SPE 157144

Unconventional Execution Strategy of a Mega Offshore Project Wassim HOUCHAIMI, NATIONAL PETROLEUM CONSTRUCTION COMPANY (N.P.C.C.)

Copyright 2012, Society of Petroleum Engineers This paper was prepared for presentation at the Abu Dhabi International Petroleum Exhibition & Conference held in Abu Dhabi, UAE, 11–14 November 2012. This paper was selected for presentation by an SPE program committee following review of information contained in an abstract submitted by the author(s). Contents of the paper have not been reviewed by the Society of Petroleum Engineers and are subject to correction by the author(s). The material does not necessarily reflect any position of the Society of Petroleum Engineers, its officers, or members. Electronic reproduction, distribution, or storage of any part of this paper without the written consent of the Society of Petroleum Engineers is prohibited. Permission to reproduce in print is restricted to an abstract of not more than 300 words; illustrations may not be copied. The abstract must contain conspicuous acknowledgment of SPE copyright.

Unconventional Execution Strategy of a Mega Offshore Project

1- Introduction Background At the turn of the millennium, with demand for oil picking up, & with the price of oil & projected to cross US$ 100/barrel (& even reach US$ 200/barrel by some predictions), all International Oil Companies (IOC’s) & National Oil Companies (NOC’s) across the globe frantically embarked on production capacity expansion projects. - In rushing to launch development projects, the producers resorted to issuing incomplete FEED’s, or no FEED at all abridged tenders periods invited sub-par bidders to enter the construction fray insisted on the Lump-Sum Turn-Key (LSTK) EPC concept, practically transferring all risks to contractors

- In fighting to secure a share of a lucrative, booming construction market, the contractors took high risks on escalating material prices, with commodity prices sky-rocketing as a result of robust & continuous demand competed against new entrants to the oil & gas construction industry were un-able to adequately assess or quantify risks due to a variety of factors (lack of time, lack of proper feed-back from business partners, lack of sufficient resources to simultaneously support tenders & projects…), thereby getting exposed to potentially devastating financial harm

The difficulties faced by the contractors were compounded by a severe shortage of industry qualified professionals, because of historical factors & as a result of large & un-anticipated demand. The Arabian Gulf was no exception to this worldwide frenzy & several ambitious development projects were simultaneously launched by the oil field operators in the early & mid 2000’s.

2 SPE 157144

Among the many developments that were sanctioned in 2005 in Qatar was a mega offshore development of a field operated by an IOC. Field Development Strategy Considering the size & complexity of the development, the strategy adopted by the field operator for the execution of the project was quite unconventional. Rather than following the conventional alley of Front-End Engineering Design (FEED) phase, followed by an EPC tendering phase based on a defined FEED, the operator issued invitations to tender (ITT’s) to selected EPC contractors on the basis of narrative functional system specifications, supported by engineering technical specifications. The field operator broke down the project into several packages & spread their execution time-frame over different periods of time to avoid overlap of construction activities & congestion in the field, & in order to also allow for orderly phased hand-overs of the facilities as they were being completed. In early 2006, along with other EPC contractors, National Petroleum Construction Company (NPCC) was invited to bid for & was ultimately awarded, after a tendering period eight to nine month-long, the LSTK Engineering, Procurement, Installation & Commissioning (EPIC) contract for the Wellhead & Process Platforms package. The following sections will compare the Functional Specifications with the FEED in terms of the engineering requirements, the merits and disadvantages, the risks & the project outcome and results from the perspective of both the client & NPCC.

2- FEED versus Functional Specifications requirements At tender stage In a classic tendering approach, the client issues an invitation to bid which includes a FEED package defining the scope of work, and answers queries raised by the bidders. The contractors use this FEED as a basis for assessing & quantifying the scope of work thru internal reviews & by means of requests for clarification. In contrast, defining the bid scope based on Functional Specifications imposed on NPCC & the other bidders extensive efforts to develop an engineering sufficiently detailed to enable identification of the requirements. The contractor must therefore deploy at tender stage a larger engineering team who will carry out “project-type” engineering activities. For the client, this implies a deeper involvement in the tendering process of the contractors, abandoning the traditional role of the commanding party & assisting the bidders in understanding the scope of work. The client’s team must thus possess a thorough understanding of the functional specifications & be authorized to present definitive resolutions to enquiries about specification interpretations. At EPC stage In a traditional FEED approach, the role of the client during this phase is to monitor the development of the detailed engineering by the contractor to ensure compliance with the contract requirements, while the contractor’s task is to develop a detailed design, building on the FEED.

