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EPC Contracts in the Oil & Gas Sector

EPC Contracts in the Oil & Gas Sector



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Published by: suryadiwang on Jun 17, 2010
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EPC Contracts - Oil & Gas Sector
August 2004
Introduction3Basic features of an oil and gas project4
The contractual structure4Bankability6
Basic features of an EPC contract7Split EPC contracts11Key oil and gas specific clauses 14in oil and gas EPC contracts
General interface issues14Feedstock and product storage14Interfacing of commissioning 15and testing regimesFeed stock specification issues16Interface issues between a supply 17or offtaker and the EPC contractor
Key performance clauses in oil 18and gas EPC contracts
Rationale for imposing liquidated damages18The law of liquidated damages18Drafting of liquidated damages clauses19Drafting of the performance guarantee regime19
Key general clauses in EPC contracts23
Delay and extensions of time23Exclusive remedies and fail safe clauses26Force majeure28Operation and maintenance31Spare parts31
Dispute resolution33Appendix 1 - Example clause
Part IPerformance testing and guarantee regimePart IIExtension of time regime
"…it is Mallesons that occupies the top spot. It is praised almostunanimously for the quality of its partners, depth of practice,its management structure and its enduring relationship withkey clients …"
Global Counsel 3000, 2002-2003
Engineering, Procurement and Construction (EPC)Contracts are a common form of contract used toundertake construction works by the private sectoron large scale and complex oil and gas projects.
Under an EPC Contract a contractor is obliged todeliver a complete facility to a developer who needonly 'turn a key' to start operating the facility, henceEPC Contracts are sometimes called turnkeyconstruction contracts. In addition to delivering acomplete facility, the contractor must deliver thatfacility for a guaranteed price by a guaranteed dateand it must perform to the specified level. Failure tocomply with any requirements will usually result inthe contractor incurring monetary liabilities.It is timely to examine EPC Contracts and their useon oil and gas projects given the bad publicity theyhave received, particularly in contracting circles. Anumber of contractors have suffered heavy lossesand, as a result, a number of contractors now refuseto enter into EPC Contracts in certain jurisdictions.This problem has been exacerbated by a substantialtightening in the insurance market. Constructioninsurance has become more expensive due both tosignificant losses suffered on many projects and theimpact of September 11 on the insurance market.Further, some project proponents believe that theproject delivery methods such as EPCM give themgreater flexibility and that they have the expertiseand experience required to control costs in anEPCM contract.However, because of their flexibility, the value andthe certainty sponsors and lenders derive from EPCContracts the authors believe EPC Contracts willcontinue to be a pre-eminent form of constructioncontract used on large scale oil and gas projects inmost jurisdictions.
This paper will only focus on the use of EPCContracts in the oil and gas sector. However, themajority of the issues raised are applicable to EPCContracts used in all sectors.Prior to examining power project EPC Contracts indetail, it useful explore the basic features of an oiland gas project.
By this we mean oil, gas and derivatives of the same such asmethanol, fertiliser etc. See also Roe, D., "LNG Trade: A Reviewof Markets, Projects and Issues in the Changing World of LNG",SMI Publishing Ltd, London on at page 119.
Some jurisdictions, such as the USA, use alternative structureswhich separate the work into various components.

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