TUDARCO-PROCUREMENT ISSUES IN OIL AND GAS CONTRACTS

PROCUREMENT ISSUES IN OIL AND GAS CONTRACTS:INDUSTRIAL PRACTICE IN TANZANIA

A: MEANING AND PRINCIPLES OF PROCUREMENT “Procurement” means buying, purchasing, renting, leasing or otherwise acquiring any goods, works or services by a procuring entity and includes all functions that pertain to the obtaining of any goods, works or services, including description of requirements, selection and invitation of tenderers, preparation and award of contractsThe oil and gas industry characterizes complex procurements due to the long lead times and high costs involved. In many cases the procurement is technically very complex and uncertain as each project is unique.

• Public procurement means “an acquisition, whether under formal contract or otherwise, of works, supplies and services by public bodies using publicly sourced finances. It involves the purchasing, hiring or obtaining by any contractual means of publicly needed goods, construction works and services by the public sector. It also includes situations in which public funds are mobilized to procure works, goods and services even if the government does not get directly involved”.

A: MEANING AND PRINCIPLES OF PROCUREMENT

• UNCITRAL model law principles: The Model Law tries to set up laws and procedures which emphasize fairness, transparency integrity as espoused in the 2011 UNCITRAL model law principles.

• “Principles Model” emphasizes more of the principles of procurement in accordance with good governance practice. The National Public Procurements Policy is based on the Principles Model which has enshrined the universality of the UNCITRAL model law; its Rationale is that, once a body is spending public money there follows an obligation on that body to account for that specific public expenditure.


• Value for Money principle: The Core Principle underlying public sector procurement which in a procurement function is a good measure of an economy and efficiency with which public financial resources are converted into procured quality goods, services and works. It is evaluated on a whole-of-life basis of the good or service being procured.


B: CONTRACTING CONCEPTS IN OIL AND GAS • Individual Contracts. Oil companies enters into a number of individual contracts with each contractor, the operator manages the contract on a one-to-one basis and for each different phase and task in the project the operator would have a new contractor.

• EPIC (Engineering, Procurement, Installation and Construction). The exposure of interfacing between individual contractors is sub-delegated to one particular main contractor, (integrator) who turn subcontracts the various work packages to the subcontractors and is responsible to coordinate them. Contractor carries the project risk as well as budget in return for a fixed price (lump sum). Normally, the main contractor enters into individual contracts with each subcontractor.

B: CONTRACTING CONCEPTS IN OIL AND GAS Disadvantage of EPIC: 1)It is unsatisfactory for the operator because the main contractor successfully excluded the financial exposure resulting from the interfacing between various subcontractors from its contract with the operator. 2)Does not bring cost savings for the operator

B: CONTRACTING CONCEPTS IN OIL AND GAS • “integrated project organizations” or “alliances”. It replaced the traditional interfaces between contractual parties with a more effective integration of resources i.e EPIC. In such contract the operator and all contractors involved are responsible for how the tasks are divided between the actors, and for coordination between phases and actors

Advantage of IPO-Alliance: smoothen coordination between all parties involved (operators, contractors, subcontractors and vendors), and thereby reduce costs, increase quality and shorten production time. The operator enters a contractual relationship with several contractors, based on a mutual sharing of risks, rewards and resources.

C: PROCUREMENT STRATEGIES

C: PROCUREMENT STRATEGIES

C: PROCUREMENT STRATEGIES Economic Impacts of Oil and Gas Activities: The Direct and Indirect Value Creation

D: EVALUATION CRITERIAMeaning of Evaluation Criteria:1.Standards used to evaluate offeror’s technical and/or operational effectiveness or the standards on which a technically sound judgement or decisions on the selection of various alternatives may be based.2.Benchmarks or standards used as point of reference for evaluating performance or level of anticipated quality; or the yardsticks against which accomplishment, conformance and suitability of an individual alternative activity, product or plan as risk award ratio are measured.Benchmarks or standards may be drawn from a firms own experience, experience of other firms or the legal requirements such as environmental, professional bodies standards

How to Develop Evaluation Criteria 1. Organisational Goals (Strategic/Commercial and

Operational): Each Oil and Gas Company has a business plan or strategy combining marketing and communication strategy, operation and logistics strategy and financial management strategy.[KPOs are Sustainable Quality or its assurance regarding inputs and outputs; Dependability to Customers; Flexibility on changes of specification; Speedy delivery, Cost and competitive price. ]

2. Organisational Capabilities: specific competencies in an industry or area of expertise of the Oil and Gas Company.

3. Industrial Requirement: Oil and Gas Industry has specific requirements for ownership, process management, organisation structure and resource acquisition and sustainability to deliver a certain level or type of professional service

4. International Standards and Conventions: The global transactions are guided by standards and conventions to facilitate suppliers to deliver goods or services that are internationally acceptable and may be exported from one country to the other.

