Addressing the productivity challenge using a build, own, operate, maintain (BOOM) contracting model
Geoff Bird A and Rob Radici AClough Limited.
The APPEA Journal 54(2) 517-517 https://doi.org/10.1071/AJ13090
Published: 2014
Abstract
Poor productivity is one of the major challenges facing the oil and gas industry in Australia. This is evidenced by significant cost and schedule overruns on every major LNG development during the recent Australian LNG construction boom. In a world where gas is a global commodity that can be easily exported, the consequences of poor productivity mean that investment dollars are directed overseas to lower risk environments to the detriment of resource development in Australia. This extended abstract explores the causes of poor productivity and it argues that one of the principle reasons is a fragmented contracting strategy, which results in the scope being split among different contractors at various phases of the project lifecycle, requiring complex and often inefficient interface management. This combined with little commercial incentive for contractors to minimise cost for the subsequent phase of the project means the responsibility falls with the operator to optimise costs during the project lifecycle. This extended abstract proposes that BOOM commercial model and contracting strategy is one way to address the productivity challenge. This model incentivises the contractor to engineer to reduce construction cost and to construct to minimise operational and maintenance costs by ensuring the contractor has a significant stake. This better aligns the commercial interests of the contractor and operator. This extended abstract also addresses the types of infrastructure development the model is best suited to and some of the critical success factors required to deliver a successful BOOM outcome.
Geoff Bird has been with Clough since September 2012 as Vice President for Strategy and Commercial. In this role Geoff is accountable for developing Clough’s corporate strategy, M&A activity and tendering. Geoff was previously at Woodside, based in Perth, for the 10 years. From 2010, Geoff had been General Manager—Commercial for the North West Shelf Project. Geoff€’s responsibilities included the preparation of business cases supporting both major and minor investment decisions, the governance of significant project contracting strategies as well as representing Woodside’s interests in LNG and domestic gas sales, marketing and shipping. Prior to this role, Geoff held senior roles in Supply Chain Procurement, primarily in the Drilling and Subsea Function and in Strategic Procurement. In January 2009, Geoff was appointed as the LNG Shipping and Trading Manager with responsibility for Woodside’s LNG shipping and trading activities. Prior to joining Woodside, Geoff spent 12 years with Shell International, initially as a Drilling Engineer in The Netherlands and then 5 years in Gabon (West Africa). In 1996 Geoff returned to The Netherlands to take up various upstream procurement roles supporting Shell’s offshore activities. In 2000 Geoff was assigned to Shell’s Strategic Procurement Team in The Hague, where he was responsible for rolling out Shell’s global procurement initiatives, including internet-based Procurement. Sponsored by Shell UK, Geoff graduated from the University of Nottingham (UK) in 1990 with a Bachelor’s degree in Mining Engineering. |
Rob Radici joined Clough in June 2012 as General Manager Commercial where he leads the commercial function for all post award activities across the Clough Group. Rob has a combined 19 years of experience in engineering, commercial and contracts experience at various companies including a combined 10 years of previous experience working at Clough in various roles including site engineer, subcontracts manager and project commercial manager. Rob has spent most of his working career in the oil and gas industry working within contract delivery models including construct only, EPC, EPCM and alliances. Prior to joining Clough, he led the subsea and pipelines commercial contracting team on the Browse project at Woodside Energy which involved the development and implementation of the contract strategy. Rob holds a Bachelor of Civil Engineering and is currently in the process of completing a Master’s in Construction Law. |
References
Macquarie Group, quoted in the Australian Newspaper, December 2012.‘Resource Industry Productivity Analysis and Policy Options’ (Discussion Paper, Australian Mines & Metals Association, July 2013) Executive Summary.
‘Resource Industry Productivity Analysis and Policy Options’ (Discussion Paper, Australian Mines & Metals Association, July 2013) 14.
The World Economic Forum Global Competitiveness Reports, 2009–10 and 2012–3 cited in ‘Resource Industry Productivity Analysis and Policy Options’ (Discussion Paper, Australian Mines & Metals Association, July 2013) Appendix A.
PricewaterhouseCoopers Productivity Scorecard, Mining edition, May 2012, cited in ‘Resource Industry Productivity Analysis and Policy Options’ (Discussion Paper, Australian Mines & Metals Association, July 2013) 14.
‘Building the Lucky Country’ (Deloitte Access Economics Business Outlook, September 2011) 40.
‘Resource Industry Productivity Analysis and Policy Options’ (Discussion Paper, Australian Mines & Metals Association, July 2013) Executive Summary.
‘Resource Industry Productivity Analysis and Policy Options’ (Discussion Paper, Australian Mines & Metals Association, July 2013) 16 and 19.
Other commonly used contract delivery models in Australia such as engineering, procurement and construction (EPC) and engineering, procurement and construction management (EPCM) are only concerned with the project up until the acceptance or handover phase once pre-commissioning activities are completed with little or no involvement in the operation and maintenance phases of the project.
Duration of the EPC phase is dependent on several factors including, but not limited to: project size; level of complexity; and, extent of long lead procurement items.
See, for example, Fédération Internationale des Ingénieurs-Conseils (FIDIC) Conditions of Contract for Design, Build and Operate Projects, First Edition 2008 (The Gold Book).
In some cases, the contractor may elect to finance the entire project off its balance sheet. For other projects, the contractor may implement a finance structure where it finances only part of the project with the balance of funding to be secured with financiers. Extensive financial modelling is performed by the contractor to determine the optimum financial solution for each project.
Some EPC contracts may also provide the contractor with access to advance payments to create a cash neutral position for the contractor.
Hybrid compensation regime refers to a mixture of lump sum pricing, cost reimbursable, re-measurable and unit rates.
Such cost elements may include blue collar labour, which may be linked to union or industry labour agreements, and consumables such as fuel, lubes and other input commodities required to make the plant or facility operate.
Performance incentives are linked to the contractor achieving a level of production output that is greater than the output specified by the owner in its performance requirements.
Greenfield project refers to an undeveloped site or field.
