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Energy contracts & disputes presentation slides - 25 September 2012

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  • 1. Contract managementand dispute avoidanceManaging operational and financial risk tokeep your energy projects on trackTuesday 25 September, 2012Date here
  • 2. Effective Delivery of the offshore windprogramme: Conclusions of the TaskForceChris HillChief Operating Officer - Offshore25th September 2012
  • 3. Offshore Wind’s Potential● 18 GW of capacity installed around our shores by 2020● With yet more in the next decade● Serving some 20% of the UK’s electricity needs from clean green sources● Employing thousands of people in manufacturing, construction and operations for decades● Improving security of supply, with less reliance on imported fuels● Making the UK a global leader in offshore wind power
  • 4. Experience thus far● Some 2 GW installed today● With mixed success● Many projects have over run on cost● Delivery gaps in next few years, not good for supply chain● Supply chain often constrained and hesitant to increase capacity● Construction risks unattractive to many financiers● Regulatory processes sometimes inadvertently adding to risk● Backdrop of economic & political climate
  • 5. Our Challenge• The DECC 2011 Renewables Roadmap stated: “we are determined to drive down costs and are establishing an industry Task Force to set out a path and action plan to reduce the costs of offshore wind, from development, construction and operations to £100/MWh by 2020”.
  • 6. Cost Reduction Task Force Industryexperts across the entire value chain Developers Centrica, DONG Energy, Mainstream Supply Chain Alstom UK, Gamesa, Siemens, Vestas Installation & Construction Technip Innovation Carbon Trust, Energy Technologies Institute Cross Sector Eversheds, Garrad Hassan Grid SKM Finance Lloyds Banking Oil & Gas Wood Group
  • 7. Rising to the challenge ● Task Force has considered evidence and bench marked best practice including ● The Crown Estate’s Pathways as it emerged ● Oil & Gas Sector ● Offshore Wind Sector ● Electricity sector and elsewhere ● We examined our ways of working ● And questioned were they optimal? ● We identified cost barriers ● And considered ways of removing them
  • 8. Key Recommendations 1. Supply chain ● Identify key risks and tackle bottle necks (Industry and Gov’t) ● Give greater project clarity to supply chain to allow more informed decision making (Industry) 2. Innovation ● Seek to standardise development and deployment (Industry) ● Deliver and make best use of Offshore Wind Test Centres for greater confidence in new turbines and deployment (Industry and Gov’t)
  • 9. Key Recommendations3. Contracting Strategies● Seek to adopt “Alliancing” model to contracting as used successfully by the Oil and Gas Sector. Evidence taken from National Grid, SSE & DONG● With more integrated collaboration vertically across supply chain and horizontally working with competitors (Industry)4. Planning and Consenting● Ensure planning reforms are fully embedded and working for Offshore Wind (Industry and Gov’t)● Ensure appropriate flexibility in planning practices and guidance to allow for offshore wind’s emerging technology issues (Industry and Gov’t)● Ensure appropriate resourcing of Statutory Advisors to meet project needs (Gov’t and Industry)
  • 10. Key Recommendations5. Grid● Increase and standardise sub sea cable voltages (Gov’t and Industry)● Review potential to standardise transmission and substation design including via a central Design Authority (Industry)6. Finance● Simplify deal structures where possible (Industry)● Deploy GIB to facilitate and leverage finance (Gov’t)● Look to pool assets to help diversify risk to investors (Industry)● Increase engagement with finance sector to educate and inform (Industry)
  • 11. Key Recommendations 7. Monitor and Manage Risk ● Create a new Programme Board comprising representatives of development, supply chain, statutory consultees and various Gov’t departments ● To assess and address offshore wind industry risks ● Demonstrating to 3rd parties the industry is making progress ● Improving delivery ● Reducing cost ● Improving investor confidence
