SMART consulting contracts- An operator perspective

Abstract The nature of operator / consultant relationship is constantly evolving under the stresses of resource demand / supply gap and emerging oilfield technologies needed to explore for and develop the increasingly complex hydrocarbon sources. Service companies entered into turnkey or 'oil for services' type of payment in the 90's. Never mind the results of these risk ventures, but there were fewer opportunities for confusion. The present situation of increased operator work load, professional resource constraints, and Service Company emerging integrated technologies ownership combined with their IPM skills has created an opportunity for joint teams assignment of large development projects. But, there is now less contractor willingness to sign shared risk contracts. Hence, the operators need to more clearly identify their external support needs and spend the required time in order to sign Specific, Measurable, Achievable, Recordable and Tractable (SMART) contracts. Vague contracts with unidentified risks, unresolved issues and undelivered promises create confusion, disappointments and may lead to litigation. Problem is especially acute with the NOCs in the Middle East where joint teams with the responsibility to devise and execute integrated large gas development projects must involve multidiscipline teams. When consulting, service and execution contracts are all intermingled into one commercial document, executed by two culturally diverse entities; implementation can easily be problematic for all stakeholders. The paper will describe the clarity required for roles and responsibilities in a SMART contract with the development plan, HSE, quality assurance, workflow and scope and deliverables. The work plan, the cost, time and resources, the organizational structure with identification of processes for project risks assessment and a built in flexibility for dispute resolution, change management and metrics for final acceptance will be defined for joint execution of a dynamic development project. Introduction Three important axioms presented by the modern economists as stated in the book titled "Freakonomics" (Levitt et al1.) are; "Incentives are the cornerstone of modern life", "Experts use their informational advantage to serve their own agenda" and that "Knowing what to measure and how to measure it makes a complicated world much less so". The relationship between the hydrocarbon asset owners and a plethora of consultant and service organizations has always been governed by these three principles. However, a constant change in the attractiveness of incentives for each of these entities has produced wide variations in the structure of contracts and the depth of client / contractor relationship. Therefore, it is important to identify the market forces and the environmental changes that have taken place over time to realize the best value for either party from the consultant contracts. Let us start with tracking our past as to where we came from to know where we are and possibly predict where we are going. The consultants hired by the operators until the early 90's were usually subject matter experts or firms providing consultancy services in a narrow moat. The operators, if challenged in a particular technical area would sign up the individual or an organization to obtain their "recommendations" in the form of a formal report for a fixed or recurring fee over time. Large operators were themselves engaged in fundamental and applied research and technology that benefited their assets. Outsourcing expertise in the core technologies areas was not encouraged. The successive episodes of oil prices collapse, followed by cost reduction efforts and layoffs created the environment of the 90's. R&T was scaled down and the oil companies reduced their operating and capital spending. In the face of shrinking capital budgets, and the need to revive brown fields with a higher risk profile, the operators had more projects than allocated funds. The service companies, on the other hand, were challenged with excess capacity, reduction in service orders and pressures to offer price discounts on services. The large service companies responded by taking on more risk / reward projects, offer bundled services and turnkey arrangements. The challenges posed by these contracts could not be met without developing a "reservoir centric" knowledge base by the service companies, along with the development or acquisition of new hardware, software and other technologies that increased economic value of the assets through computing efficiency and technological innovations. Complex turnkey projects of large magnitude and potential for huge losses catapulted the service providers into "integrated project management" expertise also by the same token. Farrell2. has described several partnering arrangements between clients and contractors under a risk / reward theme. MoomJian3. has described a few other arrangements for drilling contracts that combine "footage" and "incentives" for safely drilled wells at the lowest cost. Straughen4. identified challenges of the mid-90's industry and proposed "re-engineering the alliances and partnerships" between the service providers and the clients. Hallmark of all these contracts was a degree of risk assumed by the contractor in return for more integrated project empowerment and higher rewards for meeting the operator objectives. Cost reduction thus became a necessary element of any delivery to maintain margins for the contractor. In this environment many of the small and medium sized companies either merged or got acquired by their larger counterparts. Gray, et al5. described the plight of small and medium size innovative enterprises (SME) under the CRINE (cost reduction in new era) paradigm. The$14/- per barrel price in 1999 further reduced capital spending by the asset owners and forced the SME's to assume much higher risk in partnerships as described by Kemp and Stephen6. Kusaka et al7. describe another contract in which the service provider could access CAPEX dollars only if the operator objectives were met through contractor technical expertise and project management skills. Operators being in the driver's seat, it was the service organizations that emphasized structured contracts through a detailed project description and integration of technical processes. The Alliance - Value model proposed by Brett, et al8. is an example of service companies proposing technical excellence to minimize their downside risk. Legacy of the 90's era and the present high hydrocarbon products prices thus set the stage for the asymmetric positions that have developed in the industry since the start of 2003. Table 1. shows a number of metrics such as technologies, software, project management skills that determine the need for contractual alliances between operators and the service companies. Table 2. desribes the asset ownership and capital spending increases by various type of operators that has created the economic boom conditions for service and consulting organizations. A combination of these two factors is reflected in the environmental change that prompts the call from operators to structure the contracts differently.