TUDARCO-PROCUREMENT ISSUES IN OIL AND GAS CONTRACTS

PROCUREMENT ISSUES IN OIL AND GAS CONTRACTS:
INDUSTRIAL PRACTICE IN TANZANIA

A: MEANING AND PRINCIPLES OF
PROCUREMENT
“Procurement” means buying, purchasing,
renting, leasing or otherwise acquiring any
goods, works or services by a procuring entity
and includes all functions that pertain to the
obtaining of any goods, works or services,
including description of requirements, selection
and invitation of tenderers, preparation and
award of contracts
The oil and gas industry characterizes complex
procurements due to the long lead times and high
costs involved. In many cases the procurement is
technically very complex and uncertain as each
project is unique.

• Public procurement means “an acquisition,
whether under formal contract or otherwise,
of works, supplies and services by public
bodies using publicly sourced finances. It
involves the purchasing, hiring or obtaining by
any contractual means of publicly needed
goods, construction works and services by the
public sector. It also includes situations in
which public funds are mobilized to procure
works, goods and services even if the
government does not get directly involved”.
A: MEANING AND PRINCIPLES OF PROCUREMENT

• UNCITRAL model law principles: The Model Law
tries to set up laws and procedures which
emphasize fairness, transparency integrity as
espoused in the 2011 UNCITRAL model law
principles.
• “Principles Model” emphasizes more of the
principles of procurement in accordance with
good governance practice. The National Public
Procurements Policy is based on the Principles
Model which has enshrined the universality of
the UNCITRAL model law; its Rationale is that,
once a body is spending public money there
follows an obligation on that body to account for

• Value for Money principle: The Core
Principle underlying public sector
procurement which in a procurement
function is a good measure of an economy
and efficiency with which public financial
resources are converted into procured
quality goods, services and works. It is
evaluated on a whole-of-life basis of the
good or service being procured.

B: CONTRACTING CONCEPTS IN OIL AND
GAS
• Individual Contracts. Oil companies enters into
a number of individual contracts with each
contractor, the operator manages the contract
on a one-to-one basis and for each different
phase and task in the project the operator would
have a new contractor.
• EPIC (Engineering, Procurement, Installation and
Construction). The exposure of interfacing
between individual contractors is sub-delegated
to one particular main contractor, (integrator)
who turn subcontracts the various work
packages to the subcontractors and is
responsible to coordinate them. Contractor

GAS
Disadvantage of EPIC:
1)It is unsatisfactory for the operator because
the main contractor successfully excluded the
financial exposure resulting from the interfacing
between various subcontractors from its contract
with the operator.
2)Does not bring cost savings for the operator

GAS• “integrated project organizations” or
“alliances”. It replaced the traditional
interfaces between contractual parties with a
more effective integration of resources i.e EPIC.
In such contract the operator and all contractors
involved are responsible for how the tasks are
divided between the actors, and for coordination
between phases and actors
Advantage of IPO-Alliance: smoothen
coordination between all parties involved
(operators, contractors, subcontractors and
vendors), and thereby reduce costs, increase
quality and shorten production time. The

C: PROCUREMENT STRATEGIES
Economic Impacts of Oil and Gas Activities: The Direct
and Indirect Value Creation

D: EVALUATION CRITERIA
Meaning of Evaluation Criteria:
1.Standards used to evaluate offeror’s technical
and/or operational effectiveness or the
standards on which a technically sound
judgement or decisions on the selection of
various alternatives may be based.
2.Benchmarks or standards used as point of
reference for evaluating performance or level of
anticipated quality; or the yardsticks against
which accomplishment, conformance and
suitability of an individual alternative activity,
product or plan as risk award ratio are measured.
Benchmarks or standards may be drawn from a