  • 12. Contracting Strategies: CRINE & PILOTCRINE (Cost Reduction In the New Era)• Was the first Oil & Gas initiative and was established in 1992/3• It involved Oil Companies and Contractors/Suppliers• Objective - to reduce the cost of new Oil & Gas Projects in the UKCSPILOT• Was set up in late 1999 in response to a very low oil price• It involved Government (DoE, Treasury, HSE), Oil Companies, Contractors/Suppliers and Trade Unions• Objective – to maximise the recovery of hydrocarbons from the UKCS
  • 13. CRINEThe initiative addressed a number of areas but the four main ones were:• Contracting relationships and risk allocation• Standard contracting terms• Forward planning and visibility of activity• Improving the efficiency of the prequalification and bidding process
  • 14. CRINE Outcomes• Contracting relationships and risk allocation. Industry had tended to be adversarial which was viewed as wasteful. There was therefore a move to collaborative “Alliancing” relationships where there is cost transparency, pragmatic risk allocation, shared contingency and all parties are rewarded based on the overall project outcome• Standard contracting terms. A number of standard contracts were produced covering specific topics such as Design, Construction, Offshore Services, Well Services, etc• Forward planning. To give the supply chain a better understanding of the future activity levels, thereby enabling them to plan their resourcing and investment accordingly, annual “Share Fares” were established where the Oil Companies and Main Contractors would present their workload plans• Improving the bid process. The primary outcome on this was the establishment of First Point Assessment Ltd (FPAL), an industry registration system which was intended to avoid contractors and suppliers doing multiple submissions and proposals
  • 15. Standard contractsAmongst other things, these addressed the following issues; Back to back indemnities Limits of Liability Clauses on Variations, Force Majeure, Suspension, Dispute Resolution Third Party liabilityIn addition, the industry developed a “Mutual Hold Harmless Deed” wherebydifferent Contractors, working on the same facility, indemnify each other inrespect of personnel/property and consequential losses. In 2003, all of thesewere re-badged as LOGIC (Leading Oil & Gas Industry Competitiveness)
  • 16. PILOTPILOT had a much broader remit than CRINE due to the wider stakeholderparticipation, and assumed ownership of the ongoing work that had beenstarted by CRINEOther topics addressed included such things as; Licensing and regulation Fiscal Technology Access to infrastructure Safety Training and development
  • 17. Task Force: Conclusions● We can make far reaching changes to practices across the offshore wind sector● We can reach £100 / MWh by 2020● We need sufficient project momentum, supply chain capacity and competition, and stronger intra-industry and stakeholder cooperation● Barriers are surmountable, with both the industry and Gov’t willing to address them● The UK offshore sector can deliver vast quantities of low carbon generation, in an affordable manner● While providing thousands of jobs for decades to come
  • 18. Managing international contractsas a business assetTim Cummins, IACCM25 September 2012
  • 19. Contracts: Are We Wasting Our Energy?Negotiation Disputes
  • 20. What we negotiate … and disputeTop negotiated terms Top disputed issues1. Liabilities 1. Scope and goals2. Indemnities 2. Change management3. Price / charge 3. Delivery4. IPR 4. Performance5. Payment 5. Responsibilities6. Liquidated damages 6. Pricing7. Performance G’tees / SLA 7. Sub-contractors8. Delivery/acceptance9. Applicable law / jurisdiction10. Confidentiality /NDA
  • 21. ‘Troubled relationships’ = disappointing outcomes Research shows that The likelihood of commercial issues significantare the primary cause in ~70% innovation or incremental value of ‘troubled relationships’ is reduced by ≥ 60% So achieving improvement is importantCopyright © 2012 IACCM. All rights reserved.
  • 22. Factors that reduce dispute probability1. Risk allocation2. Problem solving3. No-blame culture4. Joint working5. Communication6. Gain and pain sharing7. Mutual objectives8. Performance measurement9. Continuous improvement
  • 23. What is the scale of loss or potential forgain? the average impact to bottom-line performance that results from weaknesses in contract management / commercial assuranceCopyright © 2012 IACCM. All rights reserved.