SPE 157144 3

When dealing with Functional Specifications, NPCC’s engineering activities extended from conceptualizing the requirements stipulated in the Functional Specifications to developing & detailing these concepts, in effect encompassing both FEED & detailed engineering merged into a single phase. During this process, the client worked hand in hand with NPCC in a guiding role in order to ensure that the design developed by the latter meets the requirements of the Functional Specifications. For both engineering teams, the implications of substituting the FEED with Functional Specifications, at either tender stage or EPC stage, are therefore identical : a larger contractor’s team to attend to a wider scope of work, & the deeper involvement of a stronger client’s team, committed & empowered to assist the contractor & facilitate the development of engineering from the narratives of the Functional Specifications to a detailed design.

3- Advantages & drawbacks of the Functional Specifications, compared with a FEED Merits From the client’s angle, Functional Specifications significantly reduce the lead time to first-oil, by eliminating the FEED phase. They also transfer the project risks to the EPC contractor in a more effective manner, since Functional Specifications reduce the exposure of the client to the loopholes inherent to FEED. An added advantage is the elimination of the transition between FEED & detailed design, since the FEED & detailed design are combined during the EPC phase. From the EPC contractor’s angle, & since it is technically more demanding, such an approach offered NPCC & other experienced contractors the opportunity to differentiate themselves from the pack, by leveraging their experience & technical expertize to optimize the design at tender stage, therefore submitting more commercially-attractive offers. Disadvantages To the client, the drawbacks of this approach to the client are : - the high risk allowance that the EPC bidders were bound to make, in due recognition of the uncertainty arising from the absence of a FEED. - the necessity of deploying a larger engineering team during both tender & EPC stages. From the perspective of the bidders, the drawbacks at tender stage were the efforts associated with the following challenges : - the un-usual quantum & type of engineering efforts at tendering stage. - the assessment of the equally un-usual level of risk transferred to the EPC contractor as a direct result of the absence of a clearly defined scope of work baseline. After award, the main challenge that faced NPCC’s engineering team was to adapt to a novel mode of engineering development encompassing FEED-type reasoning & approach combined with the more traditional

4 SPE 157144

activities of detailed engineering.

4- Risks associated with Functional Specifications The risks arising from the Functional Specifications stem essentially from the absence of the baseline that the FEED furnishes. They manifest themselves in scope growth & its implications, and in under-estimation of the EPC phase duration, & equally affect the client & the EPC contractor. For the client, the major implication of the scope growth is un-foreseen delays to the project completion, in turn delaying first-oil production & affecting the commitments of the operator towards his clients. Scope growth could also provide the contractor with grounds for raising claims, creating contractual situations that could affect the working relationship between both teams, ultimately negatively impacting the progress of the works. For NPCC, the scope growth translated into : - increase in the size & weight of the facilities under construction, necessitating changes to the initially-envisaged fabrication, assembly, load-out, transportation & offshore installation methods. - difficulty of meeting the project milestones & completion dates. - increase in financial expenditures. Another risk similarly leading to schedule delays is the contractor’s under-estimation of the scope of work or over-looking of critical-impact issues, because of the absence of e.g. Piping & Instrument Diagrams (P&ID’s), lay-out drawings, process and safety studies, … (all of which are normally part of the FEED). The resulting under-estimation of the EPC phase duration will translate into delays to the envisaged completion, impacting the production plans of the client.

5- Execution of the EPIC phase The EPIC phase was awarded to NPCC in early 2007 & the facilities were successfully handed over, ready for start-up, approximately forty months later. The project was an un-mitigated success by any standard. A successful execution dictated a highly disciplined team-work approach by both the client & NPCC. The client deployed a large team with a strong & empowered leadership, located alongside NPCC’s team. Ad-hoc meetings were held as required, & matters discussed across the table. Decisions were taken at site, rarely referred to headquarters. Agreed resolutions were immediately implemented & regularized in parallel. The successful execution also required an effective risk management system to be in place, a system that pro-actively identify & mitigated risks. Complexity of the scope of work The scope of work involved several types of process : production, 3-phase separation, sand separation, sand treatment, water treatment, gas de-hydration, gas multi-stage compression and heat exchange (heating &

SPE 157144 5

cooling) & all types of utilities : chemical treatment, instrument air, nitrogen, potable water, fire water, high, medium & low-voltage power, mechanical handling in addition to the great material diversification (carbon steel, several types of stainless steel alloys, low-temperature carbon steel, glass-re-inforced epoxy (GRE), copper-nickel, etc…). This complexity added to the challenge of developing detailed engineering from Functional Specifications. Increase in the size & weight of the facilities Substantial increase in the size & weight of the facilities was experienced as a consequence of scope growth. The total weight of the structure grew by approximately 33% from the factored gross weight calculated at tender stage. In additional to the financial strain, this resulted in radical changes to the assembly & fabrication methods, which in turn necessitated re-sequencing of activities to accommodate the un-planned changes. The client co-operated with NPCC to minimize the impact of the disruptions by adopting a practical, fit-for-purpose approach. NPCC’s team endeavored to absorb the growth & implemented it in the most expeditions manner, sparing no effort in this regard. Novelties Part of the scope growth lead to un-anticipated novelties. Such novelties included one of the largest water treatment skids in the world, together with prototypes for the largest water treatment pumps of their kind specially developed & tested to meet the project process requirements. At tender, neither the skids nor the pumps could be properly sized for absence of studies that the FEED would normally include. The un-usual scope growth also lead to the largest & heaviest process topside fabricated in the Arabian Gulf & to the heaviest offshore single-lift to date in the Arabian Gulf. Other un-expected novelties resulted from the metallurgy & material corrosion studies that were performed during the EPC phase, while customarily performed at FEED stage, and which affected the weldability of rotating equipment components & heat exchangers parts. Both teams worked closely together to overcome the numerous problems encountered in ensuring the successful incorporation of these novelties in the plant. Key success factors Beside the team-work approach enforced by both teams, the key factors that contributed to the success of the project were : - the strong commitment of both the client & NPCC, demonstrated by the forming of a Project Steering Committee at NPCC, with the CEO of NPCC chairing its bi-weekly meetings