5. Legal and Statutory Requirements: laws and procedures governing the procurement process, production, distribution and delivery of products or services. It includes specification of documents and information to be submitted by bidders, date, place and format of submission of bids; legal arrangements for delivery of such products, Normally, legal requirements vary with products and services.

How to Develop Evaluation Criteria

Types of Evaluation Criteria • Critical Criteria: standards which their presence precludes a particular supplier E.G registration as class I contractor by the CRBT or products approved by TFDA. In that, consideration shall only be given to class one contractors registered by CRBT or products approved by TFDA excluding any other contractors or products though they may suit the need of the procuring entity.

• Non Critical Criteria: standards which their presence do not preclude a particular supplier or a product E.G a professional engineering firm or an authorised distributer of computers. Products may be described by physical, chemical and technical characteristics without biasing the source, manufacturer or the licensing authority or rules governing their production.

Factors of Evaluation Criteria • Subjective Factors: factors which can neither be expressed in monetary value nor quantified in any comparative scale. E.g. working experience of an individual, experience of a firm in particular business or quality of a product. These factors are merely subjective and depend on the user of such criteria and how such a user can be able to interpret the information, analyse and use it for evaluating a performance of a firm or an individual.

• Objective Factors: factors which can be expressed in monetary value or weighing scale that is clear and may be used for comparison. E.g. turnover, profitability, project value, years of working experience, number of projects, duration of project, number of staff, number of equipment, asset value, location site distance from the project area, debtors turnover ratio, liquidity ratio, etc. These factors are quantifiable and may be compared based on volume or cost or percentages.

7cs of Appraisal 1. Competency: having the right technical skills and processes2. Capacity: having the right physical, human and financial

resource for the requisite technical skills and processes3. Commitment: committed to deliver to the customer,

expected quality and services that add value to consumers4. Control systems: having the requisite physical, human and

financial controls5. Cash, financial stability and Sustainable Appropriate

Financial Position6. Cost: offering the lowest evaluated total cost of ownership

(bidding costs, acquisition, after sales services and a residual value after life circle of the product)

7. Consistency: how long can the individual or an organisation can deliver the same quality and cost of ownership

PROCUMENT EVALUATION CHART

E: INTERNATIONAL RULES ON PROCUREMENTStrict Rule and Mandatory Procedures1994 UNCITRAL Model Law on procurement of goods or construction, stating in Article 18:(1) that except otherwise provided ‘a procuring entity engaging in procurement of goods or construction shall do so by means of tendering proceedings’ (narrow exceptions from this in Article 18 (2)) while the procurement of services is made less rigid – Article 18 (3) with reference to Chap IV provisions on methods for procurement of service and Article 43 on lawful selection procedures with simultaneous negotiations.•However: Other legal public contract regimes are generally less strict on the question of mandatory procedures for contract awards.

E: INTERNATIONAL RULES ON PROCUREMENTLess Strict Rule on Mandatory ProceduresSimply state that “tendering for contracts may take place with or without negotiations, provided that the contract candidates are duly notified of the procedure to be followed”.This is supported by the WTO 1994 GPA Article IX Paragraph 2 which leaves it to the entity’s discretion whether the procedure will be a plain tendering procedure with or without the involvement of simultaneous negotiations.

