As a result of the rapidly changing and volatile conditions in the market as well as the regulatory environments they operate in, contracts in the energy industry are growing in complexity as well as volume. The risks to the stakeholders, people, property, and the environment inherent in the operation of the energy industry calls for scrutiny of the risks involved, and how to distribute the risks among the stakeholders and partners involved in projects.
We asked the experts from our speaker panel at the 7th Contract Risk Management in the Energy Sector 2019 about the biggest contract management challenges and risks today facing energy companies and the steps that need to be implemented to mitigate contract risks.
The Deepwater Horizon oil spill (Macondo) in 2010 drew the attention of the industry on the risks inherent to oil and gas exploration and production and the need for risk mitigation that is contractually managed. As a result, the trend of operators seeking to spread their risk to their contractors has been on the rise.
Contractor companies sometimes venture into projects without a complete picture of the risks and complexities involved in the contracts. Adopting systems than can track deliverables of all stakeholders throughout the lifecycle of the energy projects in a transparent manner is key and remains a challenge.
Nicholas Gould – Visiting Professor, King’s College London, UK is of the opinion that energy companies need to do more than passing on all the risks to contractors, “The biggest contract management challenge relates to upfront preparation. More specifically, sufficient and realistic procurement planning and scheduling. Simply passing all risks under EPC contracts does not really focus on the most difficult challenges but relies on the hope that the contractor will deal with the issues.”
In order to mitigate contract risks, he advocates having a “transparent risk schedule and detailed program for sharing risk and defining more clearly the risk and so the financial impact would benefit employers and contractors. Coupled with a risk-sharing mechanism or better still an alliance-based contract creating shared goals and emphasizing information sharing between the parties.”
Transparency among the parties is key to contract management, and technology is making it easier than ever to keep track of deliverables, timelines, risks outlined and the costs for missing deliverables and exceeding the agreed timelines. Stakeholders need to be able to track the obligations outlined in contracts and understand what happens after a deal is finalized. Often the case is that deliverables are not monitored, tracked and sometimes not met. Risk management becomes easier when the stakeholders are updated in real-time as to what has happened, and what needs to be done. Technology has made it possible to automate as well as simplify the process of making contracts; operators, as well as contractors and suppliers, are embracing disruption & seizing technology advances. Modern contract management systems and platforms, streamlined processes, better risk management strategies are the way forward.Greater standardization and automation are critical to reduce fragmentation and enable increased efficiency in anticipating and avoiding typical operational risk. This will allow increased focus on the much bigger challenges of adapting the business to changing market conditions and focusing on the innovations needed to meet the opportunities of the future,” said Tim Cummins –President, IACCM, UK.
In order to reduce contract risks, Marina Mills-Head of Contract Management, Hitachi Zosen Inova AG, Switzerland, recommends having “A user friendly contract risk evaluation & allocation approach used by clients and main contractors together with relative transparency that would identify the risk(s), with which party the exposure lies, whether one party can mitigate it and how, if not – what are the contractual solutions to control and/or reduce this risk.”
The 4th EPC Project & Contract Management for Energy Sector will gather senior decision-makers from Construction, Legal, Contract, Risk & Procurement divisions of leading Energy companies to discuss and benchmark best practices to gain efficiency and increase ROI by tackling project complexity, rising costs and various risks.