EPC Analysis

EPC CONTRACTS: RISKS IN MEGA EPC PROJECTS Agenda for Presentation EPC Contract Fundamentals:

EPC Contract Fundamental: Some Questions Contracting Strategy Contract Performance Risks Revenue Profile For a Typical EPC Contract Execution Risk As EPC Contract Progresses Execution Risk As Cost Plus Contract Progresses Relative Risk Reward Profiles of Different Contract Strategies

EPC Contract Execution Risks: Owner Contractor Interactions

Owner Demands and Oversights Contractor Pressures Disputes: Causes and Possible Reasons Summary Research Findings: Risk Management

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Case Study in Risk Management: “EPC Contract Risk Assessment and Mitigation During Economic Meltdown”

Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

Graphs and Figures

1/7/2010

Fixed Price Contract Economic Benefits

EPC Contract: Advantages Fixed Price Contract, Negligible Escalation

Hardly any escalation in costs occur Contractor brings to fore the best practices in project management

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Timely Execution and Project earnings Start Faster Life Cycle Cost of Project Diminishes.

Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

Design-build/engineer, procure, construct EPC contracting can potentially save millions of dollars up front, as well as dollars paid in change orders while construction proceeds.

EPC Contract Fundamental: Some Questions Owners often question whether the checks and balances are in place and question who really pays for alterations in design.




Owners look toward the designbuild/EPC contractor to be the one stop shop and the last stop for all the costs to be incurred for a project—from inception to project closeout.




Thus, change becomes an issue that may not be well defined in today’s design build/ EPC construction environment.

Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

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EPC Contract Fundamentals: Some Questions In a changing world, what does uncertainty mean for the design-build/EPC industry?




What do the current world economic conditions, as well as the current U.S. economic conditions mean to a design-build/EPC contractor wanting to play in the construction industry today?




How do factors such as labor supply restrictions, loss of intellectual knowledge, and gap in fund availability for the infrastructure projects pose challenges to a design-build/EPC contractor wanting to play in say E&P or Power Sector.

Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

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EPC Contract Fundamentals: Contracting Strategy Contracting Strategies

To achieve the specific project goals, however, the delivery system must be compatible with the owner’s contracting methodology and procurement process.

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One of the single most important decisions that any design-build/EPC contractor will make is on the type of contract that it enters into with an owner. The contract strategy represents the way in which the delivery

Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

The design-build/EPC process merely establishes the roles and relationships among the key members of the project team.

EPC Contract Fundamentals: Contracting Strategy Contract Performance Risks Systems are packaged and paid for by the owner.

-also accepts the risks of performing -those functions according to the standards -and conditions laid down in the contract

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Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

Owner will insist via the contract provisions that the contractor, in return for being paid to execute those functions,

EPC Contract Fundamentals: Contracting Strategy Contract Performance Risks Typically, in fixed-price contracting, any unforeseen cost is not strictly underwritten within the original contract and likely to be assumed by the contractor.

This buffer is calculated in the form of a contingency and can represent up to 15% of the asking price. The best case scenario is that these are not exercised, in which situation they are released and materialize as additional “cream” on top of the base price/margin. 7

In the worst-case scenario, these risks exceed the contingencies put in place and erode the base margin to an extent that the contractor loses money on the project

Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

The fixed price that envelops the contract should accommodate a worst-case scenario if execution risks become a reality.

EPC Contract Fundamentals: Contracting Strategy Contract Performance Risks

When the contractor provides a price for the design build/ EPC scope, it is obligating itself to provide the

affirms can be accomplished within the time required timeliness, and thus affirms that its costs are sufficient to meet both requirements in terms of resources labor, equipment, and so on—all for a fixed cost. 8

Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

project scope and quality that meets the owner’s requirements functionality,

EPC Contract Fundamentals: Contracting Strategy Contract Performance Risks Contractors initially welcomed the lion’s share of risk on EPC projects in return for the significant profit potential that could be derived from having simultaneous control over

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Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

design, procurement, and construction and any resulting efficiencies in cost and schedule.

Revenue Profile Rebased to 1 for a Typical EPC Contract

Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

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Typical Amplification of Execution Risk As EPC Contract Progresses

Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

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Typical Amplification of Execution Risk With Cost Plus Contract

Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

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Relative Risk Reward Profiles of Different Contract Strategies

Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

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EPC Contract Execution Owner Contractor Interactions: Owner Demands However many owners demand

With no corresponding assumption of risk, and without a proper change management process defined in the EPC Contract for such interventions.

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Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

Increased role in the design process, Heightened fast-track completion requirements, Enhanced performance guaranties Owner supplied equipment

EPC Contract Execution Owner Contractor Interactions: Contractor Pressures

Contractors bid on EPC projects where they were Unable to adequately utilize value engineering Unable to Innovate to Balance 15 Forced to swallow increase in risk.

Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

Risks associated with third-party technology and equipment supplied by owner equipment manufacturers (OEMs) increasingly shifted to the contractor.

EPC Contract Execution Owner Contractor Interactions: Consequences Profit margins declined,

Not surprisingly, contractors met the increase in risk with higher pricing, thereby depriving owners of the cost savings EPC projects were intended to provide. Even worse, the incidence of disputes soared, often followed by protracted and costly litigation. 16

Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

Owner penalties increased, EPC contractors were caught in the squeeze.

EPC Contract Execution Owner Contractor Interactions: Disputes

Increase in construction related disputes over the past few months

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The survey also found that the disputes were much more prevalent on complex projects costing more than $500 million

Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

A recent survey of construction trends in Power Plants in US, Europe and Asia and Middle East By BASmS Business Intelligence Group found that there has been a significant

EPC Contract Execution Owner Contractor Interactions: Disputes Thus the major causes of disputes and claims:

2.Excessive change orders and owner/contractor interference. Less frequent causes mentioned were

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differing site conditions, acceleration issues and non-performance of subcontractors.

Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

1.Architect/engineer error and omission,

EPC Contract Execution Owner Contractor Interactions: Disputes Possible Reasons

leads to hard-line negotiations, tough contract terms and strict enforcement of contract language. 19

Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

Tighter current global economic environment… fight harder for every dollar

Summary of Research Findings





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Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd.




Recent project experience and recent trends within the construction industry indicate that executing projects is going to be more difficult and more risky in the future. Understanding these risks and their legal implications will be critical so that both the owners and the design-build/EPC contractors can be successful. EPC Contracting with negotiated alliance and change management processes built in may be more viable alternatives. Rigorous Use of Risk Management Techniques will become a necessity for EPC Contractors while Bidding, Planning and Executing.

As an integral part of sound project management practices,

Risk management is a systematic and proactive approach to reduce uncertainties 21

Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

Managing Risks

Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

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Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

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Case Study in Risk Management: EPC Contract Risk Assessment and Mitigation During Economic Meltdown.

Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

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EPC Contract Risk Assessment and Mitigation During Economic Meltdown.

2.EPC Risk Analysis and Mitigation : Risk Allocation Insurance and Hedging

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Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

1..EPC Risk Dynamics Measures of Economic Downturn and Macro Impacts Six Macro Economic Factors GDP Global Equities Exchange Rates, Capital Flows and Chinese Yuan Manufacturing and Industrial Production Oil Price Volatility and E&P Spending Oil Price Volatility and E&P Cost Dynamics

3.EPC Projects Data : Value at Risk Projects Affected Research Findings 4.World’s Largest EPC Contractors Backlog and Impact on Global Forward Manufacturing 5. Thank You

Economic Downturn and Macro Impacts: The Six Factors

Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

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Economic Downturn and Macro Impacts on GDP Growth

Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

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Economic Downturn and Macro Impacts on Global Equities

Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

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Economic Downturn and Macro Impacts on Exchange Rates and Capital Inflows

Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

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Economic Downturn and Macro Impacts Chinese Yuan: Government Manipulated Exchange Rates

Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

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Economic Downturn and Macro Impacts on Manufacturing

Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

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Economic Downturn and Macro Impacts on Industrial Production

Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

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Economic Downturn and Macro Impacts: E&P Costs Escalate and Fall In Meltdown

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E&P IHS/CERA Upstream Capital Costs Index

Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

Dynamics Of Risks

Economic Downturn and Macro Impacts: Oil Price Volatility and Exploration and Production Spending

Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

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Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

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Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

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Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

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Risk Analysis Mitigation Insurance

Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

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Risk Analysis Mitigation Risk Transfer Instruments

Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

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Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

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MANAGING EPC RISKS IN MEGA EPC PROJECTS RECOVERY FROM THE DOWNTURN

The Projects Affected During Transition

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Total cost: $114.5 billion

Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

1.Ras Tanura Integrated Project (RTIP) 2.Pearl GTL 3.Petro Rabigh Refinery Upgrade 4.Shah Sour Gas Field Development 5.Khurais Oilfield 6.Manifa Offshore Oilfield 7.Saudi Kayan Petrochemicals Complex 8.Hassyan Power & Desalination Plant 9.Ras Girtas Power Project 10.Shaybah Phase 2 Expansion

The countries behind our project list are Saudi Arabia, Qatar and the UAE, where energy and infrastructure projects on a world-leading scale continue to progress. With almost US$120 billion worth of critical energy and infrastructure projects up for grabs

MANAGING EPC RISKS IN MEGA EPC PROJECTS RECOVERY FROM THE DOWNTURN

EPC Companies Who Matter 1. 2. 3.

5. 6. 7. 8. 9. 10.

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Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

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Bechtel (USA) Technip (France) Aker Solutions (Norway) Chiyoda Corporation (Japan) SNC-Lavalin Group (Canada) J. Ray McDermott (USA) JGC Corporation (Japan) Hyundai Heavy Industries (South Korea) Foster Wheeler (USA) Daelim Industrial Company (South Korea)

MANAGING EPC RISKS IN MEGA EPC PROJECTS RECOVERY FROM THE DOWNTURN

EPC Companies Who Matter..Contd

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Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

Fluor, Foster Wheeler, Shaw Group, Jacobs, Technip, Toyo, JGC, Toyota, and GS Engineering in Korea, they typically win the majority of the work. As their backlogs increase that’s a clear barometer that equipment will be ordered going forward and are signals for the manufacturers to start forward Planning.

Projects Today Nassiriya Oilfield (Iraq)

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Integrated Gas Development Project (UAE)

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South Pars Gas Field (Iran)

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Jubail Export Refinery (Saudi Arabia)

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Tianjin Petrochemicals Complex (China)

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Touat Gas Field (Algeria)

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Gassi Touil Gas Field (Algeria)

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Skikda Refinery Upgrade (Algeria)

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Sipchem Polyvinyl Plants (Saudi Arabia)

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Borouge (UAE)

Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

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1.

Projects Today 1. 2.

4. 5.

6. 7. 45

8. 9. 10.

Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

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Trans Sahara Pipeline Al-Shaheen Refinery Nabucco Pipeline Yanbu Export Refinery Khalifa Point & Fujairah Refineries Jubail Export Refinery Integrated Gas Development Abu Dhabi Crude Oil Pipeline Kuwait Oil Co drilling platforms Oman oilfield services contract

Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

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You
Thank

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