Turnkey Projects in the Oil and Gas Industry - Case Study Example

Turnkey Projects in the Oil and Gas Industry Background From the provided scenario, it is determined that a company’s new boss wanted the project manager to prepare a report on the advantages and the disadvantages of the turnkey contract solutions. In this regard, the company requires the report as it is financially sponsoring the design along with building a new 200k bpd (barrels per day) refinery within a particular West African nation. It is further devised that the boss has worked upon in a turnkey contract pertaining to the similar size along with scope for Ghanaian oil and gas sector that had been initiated in the year 2008. This work experience will assist the manager to design the report on the basis of the turnkey concept. West African countries are determined to be on the verge of being regarded as a developing state. However, managing an oil refinery project will require extensive research and effective application of the project management concepts. In such situation, turnkey projects might provide help to the project manager. Introduction Turnkey concept in recent scenario is neither a new term for the organisations nor it is being only used in the international contracts. This particular term was generated in the United States while building and designing the oil and gas industry based establishments. Apart from this, the term is being vastly used with regard to ‘single responsibility’, ‘design constructor’ and ‘package contract’ among others. Under the purview of turnkey contract, it is considered that the contractor is designated for designing as well as building of the facility (Schneider, 1986). In accordance with the findings of the Wöss (2008), it has been ascertained that the International Chamber of Commerce (ICC) had designed a latest model with regard to the turnkey contract. This particular latest form had been developed with a view to suite the commercial contract in the year 2007 (Wöss, 2008). This particular report intends to discuss the base concept of the turnkey contract or projects. Besides, the report further intends to reflect the advantages and disadvantages of the turnkey contracts. In this regard, it can be further conveyed that the report will discuss the different types of turnkey contract systems with example. Furthermore, the report also intends to discuss the vital responsibilities of the owner, designer and the contractor related to turnkey contract. This report will assist in deriving information about the concept of turnkey contracts and how it is being associated with the project management notion (Wöss, 2008). Explanation of the Notion i.e. Turnkey Contracts Are Still the Method to Prevent Project Cost Over-Runs and Deliver On-Time Completions Turnkey contracts represent a method which is usually being applied by the foreign company pertaining to the export strategies. In this respect, the foreign companies export the processes and technologies by designing and building a plant in another country. With respect to the procedure, the company in a different country hires a contractor and builds up the operation there. Such projects are termed as turnkey contracts as after the completion of the project, the foreign company sells it for the operational purpose. Furthermore, it has been observed that turnkey is applied within the organisations, which are specialised in the production technologies and pharmaceutical industry among others. In this context, it is further acknowledged that the organisations in these fields are complex as well as expensive (Evans, 2005). Turnkey contracts endure various characteristics that assist a company in the completion of the project. The key characteristics of the turnkey contract are the machinery equipment, project administration, operation, licensing, material control and ‘mega projects’ among others. The functions of the turnkey contracts express the obligation of the contractor with regard to the completion of the project as per the client’s specification. Correspondingly, the project must be completed in time and at a reasonable price. Other vital function of the turnkey project is that it details about the position of the different parties being involved in the project execution. The details relate with the payment, time and quality among others (Baker, 2004). Considering the case scenario, the project pertains to the design along with building of oil and gas unit in a West African nation. In this regard, it has been observed that the West African nations are projected to witness major development in the not so distance future. The application of the turnkey projects provides an in-depth understanding of the concept and its underlying benefits and disadvantages (Baker, 2004). Project Cost Over-Runs and Deliver On-Time Completions: Explanation of the Concept It has been ascertained that there exist five basic and vital reasons that mainly cause project delays and also result in cost over-runs (KPMG, 2013). An in-depth analysis of this concept replicates that delay along with cost overrun are incorporated with the process of project management. It might seem that these factors are not so important but the modern day organisations are driven under the dais of profitability and sustainability in the midst of the competitive market scenario. In this regard, it has been further observed that in order to derive profitability, time, scope