How to Develop Evaluation Criteria
1. Organisational Goals (Strategic/Commercial and
Operational): Each Oil and Gas Company has a
business plan or strategy combining marketing
and communication strategy, operation and
logistics strategy and financial management
strategy.[KPOs are Sustainable Quality or its
assurance regarding inputs and outputs;
Dependability to Customers; Flexibility on changes
of specification; Speedy delivery, Cost and
competitive price. ]
2. Organisational Capabilities: specific
competencies in an industry or area of expertise
of the Oil and Gas Company.
3. Industrial Requirement: Oil and Gas Industry has
specific requirements for ownership, process

4. International Standards and Conventions: The
global transactions are guided by standards
and conventions to facilitate suppliers to
deliver goods or services that are
internationally acceptable and may be
exported from one country to the other.
5. Legal and Statutory Requirements: laws and
procedures governing the procurement
process, production, distribution and delivery
of products or services. It includes
specification of documents and information to
be submitted by bidders, date, place and
format of submission of bids; legal
How to Develop Evaluation Criteria

Types of Evaluation Criteria
• Critical Criteria: standards which their presence
precludes a particular supplier E.G registration
as class I contractor by the CRBT or products
approved by TFDA. In that, consideration shall
only be given to class one contractors
registered by CRBT or products approved by TFDA
excluding any other contractors or products
though they may suit the need of the procuring
entity.
• Non Critical Criteria: standards which their
presence do not preclude a particular supplier
or a product E.G a professional engineering firm
or an authorised distributer of computers.
Products may be described by physical, chemical

Factors of Evaluation Criteria
• Subjective Factors: factors which can neither be
expressed in monetary value nor quantified in any
comparative scale. E.g. working experience of an
individual, experience of a firm in particular business
or quality of a product. These factors are merely
subjective and depend on the user of such criteria and
how such a user can be able to interpret the
information, analyse and use it for evaluating a
performance of a firm or an individual.
• Objective Factors: factors which can be expressed in
monetary value or weighing scale that is clear and
may be used for comparison. E.g. turnover,
profitability, project value, years of working
experience, number of projects, duration of project,
number of staff, number of equipment, asset value,

7cs of Appraisal
1. Competency: having the right technical skills and
processes
2. Capacity: having the right physical, human and
financial resource for the requisite technical skills
and processes
3. Commitment: committed to deliver to the customer,
expected quality and services that add value to
consumers
4. Control systems: having the requisite physical, human
and financial controls
5. Cash, financial stability and Sustainable Appropriate
Financial Position
6. Cost: offering the lowest evaluated total cost of
ownership (bidding costs, acquisition, after sales
services and a residual value after life circle of the

E: INTERNATIONAL RULES ON PROCUREMENT
Strict Rule and Mandatory Procedures
1994 UNCITRAL Model Law on procurement of
goods or construction, stating in Article 18:(1)
that except otherwise provided ‘a procuring
entity engaging in procurement of goods or
construction shall do so by means of tendering
proceedings’ (narrow exceptions from this in
Article 18 (2)) while the procurement of services
is made less rigid – Article 18 (3) with reference
to Chap IV provisions on methods for
procurement of service and Article 43 on lawful
selection procedures with simultaneous
negotiations.

Less Strict Rule on Mandatory Procedures
Simply state that “tendering for contracts may
take place with or without negotiations, provided
that the contract candidates are duly notified of
the procedure to be followed”.
This is supported by the WTO 1994 GPA Article IX
Paragraph 2 which leaves it to the entity’s
discretion whether the procedure will be a plain
tendering procedure with or without the
involvement of simultaneous negotiations.

