Upload
zhangj5
View
240
Download
1
Embed Size (px)
Citation preview
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
8/10/2019 OGL_ScottGreer_Negotiating LNG EPC Contracts
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
8/10/2019 OGL_ScottGreer_Negotiating LNG EPC Contracts
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
8/10/2019 OGL_ScottGreer_Negotiating LNG EPC Contracts
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
8/10/2019 OGL_ScottGreer_Negotiating LNG EPC Contracts
5/39
Selection of ContractorSelection of Contractor
But no matter how good the contractor, thesuccess of your project depends on theind iv iduals
Must specify contractor key personnel
8/10/2019 OGL_ScottGreer_Negotiating LNG EPC Contracts
6/39
Selection of ContractorSelection of Contractor
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.
8/10/2019 OGL_ScottGreer_Negotiating LNG EPC Contracts
7/39
Selection of ContractorSelection of Contractor
FEED Stage
Its become challenging even at the FEED
stage
Why?
Not want to tie up key people
8/10/2019 OGL_ScottGreer_Negotiating LNG EPC Contracts
8/39
Selection of ContractorSelection of Contractor
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%3DN8/10/2019 OGL_ScottGreer_Negotiating LNG EPC Contracts
9/39
Selection of ContractorSelection of Contractor
2 Ways to Con tract for EPC Work
1 Bid
2 Open-Book Sole Source Negotiation
8/10/2019 OGL_ScottGreer_Negotiating LNG EPC Contracts
10/39
Selection of ContractorSelection of Contractor
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
8/10/2019 OGL_ScottGreer_Negotiating LNG EPC Contracts
11/39
Selection of ContractorSelection of Contractor
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.)
8/10/2019 OGL_ScottGreer_Negotiating LNG EPC Contracts
12/39
22-- CostCost
8/10/2019 OGL_ScottGreer_Negotiating LNG EPC Contracts
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
8/10/2019 OGL_ScottGreer_Negotiating LNG EPC Contracts
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
8/10/2019 OGL_ScottGreer_Negotiating LNG EPC Contracts
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
8/10/2019 OGL_ScottGreer_Negotiating LNG EPC Contracts
16/39
CostCost
8/10/2019 OGL_ScottGreer_Negotiating LNG EPC Contracts
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%)
8/10/2019 OGL_ScottGreer_Negotiating LNG EPC Contracts
18/39
EscalationEscalation -- IPA AnalysisIPA Analysis
8/10/2019 OGL_ScottGreer_Negotiating LNG EPC Contracts
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
8/10/2019 OGL_ScottGreer_Negotiating LNG EPC 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
8/10/2019 OGL_ScottGreer_Negotiating LNG EPC Contracts
21/39
33-- Change OrdersChange Orders
What contractual measu res can youimp lement to reduce Change Orders?
8/10/2019 OGL_ScottGreer_Negotiating LNG EPC Contracts
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
8/10/2019 OGL_ScottGreer_Negotiating LNG EPC Contracts
23/39
Change OrdersChange Orders
Soil Issues - key area
of claims
Risks unknown soil
piles
Mitigation - drive test
piles before signingEPC (if possible)
8/10/2019 OGL_ScottGreer_Negotiating LNG EPC Contracts
24/39
Change OrdersChange Orders
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
8/10/2019 OGL_ScottGreer_Negotiating LNG EPC Contracts
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?
8/10/2019 OGL_ScottGreer_Negotiating LNG EPC Contracts
26/39
DelayDelay
Schedul ing
Obl igat ions
Good, detailed CPM
Schedule
Strong contract rights
re: scheduling
obligations Must tie to TUA
obligations
8/10/2019 OGL_ScottGreer_Negotiating LNG EPC Contracts
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?
8/10/2019 OGL_ScottGreer_Negotiating LNG EPC Contracts
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
8/10/2019 OGL_ScottGreer_Negotiating LNG EPC Contracts
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
8/10/2019 OGL_ScottGreer_Negotiating LNG EPC Contracts
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
8/10/2019 OGL_ScottGreer_Negotiating LNG EPC Contracts
31/39
55-- PerformancePerformance Guarantees andGuarantees and
WarrantiesWarranties
Key Issues w ith Performance Guarantees andWarranties
8/10/2019 OGL_ScottGreer_Negotiating LNG EPC Contracts
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
8/10/2019 OGL_ScottGreer_Negotiating LNG EPC Contracts
33/39
Performance Guarantees/WarrantiesPerformance Guarantees/Warranties
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?
8/10/2019 OGL_ScottGreer_Negotiating LNG EPC Contracts
34/39
Performance Guarantees/WarrantiesPerformance Guarantees/Warranties
Warranties
Length of warranty - usually 18 months to 2years
Owner right to correct Assignment of Subcontractor warranties
8/10/2019 OGL_ScottGreer_Negotiating LNG EPC Contracts
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
8/10/2019 OGL_ScottGreer_Negotiating LNG EPC Contracts
36/39
Limitation of LiabilityLimitation of Liability
Delay & Performance Liqu idated Damages
Exceptions to cap
Applicability in the event of termination
Combined cap?
8/10/2019 OGL_ScottGreer_Negotiating LNG EPC Contracts
37/39
77-- Financial SecurityFinancial Security
What financ ial secu r i ty shouldI get from the Contracto r?
8/10/2019 OGL_ScottGreer_Negotiating LNG EPC Contracts
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
8/10/2019 OGL_ScottGreer_Negotiating LNG EPC Contracts
39/39
Scott A. Greer
www.kslaw.com