  • 24. Contracting and alliancingPeter Scurlock, Eversheds LLPTrevor Jones, National Grid25 September 2012
  • 25. Overview• Current procurement strategies – Turnkey and multi-party contracting – the challenges of multi-party contracting• Current contracting strategies – forms of contract – choosing the right forms• Alternative contract structures – the drivers for change – alliancing – different types of alliancing and partnering arrangements – Pros and cons of alliancing – Lessons learned from other sectors
  • 26. Procurement strategies• Turnkey approach – Single point responsibility – Majority of risks associated with time, cost and quality “wrapped” under one contract – Still used in certain biomass projects
  • 27. Procurement strategiesTurnkey contracting Developer Turnkey Supplier Sub-Contractor Sub-Contractor Sub-Contractor
  • 28. Procurement strategies• Multi-contracting approach – No single point responsibility – Developer enters into series of EPC contracts with suppliers – Developer retains the interface risk – Used in on and offshore wind and large-scale biomass projects
  • 29. Procurement strategiesMulti-party contracting Developer Balance of Plant Turbine Supply
  • 30. Procurement strategies Multi-party contracting Consultant Developer OFTO Appointments Site Transportationinvestigation and installation surveys contracts Foundation Foundation Offshore Offshore Turbine Supply Installation Cable Cable Supply Supply Installation Onshore Onshore Offshore Turbine Cable Substation Substation Installation
  • 31. Procurement strategies• The challenges of multi-party contracting – dealing with the interface risk – multiple number of contracts that need to be negotiated and administered – need for a proactive approach to project management• Dealing with the “known unknowns” – weather downtime – seabed conditions – supply chain constraints – claims• Marginal project economics
  • 32. Contracting strategies• Different forms of contract currently in use – FIDIC – LOGIC – BIMCO – NEC – Bespoke forms • Hybrid approach
  • 33. Contracting strategies• Different contracts have different approaches – to risk allocation – to delay – to additional costs – to liability – to indemnities (“knock for knock” v. conventional approach) – to project management and contract administration – to dispute resolution
  • 34. Contracting strategies• Choosing the right forms of contract – the need for consistency, flexibility and the right approach to risk allocation and risk management – the need to be bankable• Ensuring a consistent approach – standardised contracts for offshore wind and other types of project? – use of contract checklists
  • 35. Alternative contract structures• Drivers for change – the need to reduce costs – the drive for continuous improvement – the need to align interests
  • 36. Alternative contract structures• Drivers for change – the need to reduce costs • visibility of programme • long-term relationships • avoiding duplication • unlocking technology innovation and efficiencies • reducing the number of claims
  • 37. Alternative contract structures• Drivers for change – the drive for continuous improvement • incentivising and motivating good performance • inadequacy of damages • encouraging teamwork and collaboration • developing and sharing technology innovation and efficient ways of working
  • 38. Alternative contract structures• Drivers for change – the need to align interests • incentivising collaborative working and sharing of know-how • ensuring all key suppliers have a stake in the success of the whole project • ensuring that the commercial incentivisation drives the right behaviours • sharing risk and reward • moving towards a “no blame, no claim” culture
  • 39. Alternative contract structures• Alliancing – a formal relationship formed between two or more parties to pursue a set of mutually agreed upon goals – a contracting strategy which aligns the goals of the developer and supply chain with a view to minimising cost, increasing profitability and contributing to each others’ long term future
  • 40. Alternative contract structures• Different types of arrangement – Incorporating partnering and collaborative working provisions in existing contracts – Target cost contracts – Framework agreements – Individual alliance agreements – Project alliances – Strategic alliances
  • 41. Alternative contract structures ‘Pure’Degree of Integration Traditional ‘EPC’ Contracting AlliancingShared Cost Risk     Shared Programme Risk     Shared Quality Risk     Pan Alliance Incentivisation     
  • 42. Alternative contract structures• Pros and cons of alliancing – Pros • Integrated delivery = best for task • Minimises duplication • Maximises purchasing power • Secures supply chain and availability of resource • Reduction in claims • Alignment of interests encourages focus on mutual goals • Incentivises innovation and sharing of know-how and IPR • Improves health and safety performance • Early contractor involvement improves “buildability”
  • 43. Alternative contract structures• Pros and cons of alliancing – Cons • Lack of accountability and clarity • Potential blurring of responsibility in relation to key issues such as health and safety • Lack of competitive tension • Heavy reliance on commercial model • No single point responsibility for defects • Requires total buy-in and a complete cultural shift • Conflicting cultures • Knowledge and skills leakage
  • 44. Alternative contract structures• Lessons learned from other sectors – Make sure that you are comfortable with the extent of integration and risk sharing – Ensure sufficient competitive tension – Get the commercial model right – Agree meaningful incentives and adopt the right performance measures – Agree exit strategy and implement post-alliance protections
  • 45. Alternative contract structures• Lessons learned from other sectors – The need for consistent contracts – Invest time in educating alliance members to ensure that right behaviours are adopted from the outset – Incentivise knowledge sharing – Don’t hold back
  • 46. www.eversheds.com © EVERSHEDS LLP 2009. Eversheds LLP is a limited liability partnership.
