A research proposal on contract strategies for projects in the subsea oil and gas industry
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In different subsea oil and gas projects developments, the award of large contracts for a variety of works is undertaken. Nevertheless, the overall strategy for distributing these contracts to different contractors is the main issue regarding to contracting strategy. The recent researches on the field of contract strategies establish that the world is growing very fast technologically thus provoke the need for further exploration for sources of energy especially in subsea oil and gas industry. Furthermore, a profound increase in the projects complexity, increase in projects sizes as well as the intensified international engagements in related issues characterize oil and gas projects in the present world. Although these projects are based in the sea, it is argued by different scholars that construction processes have numerous groups of individuals and companies who get involved either as suppliers, buyers or as the real builders.
To maintain and ensure ethical relationships among the various stakeholders contracts are formed. A contract is a legal term that is either written or spoken as an agreement between two or more parties for the purpose of the delivery of particular services in return for money or any other valuable asset (Blum, 2007, p. 88). In projects related to subsea oil and gas engineering, the process and the character of contracting and presentation of projects contracts is of great significance for the future course of the project and as well for the general success of the project.
As far as subsea oil and gas industry is concerned, contracts are the critical tolls for the allocation of tasks, risks and responsibilities. Most importantly, contracting strategies in the above discussed industry takes into account the division of responsibilities within the project cycle, the desired allocation of risks, splitting of engaged parties and services among the involved groups as well as taking into account the interface and the market situation. Realistic selection of contracting strategies is the foundation of realization of goals and objectives of such projects. According to Blum (2007), it is of importance for involved stakeholders in such projects to have the awareness and knowledge about the particular characteristics of probable contracting strategies. Contracting strategies refer to the strategies in all stages of a project that establish a level of integration in design, the actual construction and ongoing maintenance in a project and gives support to the project in form of risk delivery, risk allocation and incentivisation.
The Rationale of the Research
Considering the increased exploration and initialization of subsea oil and gas exploration and extraction projects, it is of importance to acknowledge the significance of instigating effective and realistic contracting strategies, as they are key to the success of each and every projects. For this reason, it is important to bring into light various contracting strategies by discussing, exploring and analyzing the impacts of such strategies in subsea oil and gas engineering. It is in this respect that the research that will follow will go even deep to thrash out the advantages as well as the shortcomings of different contracting strategies with respect to various literatures in the specific field.
As many comprehend, there has been very little in terms of research concerning contracting strategies especially in the subsea oil and gas sector. Although few study this issue, many companies are investing in the industry probably ending up adopting one or several contracting strategies. It is therefore a major issue when the necessary research that can guide these companies in selecting the best approaches is unavailable.
The aim of this research will be to investigate various types of contract strategy used in the subsea oil and Gas Industries and the consideration made before choosing for a particular project. In addition, the research will provide insight in various concept of contracting strategies besides going deep to unclothe various strategies used in the subsea oil and gas industries. Furthermore, the research will explore, discus and determine the role of contract strategy in project management by comparing and evaluating their impacts on a project by applying cost reimbursable contract strategy and lump sum contract strategy. Finally, the study will materialize in identifying the benefits and disadvantages of the various types of contract strategies.
The importance of the study
On the event of the completion of this planned research, it is anticipated that various stakeholders in subsea gas and oil industry will be provided with adequate and vital information about contracting strategies in the field, their impacts on general project performance, their advantage and disadvantages as well being equipped with information on the roles of various contracting strategies.
To these ends, the study calls on the following research questions:
- What are the various types of contracting strategies used in the subsea oil and gas industry?
- What are the considerations made before choosing a contracting strategy?
- What are the roles of contracting strategies in the subsea oil and gas industry?
- What are the advantages and disadvantages of the discussed contracting strategies?
The empirical part of the research examines the theoretical framework of the perspective of different contracting strategies, their effectiveness, their roles as well as the benefits and shortcomings that accrue as a result of their espousal.
During the initial stages of any project, the main issue that faces the project management stakeholders is to make informed decisions on which contract strategies to adopt that best suits the project for successful achievement of the projects goals and objectives (Inkpen & Moffett, 2011, p. 187). According to Babusiaux (2007), contract strategy refers to the process or the endeavor to select an organizational or projects contractual policy that is required for the execution of specific projects within the major venture.
Most importantly, a proper and effective contract strategy for a project especially the ones related to subsea oil and gas industry involves making of five critical and basic decisions that include; setting of the projects objectives and constraints and making of informed decisions on the selection of proper project delivery method. In addition deciding on selection of proper contract type as well as adopting realistic contract administrative mechanisms serves as a basis for triumphant selection of contracting strategies. Nevertheless, in the subsea oil and gas engineering projects, a contract type is selected by the managers of the project through the advice of the projects engineers and his or her legal advisor. However, the selection in this case must meet the objectives and the goals of the project and be able to take into account the constraints that relate to the project.
The objectives are in terms of the time objectives, functional performance, transfer of technology, use of local materials and resources, allocation and payment of risks as well as cost objectives among others. This lead to a reflective increase in the projects complexity, increase in projects sizes as well as the intensified international engagements. Essentially, there are different contracting strategies in subsea oil and gas industry. The contracting strategies include; Engineering Procurement and Construction (EPC) contracting strategy, Engineering Procurement and Construction with Long Lead Items (EPC with LLIs), Engineering, Procurement and Construction Management strategy (EPCM) as well as the Progressive Lump Sum (PLS) (Ross & Williams, 2012, p. 236).
As a matter of fact, the selection of a specific contracting strategy in the subsea oil and gas industry depends on the level of risk an owner of a project dares to undertake and in most cases it reflects the desired peril, the goal and the aspirations of the owner. For that reason, the specific features and factors of the particular project have to be handled with an in-depth analysis and compared to the characteristics of the respective strategy in a manner that provides a foundation for deciding and choosing on the most appropriate solution (Babusiaux, 2007, p. 116).
As all this contracting strategies are based on the procurement process, it is basically known that supply chain in the industry of oil and gas has not been taken seriously for quite some time and this has resulted to significant drawbacks . Nevertheless, technological changes lead to the development of core values that aim only at fast exploration with consequent high production of oil and gas products.
According to Piskarev & Shkatov (2012) before selecting a contracting strategy to implement, owners of subsea oil and gas projects should ensure that, they consider basic attributes that determine which effective strategy works best in particular environments. To maximize on this, the key factors to consider in such cases include; the type, the size and the location of the subsea industry. Additionally, as mentioned in the overview, decisions should consider risk allocations, the projects interface, the time constraints and the market structure among many other factors.
Inkpen, A. C., & Moffett, M. H. (2011). The global oil & gas industry: management, strategy & finance. Tulsa, Okla, PennWell.
Blum, B. A. (2007). Contracts: examples & explanations. Austin, Wolters Kluwer Law & Business
Babusiaux, D. (2007). Oil and gas exploration and production: reserves, costs, contracts. Paris, France, Editions Technip.
Piskarev, A., & Shkatov, M. (2012). Energy Potential of the Russian Arctic Seas Choice of development strategy. Burlington, Elsevier Science.
Ross, A., & Williams, P. (2012). Financial Management in Construction Contracting. Chicester, Wiley.