6 SPE 157144

- the micro-management of the engineering activities by both parties, to keep a tight track of the changes & reflect and incorporate them in the sequence of activities - the continuity in Senior Management & Project Management Leadership within both organizations - the fact that all project phases, from Engineering thru Procurement & Construction to Commissioning were performed in-house by NPCC, providing a maximum flexibility in re-sequencing of activities & in absorbing the scope growth Project Outcome Despite all the difficulties faced during the execution of the EPC phase, the project achieved all the objectives of the client. - The construction HSE targets were exceeded. - The quality of the final product was excellent, by the client’s own account. - The design & process parameters stipulated by the Functional Specifications were met. - The facilities were handed over & readied for start-up almost on time. The project achieved some of NPCC’s objectives. - NPCC could deliver the project with minimal delays, in spite of the scope growth & in spite of all the various un-foreseen developments. - The successful completion of the project provided NPCC with a powerful marketing tool & allowed it to position itself ahead of the competition in the region & beyond. - The lessons learnt on this project enhanced NPCC’s performance on subsequently awarded projects.

6- Conclusions & recommendations Having compared the FEED model to the Functional Specifications approach both at tender & during the EPC phase, having highlighted the major additional risks associated with the Functional Specifications & having reviewed the difficulties resulting from the Functional Specifications, what conclusions to draw & recommendations to make in the matter of FEED versus Functional Specifications ? Though the project executed by NPCC can be considered a success by any criterion, it cannot be set as a norm. Large & complex projects require a detailed assessment on the best execution strategy. The relative lack of success for the timely & within-budget delivery of the majority of the mega offshore projects executed recently reveals that project outcomes are particularly sensitive to the FEED, pointing to a need for the industry to balance the aggressive targets for production start dates with some reasonable development of engineering. Time-investment in a gated, phased, systematic & completed FEED eliminate risks & uncertainties during the EPC phase, leading to more accurate & reliable completion date estimates &, ultimately, lower EPC costs. Conversely, delays have been experienced where initial schedule gains, resulting from a short-sighted strategy of incomplete or no FEED at all, have been squandered & lost to scope growth and disputes over interpretations & definitions during the EPC phase. It is also to be stressed that not all clients nor all contractors can adopt the Functional Specifications approach, as tempting as it can be. Working with Functional Specifications implies a shift in paradigm, from a familiar & rather orderly FEED world to the exacting & mostly un-chartered Functional Specifications domain. For various reasons, many organizations are simply unable to effect this change & venture out of the FEED

SPE 157144 7

comfort zone. On the client’s side, the requisites for a successful Functional Specifications approach are strong knowledge, empowerment of the project team to take decisions and authorize changes, the conscious decision to be practical & the will to closely co-operate with the contractor. On the contractor’s side, strong engineering knowledge extending to FEED & capable of successfully defending fit-for-purpose proposals & solutions, the will & know-how to invest heavily in engineering tender stage, a risk appetite balanced with a strong risk management are mandatory attributes for a winning venture into a Functional Specifications scenario. However, it is the combination of a willing client & a qualified contractor that will create the success story, as neither the clients on his own, no matter how will prepared he is, nor the contractor alone, irrespective of his capabilities, can ensure the success of the Functional Specifications scenario. In view of this analysis & drawing on its own experience, would NPCC recommend the Functional Specifications approach to any of its clients ? Would NPCC engage again in a tendering process based on Functional Specifications ? A traditional FEED approach would be preferred & privileged over a Functional Specifications one, because of the lower risk & the lesser uncertainties that a FEED guarantees, despite the increased competition that it attracts. However no definite position can be taken by NPCC. Understandably, the decision to bid or not based on Functional Specifications will depend on its order backlog, the potential future work-load forecast & the market outlook. Strong demand for the services of EPC contractors will make NPCC more selective & more risk-averse, therefore more inclined to favor FEED over Functional Specifications, while scarcity of tenders will force it to compete for winning projects, irrespective of the basis of tender.