturn; project site conditions and logistics may require social management and engagement, timely permit issue; realistic cost benchmarkingEPC Risk: shortage of capable contractors and skills shortage with all too obvious results of poor design, increasing cost and extended schedulesEPC Mitigation: resourcing plan demonstrated, impact and reliance on local requirements assessed, including interfaces and possible impacts due to other projects both locally and internationally (e.g. yard and transport requirements)

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Pre-EPC lessons learnt (2/2)• Operations and maintenance ability to achieve the expected performance to budget

EPC Risk: Performance tests requirements may be more stringent due to Sponsors’ Project financing requirements (no step-away or deemed rights)

EPC Mitigation: Identify, negotiate, and ensure performance risks and dependencies adequately ring-fenced (e.g. may rely on key supplier and/or subcontractor whose penalties are outweighed by EPC)

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EPC Construction Monitoring• Regular Independent Monitoring• Site visits, meetings, and Lender reporting

• Assessment of contractor and sponsor performance with emphasis on adding value to Sponsor while representing Lenders’ interests and compliance requirements

• Performance testing assessment at construction completion

• Lenders’ completion certification (within EPC-scope for Power, outside for Process)

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EPC lessons learnt (1/3)• Contracting strategy, management of multiple contractors and management of interfaces

EPC Risk: contracting strategy exposes project to conflicts of interest during project execution, shortcomings in design and execution, PMC over-stretched, EPC may risk loss of any financial incentive. Too often PMT Management does not get involved on the ground and believes what it is told leading to unexpected design changes, schedule failure and costs overrun.EPC Mitigation: Review teams to suit each stage of the Project; starter, completer, finisher capabilities all require different skills and experience mix, and organisationalchange management. Project teams should always included some of the clients intended operations team from design stages onwards.

• Interfaces and dependence on third parties including the integration between any upstream developments, export and offtake

EPC Risk: reliance on third-party in order to perform commissioning and performance tests EPC Mitigation: incorporate contractual safeguards, manage and incentivisethird-parties, identify dependencies and alternativesEPC Risk: interface management – reliance and responsibility; consequences for E, P, CEPC Mitigation: develop project interface and stakeholder management plan; technical interfaces should recognise responsibilities, handover, and consequential adverse effects and liabilities Should be rigorous matrices prepared detailing action timing and responsibility. Failure to understand Environment, Construction and Operational Permit requirements and obligations frequently cause delay and additional cost – rigorous control required.

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EPC lessons learnt (2/3)• The technologies to be applied and their integration into a successful operation

EPC Risk: supplied technology does not meet schedule, cost, or performance requirements

EPC Mitigation: incorporate and integrate technology supplier into project execution, monitor supplier; develop early agreement (and walk away right) during pre-award so that schedule can be met; early engagement with ECA if contingent for supplier

• Environmental and social complianceEPC Risk: environmental and social management does not meet Lenders’ holistic requirements, or international standards (even where local met)

EPC Mitigation: implement management and culture from pre-award, with accountability independent from other project management objectives

• Operations and maintenance philosophy, resourcing and training EPC Risk: EPC requirement to support owner during initial operations

EPC Mitigation: develop plan with owner during early development, provide flexibility through contract options

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EPC lessons learnt (3/3)• EPC Completion testing regime

EPC Risk: resourcing and readiness for performance tests, requires owner acceptance, usually more rigorous due to PFEPC Mitigation: experienced commissioning team, contract should require appropriate technical demonstration

• Achievements should be demonstratedEPC Risk: reporting does not reflect real progress, shortcomings not recognised, potential material execution impact EPC Mitigation: recognise different project cultures, embed transparency between achievements, on-site management, reporting and resolution

• Health and SafetyEPC Risk: No lender or finance body wants to be associated with an unsafely implemented project. Too many cases known where PMT EHS policies inadequately observed and applied. EPC Mitigation: recognise requirements and rigorously apply and record. Ensure “Stop Work” policy exists and is made mandatory part of every employees obligations – management must listen to the people on the ground.

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Final Takeaways• Identify and differentiate between typical, normal industry risks and

project specific risks

• Are the risks material to EPC success (and contractual obligations), and do required mitigation measures address the risk

• In a live project with advancing timescale, are mitigations workable and compatible with Sponsors’ reporting and resolution requirements

• Demonstrate that risks have been identified and can be mitigated

• EPC Should ensure realistic schedules and costings and ensure PMT is appropriately organised and managed for the stages of the project execution. No one solution for all cases.

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Thank You