MODEL CONTRACTUAL SOLUTIONS

for the UK’s Offshore Oil and Gas Industry

THE COMPELLING CASE FOR CHANGE

- Introduction and Background

David Odling, Oil & Gas UK,

past Chairman of the Standard Contracts Committee
Supply Chain Solutions Workshops – Autumn 2010
 Agenda

1. Background – the Starting Point

2. Today’s UKCS Business Climate

3. Some outputs from CRINE in the 1990s

4. Suite of Ten Model Contracts

5. Other model solutions

6. Benefits for Operators, Contractors and Suppliers

7. Where might we be in 2020?

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 Background – the Starting Point

• $40 oil in 1980 and $10 in 1987 (in money of the day)

• CRINE report in February 1994 (Cost Reduction in the New Era)

- need to cut UKCS costs (capex and opex) by 30%

- standardisation (technical and commercial)

- formation of contracts committee at beginning of 1996

(the CRINE initiative comprised a mixture of operators, contractors

and suppliers)

• Cost remains a major concern for UKCS today

(ref Activity Survey results published each February)

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 New developments costs have been rising rapidly
35
UKCS Unit Technical Cost 2005 - 2012
$ per boe Developed/Produced
30 Opex/boe
Capex/boe
25
13 13
20 12

15
7
10
16 15 15
5 8
0
2005 2008 2009 2010‐12

• Technical costs drive the economics of new developments

• Unit technical costs ($/boe) have risen by 80+% since 2005
– equals difficulties when oil & gas prices decline which they did!
– oil prices have recovered to $80-85 per barrel
– BUT gas is 30-40 p/th, equivalent to ~$30-40 per barrel for oil
• Northern North Sea the most expensive area
NB: technical costs exclude finding and various other costs
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 Unit Operating Costs by Region
(assuming sustained investment case)
30.0

UKCS NNS SNS CNS WofS

25.0

20.0
UOC $/boe

15.0

10.0

5.0

0.0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

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 Time will not wait - there is Window of Opportunity
• Around 45% of infrastructure could be decommissioned by 2020 unless
current activity is sustained
• If investors’ confidence is maintained, decommissioning could be delayed
by 10-15 years in many of the existing production systems

120
Example of major hub
100 Existing Production
life extension
Brownfield
Production

80

60 E&A +
’
New Devt’s Economic
cut -off
40
point
20

0
2006 2010 2015 2020 2025 2030

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 Some outputs from CRINE initiative
• Pre-Qualify in advance, not again and again for each project
– First Point Assessment (FPAL)
• Functional Specifications – standards for major, high value
plant and materials procured by the industry
– what ever happened to these?
– re-captured by in-house engineering preferences??
• Create a set of standard contracts for major activities
– at the time, big doubts whether this was achievable
(which didn’t say much for our industry’s behaviour!)

• Model Invitations to Tender (ITTs) – separate and more

recent initiative by Supply Chain Forum (previously Network)

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 Standard Contracts – the Suite
• Suite of 10 models covering most of high value, high risk
activities associated with offshore oil & gas
• Originally published in late 1990s, updated in 2000s
– available on-line at www.logic-oil.com
- Design

- Construction
- On- and Off-shore Services
- Marine Construction
- Mobile Drilling Rig
- Well Services
- Procurement of Major Plant & Equipment
- Purchase Order (short form)
- SME Services (+ sub-contract)

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 Model Contractual Solutions – what else?

• Industry Mutual Hold Harmless (IMHH) regime

– began operating in mid-2002; 400+ participants now

– knock-for-knock indemnities between fellow contractors

working offshore, covering own people, property and
consequential / indirect losses; pollution excluded

– expires at end of 2011; follow-on IMHH from 1st January

2012 now agreed, allowing more participants

• Parent Company Guarantees and Performance Bonds –

recommended model forms: see www.logic-oil.com

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 Benefits for Clients, Contractors and Suppliers
• Easier selection of bidders through FPAL
• Quicker tendering (ITTs) and contract awards
• Fewer qualifications: less negotiation
• Increasing familiarity in the supply chain
• Greater consistency in contracting practice, especially in
risk allocation
• An ability to feed back performance via FPAL
• More winners than losers

– OR so we all hoped, but sadly in recent years there has

been a tendency to drift back towards the bad, old ways

• So, is it not time to re-invigorate the whole process?

– if not … …
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 What should we look like in 2020 ?
3.5
DTI Energy Review, July ‘06

3.0 Oil & Gas Demand in UK

2.5 BERR’s (DECC’s) Renewable

Energy Consultation, June ‘08
million boepd

2.0 The Better Future

1.5
~40% of demand in 2020

UKCS Oil & Gas

1.0 Production

0.5
Existing Production Base
12% of nation’s demand in 2020
0.0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: DECC / National Grid / Oil & Gas UK

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