E: INTERNATIONAL RULES ON PROCUREMENTThe WTO General Agreement on Trade in Services (WTO/GATS) Article XIII on exemption for Government Procurement also states:1.“Articles II, XVI and XVII shall not apply to laws, regulations or requirements governing the procurement by governmental agencies of services purchased for governmental purposes and not with a view to commercial resale or with a view to use in the supply of services for commercial sale”2.“There shall be multilateral negotiations on government procurement in services under this Agreement within two years from the date of entry into force of the WTO Agreement”

F: PROCUREMENT OF OIL [PETROLEUM PRODUCTS]• The government liberalized the downstream operations

since 2000. Oil marketing companies import petroleum products for local consumptions as well as transit business through bulk procurement arrangement coordinated by Petroleum Importation Coordinator (PIC). The country demand for petroleum products is estimated to be over 1.8 million metric tons per year

• Each Oil Marketing Company importing petroleum products in BPS tender is required to open a Letter of Credit with the Commercial Bank of its choice 5 days before delivery lay can.

Challenges: 1.Different Financing costs of the LC while Pricing formula is fixed at financing cost of 1% of CIF

2.Delays by OMCs in opening and confirming an LC creates unnecessary demurage costs and increased Business risks

3. Petroleum supply chain had fragmentation of imports with higher costs due to lack of economies of scale;

4. Downstream segment has been characterized by lack of information and data which obscure tax evasion, adulteration of products and general inefficiencies in the various segments of petroleum supply chain

BPS started on October, 2007 vide EWURA ORDER NO 07-010 of October, 2007] which asserts that “ All Oil Marketing Companies importing petroleum products in Tanzania shall use bulk importation system where importation of petroleum products will be done competitively and transparently using an open tender system through International Competitive Bidding”

Govt through EWURA Sought a need to have alternative financing mechanism that intended to improve BPS for the benefit of OMCs, Consumers and the Country at large

F: PROCUREMENT OF OIL [PETROLEUM PRODUCTS]

• The Petroleum (Bulk Procurement) Regulations, 2011 was issued on 3rd June, 2011 through GN No 164 directing all petroleum imports for the Tanzania Local market through Efficient BPS.

• The OMCs formed a company known as Petroleum Importation Coordinator Limited to handle all matters related to the operations of the BPS

• The first cargo under BPS was received on 4th January, 2010 and until January, 2014 about 18 tenders were held and five companies won the tender to supply petroleum products

• EWURA (Petroleum Products Price Setting) Amendment Rules, 2013 published by way of GN No 432 of 29th November, 2013 direct issuance of capping petroleum prices for the local petroleum market at a formula of financing cost element fixed at 1% of CIF. However, financing of the products is dome by individual OMC by opening a LC with their respective banks.


• All OMCs waiting for the products are entitled to open an LC five working days prior to delivery laycan after receipt of the needed documents from the supplier. In that, supplier has to submit the Proforma invoice to the purchaser and Petroleum Importation Coordinator (PIC) latest calendar days before the first day of delivery of laycan.

Challenges Some OMCs fail to secure LC facilities in time and therefore cause some delays to off-load the products from the vessels; hence leading to unjustifiable increased demurrage days


Other Options1.One Commercial bank or a lead bank with a Consortium of other banks would open one LC to finance petroleum products importation through BPS2.Or else use the Central Bank as lead bank an aggregator due to its integrity and financial capability. However, this may not be a good option as Central Bank is a Regulator of other banks which might be contrary to the FCC Act. 3.The Single financing arrangement is on USD in order to avoid exchange rate risks


G: PROCUREMENT UNDER THE PSA• ARTICLE 20 (e) The Contractor shall “Upon purchase of goods, services or materials, follow an efficient, open, transparent, non-discriminatory and competitive purchasing and award procedure in accordance with the Law and Best International Petroleum Industry Practices and submit the relevant procurement plan to TPDC for review”;

• ARTICLE 21(f) :The Contractor shall “prepare an annual local content plan which shall accompany the annual work program and budget for Petroleum Operations in the Contract Area which shall include but not limited to procurement of Tanzanian goods, material and services”

G: PROCUREMENT UNDER THE PSA• SECTION 3(f) (a) :COSTS, EXPENSES, EXPENDITURES AND CREDITS OF THE CONTRACTOR: “Material purchased by the Contractor for use in Petroleum Operations shall be valued to include invoice price less trade and cash discounts (if any), purchase and procurement fees plus freight and forwarding charges between point of supply and point of shipment, freight to port of destination, insurance, taxes, custom duties consular fees, other items chargeable against imported material and, where applicable, handing and transportation expenses from point of importation to warehouse or operating site, and its costs shall not exceed those currently prevailing in normal arm’s length transactions on the open market”.

