ogl_scottgreer_negotiating lng epc contracts

8/10/2019 OGL_ScottGreer_Negotiating LNG EPC Contracts

1/39

Negotiating LNGNegotiating LNG EPCEPC Contracts in a TightContracts in a Tight

Construction MarketConstruction Market

Scott A. Greer

International Bar Association Annual Conference - ChicagoLNG from A to Z - September 18, 2006

Scott Greer, King & Spalding


2/39

CriticalCritical IssuesIssues

1. Selection of Contractor

2. Cost3. Change Orders

4. Schedule

5. Quality of Work and Performance

6. Liability Limitations

7. Financial Security


3/39

11-- Selection of ContractorSelection of Contractor

Who shou ld I select as the EPC contracto r?

Contractor with LNG experience

Financially strong

Ability to perform within budget, on timeand with quality work


4/39

Selection of ContractorSelection of Contractor

Sample Lis t of LNG Con tracto rs

Bechtel

Technip

Saipem

CBI

Chiyoda

KBR/JGC

Tractebel

Zachry

Aker Kvaerner


5/39


But no matter how good the contractor, thesuccess of your project depends on theind iv iduals

Must specify contractor key personnel


6/39


However, it is a very tight construction

market for LNG projects. Contractors are becoming choosy.

at least one currently declines most terminalwork

Therefore, currently more difficult to choosecontractors.


7/39


FEED Stage

Its become challenging even at the FEED

stage

Why?

Not want to tie up key people


8/39


Beware o f Key Contract Issues at FEEDStage

ownership of drawings and specs

confidentiality

guarantee of EPC work
http://images.google.com/imgres?imgurl=http://fawny.org/blog/images/ArchitecturalDrawingSheaf-SM.jpg&imgrefurl=http://blog.fawny.org/2005/05/&h=350&w=500&sz=42&tbnid=5CFPZcJehK_utM:&tbnh=88&tbnw=127&hl=en&start=99&prev=/images%3Fq%3Darchitectural%2Bdrawings%26start%3D80%26svnum%3D10%26hl%3Den%26lr%3D%26sa%3DN


9/39


2 Ways to Con tract for EPC Work

1 Bid

2 Open-Book Sole Source Negotiation


10/39


If Bid . . .

Recommended Approach FEED by one contractor Bid of EPC not include FEED contractor

Advantages/Disadvantages Time

Competition

Flexibility

But Bidding less common in tight market may be possible only in larger projects


11/39


If Open-Book Sole Source Negotiation . . .

More common currently for LNG terminals Advantages/Disadvantages

Time

Competition Flexibility

Recommended Approach Competitively negotiate MOU for FEED andEPC, setting out key terms, includingmarkups (profit, etc.)


12/39

22-- CostCost


13/39

Cos t of LNG Projec ts Has Increased

CostCost

Historically, prices dip due to improved technology

Now, due to (1) contractor demand (i.e., profit margin and riskcontingencies) and (2) material and equipment escalation, cost

of LNG projects has significantly increased

Example Liquefaction Plants

Poten & Partners

Recen tly (2004)- $200 t/yr

Now - $250 - 350 t/yr

Zeus

Recen tly (2003)- $200 t/yr

Now- in excess of $500 t/yr


14/39

CostCost

Reported Examples:

RasGas III EPC - $256 t/yr Yemen LNG - $300 t/yr

Tangguh - 18 month delay in investmentdecision led to increase from $1.4 B to $1.8 B

Woodside Petroleums North-West Shelf Gas

Project - Reported on September 6, 2006 that Cost

blowouts hit Woodside Petroleum

Increase from $2B to $2.4B for 4.2 M tonneplant = $571 t/yr


15/39

CostCost

LNG projects typ ical ly lump sum with maybe exception for nickel steel exception to Lump Sum - Chenieres Sabine

Expansion project

But now have seen exceptions for other raw

materials Contractors have hard time holding prices, orcharge for the risk

e.g ., carbon s teel

ways to m it igate contractor hedge

tie to index

limit time of variability


16/39

CostCost


17/39

CostCost -- IPA AnalysisIPA Analysis

One Study of Project Costs - Independent ProjectAnalysis (for SPE Foundation, by E.W. Merrow)

# Projects Surveyed: 118 (from year 2002 and forward)

Project Cost Range: $340 million - $6.8 billion

Project Location: North America (5%); Middle East (21%); Asia (19%);

West Africa (25%); South America (16%); Europe (5%); South Africa (5%);Mexico (3%)

Type of Projects: LNG (17%); Mineral (17%); Chemical (14%); Oil Refining

(7%); Oil and Gas Field Develop. (55%)

Contracting Strategy: EPC lump sum (71%); Reimbursable EPC (71%);

Reimbursable EPCM (17%); and Other (5%)

Contractor Selection: Bid (61%); sole source (10%); preferred (29%)


18/39

EscalationEscalation -- IPA AnalysisIPA Analysis


19/39

Profit Margin and RisksProfit Margin and Risks -- IPA AnalysisIPA Analysis

IPA reports.