  • 47. National Grid Eversheds – Energy Contracts & Disputes Conference 25th September 2012Trevor Jones – Senior Project Manager,Offshore DevelopmentUK/EU Business Development
  • 48. What were the Drivers for change? Stagnant Safety Performance Increasing/Uncommitted CAPEX Forecast Efficient Outage Management Optimise customer Relationships Project Processes/Interfaces Poor Supply Chain Performance & Management Subcontracting Relationships Complex, Costly & Risky Environmental Consents Getting More Difficult Shortages of Key Resources
  • 49. Partnering Relationship Spectrum Traditional Project Supply Chain Client Full Alliancing Partnering Partnering PartneringCompetition Cooperation Collaboration Collaboration CoalescenceProject Based Project Based Long Term Long Term Long TermRisk Transfer Risk Mitigation Risk Mitigation Risk Sharing Risk EmbracingEach side has Each side knows and Integrated supply chain One integrated team Integrated into wholeclearly established commits to the goals team focused on meeting consisting of both project lifecycleresponsibilities of the project and to program goals client and contractors Total alignmentLittle or no trust each other’s goals Usually Design & Build personnel around driving mutualDisputes often Requires a degree of Often create separate Early involvement in goal and sharing gainsresolved trust legal entity to contract design lifecycle and liabilities foradversarially Disputes typically with client Requires a high failure resolved in some Team has one set of degree of trust Both sides share their degree of compromise goals for a successful Team has one set of goals and cost and harmony program with some goals for a successful Requires extremely shared risk/reward program with shared high trust senior level‘ sponsors’ to risk/reward remove barriers and support the project
  • 50. Alliance Efficiency Model Improved SHES & Quality Performance Right Model, Right Responsibilities & Interfaces Clear & Defined Scope Deliverables Leveraging Value From Suppliers Demonstrate Value For Money Cost Certainty – No Surprises, Risk & Cost Management Robust & Deliverable Programmes Earlier, Dedicated Resource Availability & Allocation
  • 51. Alliance Contracts – National Grid Principles ?• Create the optimum construction vehicle to deliver a programme of works• Alliances comprise NG and partner as equals• Mutual Objective• Single management structure and culture• Best person for the job, multi-discipline project teams• Actual cost schedule/target based contract• Shared common objectives• Shared risk and reward• Pan-Alliance incentive mechanism
  • 52. Traditional Construction StakeholdersClient Designers Constructors Operators COST OF PUTTING IT AREA OF RIGHT WASTED POTENTIAL BUILDING IN WASTE MANAGING THE MESS LOSING THE LEARNING
  • 53. Project Partnering (INCEPTION) (IMPLEMENTATION) (OPERATION & EVALUATION) Client + Designers + Stakeholders + Constructors + OperatorsPOTENTIAL COST OF FOR ALL PARTIES AREA OF REALISED PUTTING TO ADD POTENTIAL WHAT RIGHT? VALUEANOTHER INPUT FROM ALL RIGHT FIRST TIME CAPTURE THE WAY BEST VALUE SOLUTIONS JOINT PROBLEM SOLVING LEARNING & USE IT
  • 54. Alliances Create Value By Jointly Managing Risk Reduction in Level of “Hidden Risk” NG Previous Risk Operating Cont’r Model Risk Hidden Risk NG Risk Alliance Shared Shared Risk Risk Model Cont’r Risk
  • 55. Focus on priority KPIs – introduce hurdles to understand the best performers3 “Golden” Safety VfM Customer serviceKPIs arederived from Non-negotiable Economic & Value for NG &the hurdles Efficient customer ►There is no negotiation on safety, this ►A commercially focused team must ► Customer focused organisations ►The best will be recognised & is a key aspect of all that NG do. achieve in these areas and will be are more likely to deliver value rewarded. incentivised for doing so. Anyone and align with NG values ►Highlight& communicate ►Anyone failing to clear this hurdle will not clearing this hurdle will not be good, innovative and aligned not be considered for KPI reward considered for KPI reward ► Itis important that some demonstration of the customer behaviours in the alliances. ► On target costs, all members of the focus is clear although this is may ►Challenge under performers to integrated supply team need to not be a crucial requirement in all raise their game. know their individual costs, which cases they are incentivised to keep to a ►Reward good performance