A NEW contracting strategy has made its debut in the Middle East. Developed in the North Sea and applied in the oil and gas fields of Australia and Norway, the alliance concept is now being adopted on the Arab D gas recycling scheme in Qatar’s onshore Dukhan field. And, with it comes the hope that project costs can be reduced, efficiency improved and closer relations forged between client and contractor.
Qatar’s willingness to embrace the new technique says much for changing conditions in the international oil business. The low price of oil in real terms, coupled with increasing financial demands from governments on state-owned producers, has forced companies like Qatar General Petroleum Corporation (QGPC) to cast a critical eye over past practices. Traditional methods for getting oil out of the ground are being challenged, even in the conservative environment of the Gulf. Instead, oil officials are being urged to come up with alternative strategies, aimed at improving yields and services at reduced cost.
Circumstances have placed Qatar in the forefront of this re-evaluation process. It is the smallest Gulf OPEC producer and has oil reserves of only 4,200 million barrels. At the same time, QGPC has had to play a difficult balancing act over the past 10 years. On the one hand, the state energy company has been forced to pour substantial funds into getting the first generation of gas projects off the ground. On the other, significant investment has been needed in the oil industry to reverse a steady decline in production, brought about by ageing installations and reservoirs.
The situation has demanded that QGPC undertake a radical rethink of its oil strategy.
The first tangible sign of the fresh approach came in September 1994, when the US’ Occidental Petroleum signed an innovative development and production sharing agreement for the existing offshore field, Idd al-Shargi. Seven months later, QGPC’s board of directors ushered in a brave new world in the field of project execution by approving the alliance contracting strategy for the estimated $300 million Arab D gas recycling project.
The alliance concept aims to narrow the gap between client and contractor. It has a risk/reward mechanism built in to encourage the two sides to work closer together and to align objectives. The idea is that by setting up such a structure, all parties will have a shared interest and common motivation for completing the project as quickly, efficiently and economically as possible.
The Dukhan Alliance has taken shape over the past 12 months and now comprises a full complement of five members. They are: the client, QGPC; the engineering, procurement and construction management (EPCM) contractor, Brown & Root (UK); the US’ Honeywell for the control systems supply; the compressor supplier contractor, Germany’s Mannesmann Demag Delaval; and South Korea’s Hyundai Engineering & Construction Company as the construction contractor.
Each company has agreed to shoulder a portion of the project risk. The breakdown gives QGPC a 48 per cent interest, Brown & Root 22 per cent, Hyundai 15 per cent., Demag Delaval 10 per cent and Honeywell 5 per cent.
Before signing the works contract with QGPC and the alliance agreement, all alliance members established a target cost and completion date against which their performance will be measured on the risk/reward model. If they come in under target, they will be rewarded. Conversely, if they fail to meet their objectives, they will be penalised.
Save time and money
Reducing cost and execution time is a key consideration behind the alliance concept. Speaking at a Dubai conference on alliancing and partnering in late June, QGPC technical director Abdul Razzaq Mohammed al-Siddiqi said that previous alliances had provided a 20-25 per cent saving in overall cost and a 1214 month reduction in time.* Similar results are expected to be achieved by the Dukhan Alliance, he said. Already, QGPC is confidently predicting that the first condensate will come on stream by November 1997 at the latest, some two months ahead of the target date if a conventional contracting method had been used.
The state oil company is also keen to highlight additional benefits of the alliance technique. It helps to establish long term relationships between operator and contractor, officials claim. It creates a lean project management team, where duplication of effort is avoided. By being directly involved with the contractor, client engineers are exposed to international expertise and experience, which assists in their training.
From the client’s perspective, an added incentive is that the operator has direct input in the design phase. ‘Operating companies, in executing their major development projects, have spent lots of money to comply with codes, regulations and late changes on a completed design,’ Dukhan Alliance project manager Jamal Ben Amor said in late March, in reference to the traditional approach. ‘There have had to be major modifications done on completed facilities caused by ignorance of potential suggestions by operators or contractors during the design stage. The vertical reporting system and poor communications between the project interfaces and the client, contractors and vendors have added significant value to the overall budget, but without adding value to the product.’
Such a rosy picture of alliancing is challenged by some in the industry. Contractors frequently bemoan the fact that they have to take on a higher level of risk, especially when they don’t have complete control over their actions. Others question whether the material benefits are really as great as claimed.
Alliance supporters concede the level of exposure to risk is higher for the contractor, but also argue that the rewards to be had are greater. ‘A win-win, mutually beneficial deal can be achieved,’ AI-Siddiqi said. Moreover, the savings made by the client on one particular alliance project can be used to finance new schemes, which otherwise would not be undertaken, the advocates say.
Much is riding on the success of the Arab D project and whether the expected advantages will materialise. QGPC officials are aware that the alliance approach still attracts its fair share of sceptics. Yet, the dissenting voices have done little to shake their conviction that alliancing is the way forward for the oil and gas business. ‘Not everybody shares the belief of what a successful alliance can deliver so we have a lot to prove,’ Ben Amor conceded.
‘We are confident we will do that and we will set up the model that will allow other operating companies in the Middle East to adopt the concept. All of us agree that today’s demands cannot be satisfied with yesterday’s knowledge. Together, with the alliance we can move mountains.’
*Partnering & Strategic Alliances, 26-28 March, Dubai. Organised by IIR