and sustainability are the necessary elements. Design error is considered to be a major problem that results in cost overrun. The project design with errors usually means insufficient representation pertaining to the project deliverables. This further will lead to the faulty application of the techniques with regard to achieving the result. Another reason for the cost overrun and delay is regarded as scope change. Scope is the term that defines the entire set of deliverables that is expected at the end of a project. Therefore, logically, it can be said that “all project plans, estimation, schedule, quality and base lines are usually designed base in the initial project scope. Thus, any change in the project scope during execution will mean that the entire initial project plan will have to be reviewed such that a reviewed budget, schedule and quality will have to be developed” (Ambituuni, 2011). Benefits of the Turnkey Contracts The benefits of the turnkey contracts reflect about the reduction in the scheduling process and the cost associated with it. Besides, the other advantage of the turnkey contract is regarded as the centralisation of all the responsibilities with respect to the construction and supplying of the materials among others. On further note, it has also been ascertained that it enables the countries to shares their advanced technological knowledge with the other diversified countries. For instance, the Middle East countries usually do not like the interference of the United States as well as other countries pertaining to oil refining. This is done with a motive to earn more profits. Nonetheless, the Middle East countries are not enough adept in the process of oil refining, they depend on foreign countries for gaining technological know-how. In this regard, the Middle East countries practice turnkey contracts in order to gain the knowledge with respect to technological know –how for the foreign countries (Shapiro & et. al., n.d.). Disadvantages of the Turnkey Contracts In accordance with the disadvantages of the turnkey contracts, there are mainly few drawbacks that create a hurdle in the proper execution of the aforementioned strategy. It has been observed that in most cases the turnkey projects usually lose their interest in the foreign country. However, it has been observed that in order to create a turnkey project, the information of the proprietor stands out to be a vital point. Subsequently, the company requires transferring few of their details and secrets to the foreign company. This can stand out to be a disadvantage and might create a hurdle in the successful implementation of the turnkey projects (Huse, 2002). West African nations are considered to be emerging at a rapid pace. In this regard, the turnkey contracts also endure certain disadvantages with regard to the developing countries. As the base of the turnkey project is considered to be the foreign countries, such projects are likely to face challenges with regard to the diversified culture, internal economic constraints and the political environment. This can be considered as the key disadvantage of the turnkey projects (Evans, 2005). Examples of the Global Organisations Practicing the Turnkey Projects With respect to the instances of turnkey projects, it can be ascertained that the American companies including Betchtel Corporation and Fluor Corporation have adopted the strategies of turnkey projects. Consequently, it has been observed that these companies have built and designed various foreign projects. Apart from this, Congentrix, an energy power management company has also built electric power plants within diversified countries. Another example with respect to the turnkey contracts is Fiat, an Italian automobile company that constructed its plant within Russia. These instances mainly reveal the importance and the extensive use of turnkey contracts (Caicedo, 2013). Effective Analysis of All Other Project Contracting Systems to Provide an Objective Assessment on Turnkey Contracts Different Types of the Contracting Systems That Are Used In the Oil Industry Construction Contracting World Modern Concessions In the modern day scenario, the recent contracts mainly aim at the fulfilment of the national development along with the welfare goals. In accordance with the contacts being applied in the modern organisation i.e. mainly the oil industry based companies, they essentially provide a company with the power to explore, market and to produce the resources. There exist few core principles of the modern concession contracting system with regard to the oil industry. It must be designed in accordance with the policies being framed for the ‘Private Sector Participation’ (PSP). The strategy that is applied to promote the PSP contains the set targets as well as the principles for improving the legal environment of the private sectors. On further note, another core principle of the modern concession can be regarded as its allowing of the easy access pertaining to a fair along with legal environment (Ebrd, n.d.). Example 1: An instance can be described with regard to the contract between Indonesia and the P.T. Stanvac Indonesia (PTSI). In this regard, further observation conveyed that this particular project was planned in the best possible manner to fulfil the organisations’ motive. The motive was to ensure the progressive development pertaining to the petroleum industry within Indonesia (Likosky, 