Shell announced in July that it planned to award three North Sea contracts with a combined value of more than £650m. The size of the awards was not extraordinary but their nature is. They were not huge engineering or fabrication undertakings associated with a vast new offshore development, but seven-year arrangements to cover operational requirements on existing platforms.
Term contracts for engineering and maintenance services in the North Sea have been a feature since the early 1990s. However, the length and scope of the proposed Shell awards, and a similar contract Elf placed recently with Kvaerner Oil & Gas for three of its platforms – worth £100m over five years – indicates that offshore contracting is about to enter a new dimension.
Under Shell’s proposal, three contractors will be responsible for all design, maintenance and facilities modifications for significant groups of the operator’s platforms: Wood Group Engineering for the four installations on the Brent field; Amec for the five in the East Shetlands Basin (Dunlin, Cormorant Alpha, North Cormorant, Tern and Eider); and Brown & Root for the five central North Sea facilities (the Fulmar, Auk, Gannet, Kittiwake platforms and the Anasuria floating system).
Malcolm Brindley, technical services director at Shell Expro, says the proposed arrangements represent more of a consolidation of – rather than a quantum shift in – the delegation of responsibility from operator to contractor.
He points out that such services were previously contracted out on the Brent field, but were under three-year deals to three separate contractors. Amec provided engineering for all four platforms, while the Wood Group and AOC looked after construction and maintenance on two.
Brindley says these earlier arrangements have enabled the contractors to develop their expertise and capabilities to the point where Shell feels confident in extending their responsibilities – for mutual benefit. The longer-term continuity and enhanced scope of work will allow the contractors to take a more strategic view.
‘There’s a huge change in your approach to investment in people and systems,’ says Brindley. ‘It’s all about alignment of objectives.’
Moving towards a greater sense of common purpose will increase the management responsibilities of the contractors. While Shell and Elf retain a presence in the management teams coordinating the programmes, the operators expect the contractors to offer more than they have previously.
‘I think we expect much more responsibility of the contractors to initiate business improvements,’ says Brindley. He expects the contractors to come up with proposals for cost-saving technologies and take on more responsibility for front-end engineering. ‘What we’ve tried to do is capitalise on the strengths of the two organisations,’ he says.
Alastair Rennie, Amec’s project manager for the East Shetlands Basin contract, says his company will be accountable for the entire maintenance, inspection and services budget on the five platforms and will take appropriate responsibility. ‘It’s very much our management,’ says Rennie. ‘Hopefully we’ll have a few Shell people in it.’
Elf has not devolved things quite so far on its contract with Kvaerner -the French operator has retained the dominant role on the joint management team. But Simon High, managing director of Kvaerner’s facilities management and operations business stream in Aberdeen, says there is nevertheless a noticeable enhancement of responsibility from earlier contracts where his company provided individual services on a reimbursable basis. ‘Maintenance management tends to rest with us.’
Another feature of these recent ‘integrated service contracts’ is the method of remuneration, which has borrowed heavily from the risk-reward philosophy introduced into the main contracts on offshore development projects. In the case of the service contracts, the rewards to be shared are savings achieved against the pre-set annual budgets for the various services.
Brindley says there are inevitably elements of the new arrangements that are reimbursable on the basis of costs plus a fixed management fee. However, he says that the incentive payments involved will be the key to the contractors generating a decent rate of return. ‘All profit is performance related,’ he says.
‘There’s not the slightest trace of return based on turning up,’ says Rennie of Amec. ‘There’s a strong element of reward sharing – up to 50% of the saving.’
Brindley believes that the new contracts should offer the contractors ‘comparable or improved rewards compared with the current arrangements’. And the operator also expects to see benefits. Brindley is looking to save 15% on engineering and maintenance costs. ‘It could be significantly more.’
Against the background of North Sea operators outsourcing more of their activities, some industry observers wonder whether integrated services contracts such as those awarded by Shell and Elf are not the first step down the road to the complete contractorisation of the industry. Will the day come when an oil company does not have one of its operatives visible on one of its offshore installations?
Brindley is adamant that Shell has no plans to go this far. ‘That’s certainly not what we’ve done on these contracts and that’s not what we intend to do,’ he says.
He claims Shell will retain direct responsibility on its installations for safety, production operations and overall integrity management. He also sees a key role for Shell personnel in providing the ‘interface between front-end engineering and other disciplines’.
Not all operators seem to feel the need to remain so ‘hands-on’. BP has formed an operational alliance of the main contractors on its Andrew platform, which will run for five years initially but this could be extended to cover the installation’s entire life. The arrangement has introduced a degree of interdependence.
BP is also not shying away from a scenario in which its only operative on a platform would be the oil installation manager. ‘On Harding, we’re not far from that,’ says a spokesman for BP. ‘It’s only him and two others.’
The new market for floating production systems has already seen the devolution of the operation to contractors, with companies such as Golar Nor and Bluewater leasing floating production storage and offloading vessels to operators for the duration of a field’s life. But these have tended to be relatively short-term arrangements of five to six years with vessels that can easily be moved on once the reservoirs are drained. Handing over the operation of an asset with a 20-year lifetime – not to mention decommissioning liabilities – would constitute a considerably greater act of faith.
There is little doubt the leading contractors are fast approaching the point where they could take over the operation of platforms – at least beyond the well-head. However, they appear reticent to promote this capability too forcefully, perhaps wary of the threat it could pose to the hands that feed them.
‘We have the expertise to do it,’ says High at Kvaerner, ‘but we don’t want to become an operator and a threat to a client.’