Efficient oil and gas project management always means effective and smart contracting. Success of interactions between the operator and all the parties of the project supply chain puts efficiency of contracting practices on the top of the business priorities. Contracts in the sector are known to be extremely complex and establish numerous concurrent obligations of the parties. Very often, this combined with the limitations stemming from the contractual arrangements with the host governments and the urgency in which projects get to be delivered create situations, in which companies tend to suffer from the similar “blind spots” in their contracting practices. Still, through decades of experience accumulated through running upstream projects, our industry came up with the clear, straightforward, and sector-specific contractual tools and methods, known to successfully eliminate cost and project overruns. This article covers ten most crucial of those; taken as steps in combination or one by one, they will dramatically improve company’s contracting practice and thus will ensure ease, clarity, efficiency in contractual relationships of any tier.
1. Create contract risk allocation procedure for your company’s revenue generating and procurement contracts
Contractual risk allocation is one of the frontlines of delivering upstream oil and gas projects. Decision-making about what risk a company can or cannot accept and on which basis is crucial for its stability and even existence. Creating procedure (or manual) which lists detailed position of the business on each area of risk in relation to the goods and services that the business provides to its clients is key to efficient contracting practices, smooth communication between commercial and legal teams, and clarity and consistency of what can be told to a client. Following a great example set by the supermajors in upstream oil and gas, many organizations understand that creating own “rulebook” of commercial contracting—which risk to take, under which conditions, which internal approvals must be obtained for each risk and how to then mitigate the risks taken—brings enormous value to the business.
2. Draft set of templates for company’s contracting
Following the improved levels of clarity achieved through adoption of the contractual risk allocation manual, consistency will be achieved through contractual templates that each organization have to create for its specific contractual needs. Whether it’s for revenue generation or procurement, contractual templates are the key and will save great amount of time of the negotiating parties.
3. Eliminate battle of forms
Battle of forms is a contractual phenomenon where two parties to the contract (often formalized as a purchase or service order) do not dispute the existence of the relationship between them, however, each party relies on its own terms and conditions to govern such deal. Needless to say, seller’s and buyer’s terms will be severely different when it comes to provisions like liquidated damages, indemnities and liabilities, termination and suspension, and many more. Statistically, major part of the purchaser orders placed between business in upstream oil and gas, the side of business that often runs on the basis of constant “emergency,” will be affected by the battle of forms. Knowingly or not, parties simply prefer to avoid negotiations, remaining in the situation of battling with their forms. Detecting and eliminating battle of forms is crucial. It will save hundreds of hours and millions of dollars to an average upstream oil and gas business. And depending on the ways contracting organizations decide to remove battle of forms—let’s say they choose to place an master supply agreement (MSA) with the client or supplier—this process can take a very positive turn. Negotiating MSA will inevitably bring stronger relationship, possibility to know more about supplier’s capabilities, and stronger relationship.
4. Create master services and MSAs for procurement and in revenue generating practice
One of the most efficient, cost-saving, and transparent ways of contracting, which upstream sector has been applying for decades, is the master services or MSAs. There is a major difference, however, between what how the document was advised to be shaped in 80s and 90s versus to the type of the agreement that is recommended to apply in this era. It is very difficult to expect minimum scope commitment and prices written down, hence the easiest way is to draft set of terms and conditions that covers all potential services and goods to be procured. Once the quotation is requested from the specific supplier, it can be issued and referred to, as well as the subsequent orders, to the terms and conditions of the master services agreement. This way master arrangement serves as an umbrella. The parties witness resultant time savings, which will allow them to focus on excellence and safety. In the projects delivered under the cost recovery principle the additional question that operator will have to deal with is which of its suppliers and contractors it has the right to approach with the request to place master arrangement. After all, having pre-agreed set of terms and conditions in any form and shape will provide contractor or supplier with the competitive advantage. This can be resolved through respective provisions in the procurement procedures, which are adopted subsequent to reaching agreement on contractual arrangements with the host governments. For example, operator can reserve the right to negotiate MSAs with any oilfield services and equipment supplier or wellsite contractor.
5. Create cross-indemnity arrangement for every party working on the wellsite
This step is the part of creating contract risk allocation principles and procedures, yet it is has a distinctive criticality to be addressed as a separate measure in improvement of contractual practices. This measure entails drafting a separate arrangement that every company working on the wellsite has to sign up to (often drafted in the form of mutual hold harmless deed) to provide cross-indemnity obligations to every party that also works on the same wellsite. This is done to the extent identical protection is provided. Mutual hold harmless arrangements, in which operator serves merely as an administrator, ensure that every company sending personnel and equipment to wellsite waives potential claims to all others. Such promise, often given in the form of indemnity, has to be supported by the relevant insurance. Mutual hold harmless indemnity arrangement allows the parties to be subscribed as time comes for their personnel and equipment to reach the wellsite, e.g., two contractors that were required to work on the wellsite will sign the document in 2022 and other five will sign it in 2023, becoming the part of the same arrangement.
6. Conduct regular reviews of company’s templates with cross-functional input
Every stage of the project requires different type of services and equipment and as different supply chain may be adopted, company’s templates and contractual matters have to be revisited to ensure every contractual instrument is up to date with the project supply chain requirements. Review of the company’s templates must be done with cross-functional input. In oil and gas, tormented by major litigation and disputes, business often tend to associate all contractual issues with lawyers, still major part of people who actually deal with contracts represent contract management, commercial, construction, engineering, safety, and other disciplines.
7. Create roles of contract advisors/contract engineers/contract managers to observe all contracts during their lifecycle
Frequently in small- to medium-size businesses in oil and gas, contract management discipline is absent. Conversely, in large multinationals, the contract management discipline is present under the umbrella of contracting and procurement department. Irrespective of the size of the organization, criticality of contract management function—the one responsible for observing contract lifecycles from the identification of the need to contract-close out—cannot be underestimated.
Other steps that, in combination with some of all of the above, will inevitably make contractual work in every oil and gas company more efficient, include regular internal audits of contractual matters such as claims, disputes, protracted negotiations, non-performance, and delays—all to have a solid material for further improvement—as well as the integration of the training programs that allow non-legal personnel to be proficient with traditional “legal” part of the contract i.e., terms and conditions. Last but not least, organizations that encourage their teams to actively engage in discussions of so called model contracts together with the industry influencers such as IADC, AIPN, LOGIC and others, create a greater connection with the “outer world” and get to see different perspectives, which in turn allows them to stay on top of the game when it comes to efficiency, expediency, and relevancy of their contracting work.
[The article was sourced from the author by TWA editor Adam Miszewski.]