The WTO General Agreement on Trade in Services
(WTO/GATS) Article XIII on exemption for
Government Procurement also states:
1.“Articles II, XVI and XVII shall not apply to laws,
regulations or requirements governing the procurement
by governmental agencies of services purchased for
governmental purposes and not with a view to commercial
resale or with a view to use in the supply of services for
commercial sale”
2.“There shall be multilateral negotiations on government
procurement in services under this Agreement within two
years from the date of entry into force of the WTO
Agreement”

F: PROCUREMENT OF OIL [PETROLEUM
PRODUCTS]• The government liberalized the downstream
operations since 2000. Oil marketing companies
import petroleum products for local consumptions
as well as transit business through bulk
procurement arrangement coordinated by Petroleum
Importation Coordinator (PIC). The country demand
for petroleum products is estimated to be over 1.8
million metric tons per year
• Each Oil Marketing Company importing petroleum
products in BPS tender is required to open a Letter
of Credit with the Commercial Bank of its choice 5
days before delivery lay can.
Challenges:
1.Different Financing costs of the LC while Pricing
formula is fixed at financing cost of 1% of CIF

3. Petroleum supply chain had fragmentation of imports
with higher costs due to lack of economies of scale;
4. Downstream segment has been characterized by lack
of information and data which obscure tax evasion,
adulteration of products and general inefficiencies in
the various segments of petroleum supply chain
BPS started on October, 2007 vide EWURA ORDER NO 07-
010 of October, 2007] which asserts that “ All Oil
Marketing Companies importing petroleum products in
Tanzania shall use bulk importation system where
importation of petroleum products will be done
competitively and transparently using an open tender
system through International Competitive Bidding”
Govt through EWURA Sought a need to have alternative
financing mechanism that intended to improve BPS for
PRODUCTS]

• The Petroleum (Bulk Procurement) Regulations, 2011
was issued on 3rd
June, 2011 through GN No 164 directing
all petroleum imports for the Tanzania Local market
through Efficient BPS.
• The OMCs formed a company known as Petroleum
Importation Coordinator Limited to handle all matters
related to the operations of the BPS
• The first cargo under BPS was received on 4th
January,
2010 and until January, 2014 about 18 tenders were held
and five companies won the tender to supply petroleum
products
• EWURA (Petroleum Products Price Setting) Amendment
Rules, 2013 published by way of GN No 432 of 29th
November, 2013 direct issuance of capping petroleum
prices for the local petroleum market at a formula of
PRODUCTS]

• All OMCs waiting for the products are entitled to
open an LC five working days prior to delivery
laycan after receipt of the needed documents
from the supplier. In that, supplier has to submit
the Proforma invoice to the purchaser and
Petroleum Importation Coordinator (PIC) latest
calendar days before the first day of delivery of
laycan.
Challenges
Some OMCs fail to secure LC facilities in time and
therefore cause some delays to off-load the
products from the vessels; hence leading to
unjustifiable increased demurrage days
PRODUCTS]

Other Options
1.One Commercial bank or a lead bank with a
Consortium of other banks would open one LC to
finance petroleum products importation through
BPS
2.Or else use the Central Bank as lead bank an
aggregator due to its integrity and financial
capability. However, this may not be a good
option as Central Bank is a Regulator of other
banks which might be contrary to the FCC Act.
3.The Single financing arrangement is on USD in
order to avoid exchange rate risks
PRODUCTS]

G: PROCUREMENT UNDER THE PSA
• ARTICLE 20 (e) The Contractor shall “Upon
purchase of goods, services or materials, follow
an efficient, open, transparent, non-
discriminatory and competitive purchasing and
award procedure in accordance with the Law and
Best International Petroleum Industry Practices
and submit the relevant procurement plan to
TPDC for review”;
• ARTICLE 21(f) :The Contractor shall “prepare an
annual local content plan which shall accompany
the annual work program and budget for
Petroleum Operations in the Contract Area which
shall include but not limited to procurement of
Tanzanian goods, material and services”

G: PROCUREMENT UNDER THE PSA
• SECTION 3(f) (a) :COSTS, EXPENSES, EXPENDITURES
AND CREDITS OF THE CONTRACTOR: “Material
purchased by the Contractor for use in
Petroleum Operations shall be valued to include
invoice price less trade and cash discounts (if
any), purchase and procurement fees plus
freight and forwarding charges between point of
supply and point of shipment, freight to port of
destination, insurance, taxes, custom duties
consular fees, other items chargeable against
imported material and, where applicable,
handing and transportation expenses from point
of importation to warehouse or operating site,

