Negotiation is key to success for NOCs

01 February 2009
Clients are now having to ease contractors’ terms to ensure their projects can move ahead.

When materials prices started to tumble in the final quarter of 2008, it was assumed that the main winners would be the region’s national oil companies, which could now move forward with their projects at a far lower cost than before.

But it is becoming clear that they are having to compromise with their contractors to ensure their schemes can go ahead.

This week, Abu Dhabi Company for Onshore Operations (Adco) said it had managed to bring down the cost of its engineering, procurement and construction contracts on the Sahil, Asab and Shah (Sas) full-field development to $3.5bn, a 22 per cent reduction on the original estimate of $4.5bn.

To do so, it has had to increase the size of the downpayments it will make to its contractors by up to 50 per cent, and significantly cut the potential fines it would levy on them for any delays in completing the project.

Saudi Aramco is taking similar measures as it tries to cut $1.2bn from the cost of its joint venture export refinery at Jubail, which it is developing with France’s Total. The terms on offer to contractors have been softened here too, to encourage them to sign up to the deal.

The cost cuts are important for the state-run oil giants which, in the wake of the rapid fall in oil prices in late 2008, are having to quickly re-evaluate the projects they commissioned during the oil price boom.

Crude oil is now hovering at $40-45 a barrel and, as a result, the revenues that some projects will earn are far lower than previous projections.

Offering improved terms to contractors means they will be more committed to the projects and provides some assurance that the projects will be completed.

With no signs of recovery, either in the global economy or in oil demand, these are unlikely to be the last compromises made in the region.

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