Oil and Gas Megaprojects: Challenges in Execution in the U.S.
The multi-billion dollar megaproject is nothing new to the construction industry. Constructed outside of the United States, oil and gas megaprojects are a familiar endeavor. The increased upstream production of U.S. shale gas plays, expanded oil extraction, and Canadian oil sands have energized the market for complex world-scale oil and gas megaprojects. But what would every great opportunity be without its challenges? The United States construction venue will pose unique challenges to the undertaking and completion of these construction marvels.
Andrew Rhodes recently joined Brian Davidson of DFL Legal at the 2014 Construction SuperConference to address some of the challenges facing these projects with a panel of industry leaders that featured Bart Turner of KBR, Shelley Smithson of Sasol, and Jason Dunaway from Roberts Company.
A spotlight of the discussion centered on construction labor shortages, which has caused concern due to the lack of qualified skilled and professional labor resources needed to execute megaprojects on time and within budget. This issue has caused companies to stretch their resources, in turn affecting productivity and further complicating project execution.
Unquestionably, other intrinsic challenges exist including material and fabrication availability and capacity, the financing and insurance market outlook, and the concern of risk management on a multi-billion dollar project.
We asked the panelists for a glimpse into their experiences and to share with you their insight into the challenges and opportunities facing the construction and completion of United States based oil and gas megaprojects.
What is Roberts doing to address the current shortage of available skilled labor in the U.S.?
We are actively working with community and technical colleges to develop a systemic and programmatic approach to the way we attract, select, and develop personnel. Our goal is to transform the way we currently do business by building a resource pool and knowledgebase that transcends specific markets and geographic constraints. At Roberts, we are convinced this will allow us to be better positioned to capitalize when opportunity knocks and when other service providers are not able to meet demanding resource requirements.
What can be done at the contracting phase to anticipate cost overruns and generate a favorable outcome for all involved?
The easiest approach is to bargain for more onerous contractual arrangements where the Owner is protected from the potential risk of cost overruns. This easy approach only masks the problem because service providers (i.e. contractors) will take the more onerous commercial arrangement into consideration when pricing the project. However, owners, contractors, and end users can all benefit if there is a willingness to share in the upside and downside of project awards and risks. If the parties are willing to adopt such an approach the project will benefit because all stakeholders will be focused on project execution instead of protecting their own interests through a flawed zero-sum game mentality.
What do you consider to be key contracting considerations that help control risk on megaprojects?
Two key risks that should be addressed during contract negotiations include overall limits on liability and geotechnical issues. The nature of a megaproject magnifies all aspects of the endeavor including liability and risk. For example, a ten percent overall limitation of liability on a ten billion dollar megaproject is one billion dollars which has the potential to greatly affect the financial fortitude of even the largest EPCs. Additionally, in my experience, I have noticed a shift in the allocation of risk and responsibility for soils and subsurface conditions from owner to EPC. Apart from who owns the risk, subsurface conditions are typically encountered early; and therefore pose a risk to impact or delay the project from the onset and throughout.
How does evaluation of risk play a significant role in both the planning and execution stages of an oil and gas megaproject?
With individual megaprojects routinely exceeding the $5 billion mark and cost overruns a significant concern, evaluating risk is a huge part of the go/no-go decision. During the planning stages, factors such as financing, insurance, and crude oil and natural gas prices must be evaluated before deciding whether to proceed with the project. Once a decision is made to move forward with the project, minimizing risk through contract structuring, forum and venue clauses and other tools becomes critical. Other risk factors, such as competition for workers, potential schedule delays and cost overruns also must be continually monitored and further analysis may be required to keep the project on track. From the planning stage to the project closeout stage, evaluating and mitigating these types of risk is critical to ensure the successful, timely completion of any megaproject.
What is your experience dealing with construction claims on international megaprojects and how does that translate to those based in the U.S.?
We’ve been engaged on international E&P megaprojects both during project execution and throughout the formal resolution of disputes. As we have seen firsthand, the risks and related disputes – much like the projects – are “mega” sized. Thus, the level of effort required to manage disputes and substantiate or defend claims during the job is significant and requires sufficient resources with experience substantiating requests for time and money and maintaining the necessary records to properly do so. When involved with megaprojects overseas, we have encountered situations where both Owners and EPC contractors lacked sufficient resources altogether or lacked sufficient resources with experience analyzing claims. I suspect that same lack of sufficient resources will translate to U.S. megaprojects, and, if that’s the case, it is likely that owners and EPC contractors engaging in megaprojects domestically will face additional risks due to an inability to properly substantiate or defend claims for time and money.