H:SUPPLIER PERFORMANCE
• Once a supplier is selected the focus shifts
from evaluation to the continuous measurement
of supplier performance.
• Oil and gas company must be able not only to
select the right supplier, but also to monitor
and manage performance of supplier over time
to improve performance and manage costs,
quality and delivery time.
• Measuring supplier performance is among the
ways of measuring supply chain performance.
• Oil and gas company should develop measures
to asses supply base, the purchasing
department, monitor the interfaces between
30

• The most effective performance systems will
asses performance across the entire length of
the firms supply chain, from suppliers through
internal process to customers.
• Important factors used to measure supplier
performance are quality, delivery and price.
Other factors include quality management,
partnering, Customer services, vendor co-
operation and problem resolution ability.
• Some of these factors are quantitative and
some qualitative.

Supplier performance measurement
• Supplier Performance Measurement(SPM) is the
process of measuring, analyzing and managing
supplier performance for the purpose of
reducing costs, mitigating risks and driving
continuous improvements in value and
operations.
• A supplier in this context refers to a party that
supplies goods or services, and may be
distinguished from a contractor or sub-
contractor/manufacturer who commonly adds
specialized input to deliverables also called
vendor.
33

What to measure?
•The most important factors that should be used
to measure supplier performance fall into
Quantitative (objective) and Qualitative
(subjective). Most of the objective, quantitative
variables lie within the following three
parameters:-
1.Delivery Performance
•Orders or material request sent to a supplier
have a quantity and material due date
commitment. Quantity, Lead-time requirements
and due date compliance help define a suppliers
delivery performance.
34

2. Quality Performance
• Quality Performance is critical component to
any supplier measurement system. There are a
number of ways to measure supplier’s quality
performance;
• Number of deviation (substitutes, similarity)
request, accuracy of paperwork, field
campaigns and suppliers cost of quality
inspection data and warranty data are used for
measuring supplier performance.
• The inspection measures are based on the
number of rejects versus lines/Quantity
inspected. e.g If 100 items are inspected and 4
35

3. Supplier cost reduction/supplier value
performance
• Buyers often rely on suppliers for cost –
reduction assistance. Looks at a total
acquisition cost not just price. Total
acquisition cost considers all costs, freight,
handling, quality and administrative. Cost
reductions such as cycle time reduction,
inventory reduction, Electronic data
interchange (EDI) transactions are to be
considered.
• One common method is to track a suppliers
real cost after adjustment for inflation,
36

Type of Supplier Measurement Techniques
Categorical system: requires the
assignment of rating to each selected
performance category E.g. possible ratings
such as excellent, good, fair or poor.
Weighted Point system: weighs and
quantifies scores across different
performance categories
Cost-based system: This approach qualifies
the total cost of doing business with a
supplier. The lowest purchase price is not

• The Public Procurement (Goods, works, Non-
Consultant Services and Disposal of Public
Assets by Tender) Regulations, 2005, requires
the Accounting officer to appoint a goods
inspection and acceptance committee to
ascertain that delivered goods are of required
quality and quantity as stipulated in the
contract document.
• Supplier has been defined by the PPA No.21 of
2004 as a company, corporation, organization,
partnership or individual person supplying
goods or services, hiring equipment or providing
transport services and who is according to the
38
I: LEGAL ASPECTS ON SUPPLIERS’
PERFORMANCE

1. Lack of knowledge on technical
specifications
2. Poor Performance of the service
providers
3. Goods Procured and paid for but not
delivered
4. Supplier cost reduction performance
Most of suppliers for routine items are SMEs
whose capital base is small to run the
business. Lack of initial capital for
procurement usually compels suppliers to
request advance payment to facilitate
39
CHALLENGES OF SUPPLY CHAIN

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TUDARCO-PROCUREMENT ISSUES IN OIL AND GAS CONTRACTS

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