2009) Production-sharing Agreements The concept associated with the Production-Sharing Agreements (PSAs), states about the contract that establishes mainly between the investors and government. Correspondingly, the contract incorporates the rights pertaining to the extraction, prospection and exploration of the mineral resources from a particular area. An in-depth analysis of the PSA conveys the basic characteristics. It reflects the parties being involved that share the hydrocarbon production and eventually leaves the title pertaining to the unproduced oil with the state. Apart from this, it has been further ascertained that PSA is continued to be applied in respect of establishing relationship in between the international oil companies (IOCs) and the other resource-rich countries. This is done with the motive to explore, develop and produce hydrocarbons. It has been ascertained that the fundamental notion of this contracting system is shared production (IIED, 2012). Example 2: It has been ascertained that PSAs have encouraged various private investments within the unverified areas. This can be further explained with an example. “Agreement on the exploration, development and production sharing for the Shakh Deniz prospective area in the Azerbaijan sector of the Caspian Sea” reflects the example of the PSA contract system (Likosky, 2009). In this regard, the agreement was mainly established amid the ‘State Oil Company’ and ‘BP Exploration’, ‘Elf Petroleum’, ‘Lukoil International Limited’, ‘Oil Industries Engineering and Construction’ and ‘Turkish Petroleum Overseas Company Limited’ among others (Likosky, 2009). Joint Ventures In recent times joint ventures as a contracting system are being applied in the oil and gas sector with a motive to avoid risk. It ensures sharing of risk along with costs associated with industry norms. It has been observed that the establishment of the joint venture is essentially achieved by a formal contract or under governance arrangements. In a joint venture, the parties are arranged with a motive to involve them in controlling the venture operations. Besides, the arrangements being made within this contracting system fundamentally involve three vital categories. They are categorically termed as the ‘jointly controlled operations’, ‘jointly controlled entities and ‘jointly controlled assets’. On further note, it has been ascertained that mergers and acquisitions within the oil and gas industry had accelerated in the year 2010. On the basis of this finding, it has been further determined that credit markets pertaining to the oil are opening. Consequently, the major and independent players of the capital-intensive market pertaining to the oil and gas industry are vigorously entering into partnership (EYGM Limited, 2011, 2011). Example 3: Currently, the world is viewing an accelerated joint venture and partnership in various industrial sectors. Nevertheless, the oil and gas sector is the industry, which is engaging mainly in joint ventures and partnerships. For instance, the joint venture agreement held between Exxon Mobil and Rosnefit, a Russia based oil company can be highlighted. In this respect, both the companies agreed upon to open up an American domestic oil and gas field with respect to the Russian investment (Krauss, 2012). Service Contracts A service contract is regarded as the contractual framework, which is mainly applied by the governments for acquiring IOCs expertise along with capital. In keeping with the service contract, the IOCs implement advanced technologies and therein initiate capital investment. Apart from this, in case of service contract, the IOC determines to take return with respect to the sharing of oil profit. As assessed, the prior driving factor for the countries to involve in the adoption of the service contract is to maintain their sovereignty pertaining to the natural resources. Furthermore, it has been ascertained that under the service contracts the parties mainly maintain field ownership. Service contract is looked upon as an advantageous contracting system for the countries as it enables them to keep up control on oil fields by applying their expertise. Example 4: The implementation and the use of the service contract can be explained by citing an example. The oil operation within the Norwegian Continental Shelf (NCS) is mainly characterised by accelerated rates and shortage with regard to rigs. Apart from this, it has been observed that the efficiency of drilling has also been decreased to a certain extent. This scenario was responsible for the incentive mechanism pertaining to the service contract of oil and gas companies (Ghandi & Lin, 2013). Responsibilities of the Owners, Designers and Contractors in Any Refinery Newly Build Owners It is the responsibility of the owners of refinery fields to adhere to the set rules and regulations. In this context, it has been ascertained that the owners of the refinery fields follow the labour rights to ensure proper maintenance of the human resources. It is the responsibility of the owner to have an in-depth understanding of the labour rights to deal with union and political problems during emergency. Besides, the owner of the refinery also ensures the responsibility of adhering to the regulations being mentioned in the corporate social responsibility. Ensuring employee relations effectively is another vital responsibility of the owners to maintain stability within