minimum with a bigger pipeline. ► The target price has to be set at a ►Reduce the number of level that gives sufficient incentive alliances through “natural and value for money for the type selection”? and complexity of facility being ►Remove geographic constructed. boundariesLower level •The business still requires some more detail in certain aspects and so these must by capturedKPIs are •More granular and specific KPIs are monitored as “SLAs” and are expected to be BAU for the alliancestreated as •If the alliances are not performing on these there is still potential for actionSLAs •If there is a continued poor performance on these they could be “promoted” to the “golden” KPIs Page 55 25 September 2012 National Grid – VfM support
  • 56. Conclusions An Alliance does not ‘run’ itself – it THANK YOU Success – is a contracted achieved Delivery Vehicle objectives Right / Wrong Views / Opinions Bureaucratic – Leadershi product of T&C’s – Question p – Tone or failure of over at the Top relationship whether it is the right vehicle for everythin g
  • 57. BankabilityRob McNabb, Eversheds LLPRichard Simon-Lewis, Lloyds Banking Group25 September 2012
  • 58. Questions
  • 59. Arbitration clauseschoice of forum and rulesNeil Newing, Eversheds LLP25 September 2012
  • 60. Coffee Break
  • 61. Health and safetyBetter HSE, Time, Cost & Quality throughCollaboration, Culture & Communication(& contracts)David Young, Eversheds LLPGraeme Bellingham, EDF25 September 2012
  • 62. Questions
  • 63. Best practice contract managementand dispute avoidanceRichard Ward, Eversheds LLPGary Carter, Centrica25 September 2012
  • 64. Our presentation• Some general themes on disputes and contract management• Generic responses• Specific clean energy issues• Case studies
  • 65. Disputes• What are disputes?• Any difference (broad)• Any difference that has to be resolved by others (formal)• In broad sense will be inherent in projects• In formal sense are avoidable/manageable• Avoid broad disputes becoming formal
  • 66. Why avoid formal disputes• Risk of outcomes/third party determines• Expense, external and internal• Damage to project• Collateral damage
  • 67. Causes of formal disputes• Root causes. Inherent in the project• Inappropriate contract terms and risk allocation• Unclear commercial objectives and wrong expectation• Poor teams/contractors• Contract alignment across multi contract projects
  • 68. Responses to root causes• Pre-contract reviews/joint workshops. Don’t forget the detail• Project specific analysis of expectations and contract terms/do not rely on standard responses• Risk registers• Align across all project contracts• Clean energy projects tend to be sophisticated and well understood• Remote risks
  • 69. Proximate causes• Relate to the processes around project delivery• Communications• Relationships between project teams• The design process• Contract administration
  • 70. Generic Responses to ProximateCauses• Live the contract. Don’t put it in the drawer!• Understanding the contract workshops (with supply chain)• Communication protocols (especially design)• Integration of project teams• Early warning mechanisms
  • 71. Avoiding and remedying defects• Quality assessments and inspections. On- shore/early• Early identification/early remediation• Self help remedies
  • 72. Dispute resolution• Tiered approach• Continuity over all contracts• ADR – project (or ad hoc) mediation• Advisory opinions• Experts• Dispute review boards• Arbitration – courts - adjudication
  • 73. Summary• Seek to eliminate/root causes• Maximise proximate cause management• Formal disputes significantly reduced and when arise well managed
  • 74. Best practice contract managementand dispute avoidance
  • 75. Introduction• Clean energy construction is essentially heavy civil engineering with plant bolted on• Common issues arise• Good procurement/project management – Eg CTRL King’s Cross
  • 76. Clean energy specific• New technology• Limited providers• Long lead procurement
  • 77. Case studies• Major design consultant• EPC plant• Variations
  • 78. Summary• Clear risk allocation and drafting – include mechanisms that provide Employer flexibility• Uniform provision/contract alignment• Right people with access to senior management/legal• Nip disputes early
  • 79. Questions
  • 80. www.eversheds.com © EVERSHEDS LLP 2009. Eversheds LLP is a limited liability partnership.

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