Significant increase in profit margins: 2 to 5% from 1990 - 2002 9 to 12% targets from 2004 and 2005

Significant increase in risk contingencies,particularly West Africa and Middle East

Significant premium for EPC lump sumcompared to reimbursable/mixed contracts


20/39

CostsCosts

What can be done about the rising costs?

increase competition

additional investigation prior to contractsigning

allow flow-through of costs for certainvolatile raw material costs

where financing and plant performance willallow it, consider whether the project can bedivided into smaller projects

negotiate profit margins, etc. up front


21/39

33-- Change OrdersChange Orders

What contractual measu res can youimp lement to reduce Change Orders?


22/39

Change OrdersChange Orders

Act ions Before Con tract Signed?

Good Scope of Work Both parties work diligently on scope

Performance based specifications, to theextent possible, but with sufficient detail todescribe requirements.

Owner should fully vet scope of work,particularly if FEED contractor is same asEPC contractor


23/39


Soil Issues - key area

of claims

Risks unknown soil

piles

Mitigation - drive test

piles before signingEPC (if possible)


24/39


Con trac t Measures?

Get Contractor contractualbuy-in to scope

Tight change order clauses:

Change only by change order

Unilateral by Owner or mutual

Monthly lien & claim waivers

No cumulative impact claims


25/39

44-- DelayDelay

What measu res canyou take to reduce

your chances of

hav ing a lateproject?

If it is late, what areyour remedies?


26/39

DelayDelay

Schedul ing

Obl igat ions

Good, detailed CPM

Schedule

Strong contract rights

re: scheduling

obligations Must tie to TUA

obligations


27/39

DelayDelay

Iden ti f icat ion o f Miles tones /Damages

Milestones: Ready for Cool Down (RFCD) or Ready for LNG

Critical juncture is the delivery of LNG

Partial Operation? Notice Requirements - tie to TUA obligations

Substantial Completion

Operation

Final Completion

Others?


28/39

DelayDelay

Delays Caused by Owner, Force Majeure, etc.?

Clear definition of force majeure

Clear definition of when schedule extensionis justified

Effects of 2005 Gulf Coast Hurricanes


29/39

DelayDelay

Late delivery?

Recovery rights

Acceleration rights

Delay LDs at Substantial Completion

Daily liquidated damage amounts stepped - low to high ranges of LDs

Caps Exceptions to caps

willful misconduct, gross negligence

Not exclusive remedy


30/39

DelayDelay

What if there is a delay at RFCD or Ready forLNG for a terminal?

Contractual protection --- indemnification for demurrage charges Liquidated damages


31/39

55-- PerformancePerformance Guarantees andGuarantees and

WarrantiesWarranties

Key Issues w ith Performance Guarantees andWarranties


32/39

Performance Guarantees/WarrantiesPerformance Guarantees/Warranties

Perfo rmance Guarantees

Tie Contractor obligations tocommercial obligations in TUA

If inadequate performance, what is the

sponsors remedy against contractor? Liquidated damages? Fix?

Examples: send-out rate


33/39


Other Cri t ical Issues Re: Perfo rmance

Guarantees New technologies - ex: regasification

Availability of ships for terminals Downstream capacity

Who operates prior to SubstantialCompletion?


34/39


Warranties

Length of warranty - usually 18 months to 2years

Owner right to correct Assignment of Subcontractor warranties


35/39

66-- Limitation of LiabilityLimitation of Liability

Aggregate L iab i l i ty Cap

Range of Cap

Except ions to cap:

Willful misconduct & gross negligence Contract specified exceptions

Common law exceptions

Insurance proceeds Obligation to finish work

Indemnification obligations


36/39

Limitation of LiabilityLimitation of Liability

Delay & Performance Liqu idated Damages

Exceptions to cap

Applicability in the event of termination

Combined cap?


37/39

77-- Financial SecurityFinancial Security

What financ ial secu r i ty shouldI get from the Contracto r?


38/39

Financial SecurityFinancial Security

1. Parent Guarantee

2. Letter of Credit/Bank Guarantee or

Payment/Performance Bonds1. general sponsor preference - letter of

credit/bank guarantee

2. range of amount of letter of credit/bankguarantee

3. Retainage -1. Trend: letter of credit/bank guarantee taking

the place of retainage in many cases

THANK YOUTHANK YOU


39/39

Scott A. Greer

www.kslaw.com

ogl_scottgreer_negotiating lng epc contracts

Documents