the refinery field. On further note, health and security sector is another important area, which requires the special attention of the owners (Usa, 2013). Designers Mechanical engineers are important constituent within the oil and gas sector as they assist in the designing of the refinery field. There are diversified areas for which the mechanical engineers are responsible. It is their responsibility to implement developing technologies in the oil field. Moreover, while designing the refinery field, it is also important for the designer to monitor the operations pertaining to the mechanical equipment. The designers also involve in the evaluation along with inspection of the technical process to ensure effective standard (Usa, 2013). Contractors The organised processes have been designed for the contractors of the refinery build. The processes have been briefly explained hereunder (Usa, 2013). Step 1: It involves the pre-requisite training for the contractors Step-2: The next step that is followed by the contractor is to check the ‘Site Specific Contractor Orientation’ Step-3: It is necessary for the contractor to mitigate the responsibilities of the TWIC (Transportation Worker Identification Credential) card process Step-4: It is necessary for the contractor to pass the drug test before entering the oil refinery field Step-5: On further note, it is the responsibility of the contractor to undergo additional training (Northern Tier Energy, 2011) Conclusion The concerned report provides a brief description about the importance of project management process. The report further reflects a new concept i.e. turnkey contracts that frames a vital part of the project management domain. With regard to the turnkey contracts, it assists the companies to foster export operations. Turnkey is regarded as the method, which is usually being adapted by the foreign companies to build up their operations. Certain advantages and disadvantages of the turnkey projects have also been determined which play a key role ensuring success of the involved parties. Apart from this, the report also provides an overview of the base concepts of the project management. Project-cost over runs and deliver-on time are two vital concepts related to project management process. An in-depth study of the report has revealed that the application of turnkey contracts within the organisations essentially the oil and gas sector based companies has positively contributed to the reduction of the aforementioned elements. As discussed in the report, it also reveals the different types of the contracting system pertaining to the oils and gas sector. Modern concession, production-sharing agreements, joint ventures and the service contracts are the various types of the contracting systems. From the overall evaluation, it can be evidently stated that ‘turnkey contracts are still the method to prevent project cost over-runs and deliver on-time completions’. These contracts are crucial to ensure that projects taking place on a foreign land are executed successfully. Moreover, the validity of the contract is also crucial for the executing entities of the contract to ascertain desired outcomes. Besides, the turnkey contract projects within the oil and gas industry can successfully tackle cost related complications which often emerge as a major hurdle to attain desired success. References Ambituuni, A., 2011. Causes of Project Delay and Cost Overrun, and Mitigation Approach. Academia. Baker, E., 2004. Turnkey Contracts: Getting It Right from the Start. Worldwide Independent Power, pp. 24. Caicedo, M. H. K., 2013. Turnkey Projects. Slide Share, pp. 1-6. Evans, R. E., 2005. Report on a Turnkey Project for Apple’s iPod in Nigeria. Turnkey Report – Nigeria, pp. 1-9. Ebrd, No Date. Core Principles for a Modern Concession Law (MCL). Concessions, pp. 1-2. EYGM Limited, 2011. Why Consider a JV? Publication, pp. 1-16. Ghandi, A. & Lin, C. Y. C., 2013. Oil and Gas Service Contracts Around the World: A Review. Paper, pp. 1-24. Huse, J. A., 2002. Understanding and Negotiating Turnkey and EPC Contracts. Sweet & Maxwell. IIED, 2012. How to Scrutinise a Production Sharing Agreement. SFK, pp. 8-57. KPMG, 2013. Study on Project Schedule and Cost Overruns. Expedite infrastructure Projects. Expedite Infrastructure Projects, pp. 1-123. Krauss, C., 2012. Exxon and Russia’s Oil Company in Deal for Joint Projects. The New York Times. [Online] Available at: http://www.nytimes.com/2012/04/17/business/energy-environment/exxon-and-russian-oil-company-agree-to-joint-projects.html?_r=1& [Accessed March 14, 2014]. Likosky, M., 2009. Contracting and Regulatory Issues in the Oil and Gas and Metallic Minerals Industries. Transnational Corporations, Vol. 18, No. 1, pp. 1-42. Northern Tier Energy, 2011. Contractor Responsibilities. Step-by-Step Requirements. [Online] Available at: http://www.ntenergy.com/?page_id=210 [Accessed March 14, 2014]. Schneider, M., 1986. Turnkey Contracts Concept, Liabilities, Claims. International Company Lawyers’ Conferences, pp.19-21. Shapiro & et. al., No Date. Design/Build and Turnkey Contracts – Pros and Cons. Document, pp. 1-16. Usa, U. I., 2013. Indonesia Mining, Oil & Gas Industry Export-Import and Business Opportunities Handbook Volume 1 Strategic and Practical Information. Intl Business Publications. Wöss, H., 2008. The ICC Model Turnkey Contract for Major Projects. Construction Law International, Vol. 3, No. 2, pp. 6-11. Read More