H:SUPPLIER PERFORMANCE• Once a supplier is selected the focus shifts from evaluation to the continuous measurement of supplier performance.

• Oil and gas company must be able not only to select the right supplier, but also to monitor and manage performance of supplier over time to improve performance and manage costs, quality and delivery time.

• Measuring supplier performance is among the ways of measuring supply chain performance.

• Oil and gas company should develop measures to asses supply base, the purchasing department, monitor the interfaces between purchasing and other internal functions.

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H:SUPPLIER PERFORMANCE• The most effective performance systems will asses performance across the entire length of the firms supply chain, from suppliers through internal process to customers.

• Important factors used to measure supplier performance are quality, delivery and price. Other factors include quality management, partnering, Customer services, vendor co-operation and problem resolution ability.

• Some of these factors are quantitative and some qualitative.

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H:SUPPLIER PERFORMANCE

Supplier performance measurement• Supplier Performance Measurement(SPM) is the process of measuring, analyzing and managing supplier performance for the purpose of reducing costs, mitigating risks and driving continuous improvements in value and operations.

• A supplier in this context refers to a party that supplies goods or services, and may be distinguished from a contractor or sub-contractor/manufacturer who commonly adds specialized input to deliverables also called vendor.

• SPM includes the methods and systems to collect and provide information to measure, rate, or rank supplier performance on a continuous basis. SPM should be done on each delivery and routinely reported usually occurs monthly or quarterly

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What to measure? •The most important factors that should be used to measure supplier performance fall into Quantitative (objective) and Qualitative (subjective). Most of the objective, quantitative variables lie within the following three parameters:-1.Delivery Performance•Orders or material request sent to a supplier have a quantity and material due date commitment. Quantity, Lead-time requirements and due date compliance help define a suppliers delivery performance.

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2. Quality Performance• Quality Performance is critical component to any

supplier measurement system. There are a number of ways to measure supplier’s quality performance;

• Number of deviation (substitutes, similarity) request, accuracy of paperwork, field campaigns and suppliers cost of quality inspection data and warranty data are used for measuring supplier performance.

• The inspection measures are based on the number of rejects versus lines/Quantity inspected. e.g If 100 items are inspected and 4 are rejected the reject rate is 4%

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3. Supplier cost reduction/supplier value performance

• Buyers often rely on suppliers for cost – reduction assistance. Looks at a total acquisition cost not just price. Total acquisition cost considers all costs, freight, handling, quality and administrative. Cost reductions such as cycle time reduction, inventory reduction, Electronic data interchange (EDI) transactions are to be considered.

• One common method is to track a suppliers real cost after adjustment for inflation, compare a suppliers cost against other suppliers within the same industry and the use of a number of qualitative factors to assess supplier performance.

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Type of Supplier Measurement TechniquesCategorical system: requires the assignment of rating to each selected performance category E.g. possible ratings such as excellent, good, fair or poor.Weighted Point system: weighs and quantifies scores across different performance categoriesCost-based system: This approach qualifies the total cost of doing business with a supplier. The lowest purchase price is not always the lowest total cost for an item or service.


• The Public Procurement (Goods, works, Non-Consultant Services and Disposal of Public Assets by Tender) Regulations, 2005, requires the Accounting officer to appoint a goods inspection and acceptance committee to ascertain that delivered goods are of required quality and quantity as stipulated in the contract document.

• Supplier has been defined by the PPA No.21 of 2004 as a company, corporation, organization, partnership or individual person supplying goods or services, hiring equipment or providing transport services and who is according to the contract a potential party to a procurement contract with the procuring entity.

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I: LEGAL ASPECTS ON SUPPLIERS’ PERFORMANCE

1. Lack of knowledge on technical specifications 2. Poor Performance of the service providers 3. Goods Procured and paid for but not delivered4. Supplier cost reduction performanceMost of suppliers for routine items are SMEs whose

capital base is small to run the business. Lack of initial capital for procurement usually compels suppliers to request advance payment to facilitate procurement of supplies, make partial deliveries or fail to deliver

5. Limitation on product information6. Language Barrier

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CHALLENGES OF SUPPLY CHAIN

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TUDARCO-PROCUREMENT ISSUES IN OIL AND GAS CONTRACTS