3 – Developments on the NCS
This chapter addresses changes related to the industry, the market and regulation by the authorities since 2013.
3.1 Summary of the report on projects executed on the NCS
Assessment of projects executed on the NCS
Vurdering av gjennomførte prosjekter på norsk sokkel /1/ (Assessment of projects executed on the NCS) was drawn up by the NPD for the MPE in 2013. This looked at five projects – Skarv, Yme, Valhall Redevelopment, Tyrihans and Gjøa. Its main purpose was to understand the reasons why the licensees either succeeded or failed to execute the project on time, to the specified quality and to budget in relation to the officially approved PDO/PIO.
The report concluded that most projects end up with development costs within the uncertainty range specified in the PDO. Despite this, the projects recorded big cost increases overall – largely as a result of a few cases with substantial overruns.
The review found that some important conditions must be in place for projects to succeed.
Early-phase work
A number of the projects in the review were managed on the basis of excessively ambitious plans, and the time allocated for planning work became too short. Front-end engineering design (Feed) had not been completed before the investment decision for several projects was taken.
The basis for initiating construction and procurement was thereby inadequate, and major design changes were required in a number of the projects during the building phase.
Prequalification of suppliers
Following up all deliveries along the way will be very demanding in large offshore projects. The operator must therefore prioritise which areas it will supervise directly.
Detailed prequalification of suppliers on the basis of earlier experience could reduce the risk of problems during execution
and thereby the need for follow-up. The review showed that the operator relied far too much in a number of cases on the contractor being able to deliver on the specified requirements.
Contract strategy
The project’s contract strategy must ensure cost-effective progress and quality, and give the operator opportunities for follow-up, control and corrective measures along the way. It should reflect the key risk elements in the project and be viewed in relation to the operator’s direct follow-up and prequalification of suppliers. The review showed that the operator should consider taking greater direct contract responsibility for key equipment-package deliveries.
Operator’s follow-up
All parts of the project require good and qualified follow-up, and ensuring this is the operator’s responsibility. Follow-up must be tailored to the suppliers and contract model chosen. Understanding of the Norsok standards and Norwegian requirements are a bigger challenge at foreign yards than for domestic construction contractors, and the operator has a special responsibility to follow that up. This was summed up as a lesson learnt in several of the projects reviewed.
A high level of activity meant higher prices for input factors and a shortage of resources. Where projects had encountered difficulties, a high level of activity led to more restrictive conditions for execution and was viewed by the NPD as a contributory factor to the big time and cost overruns which occurred in some of the projects reviewed.
3.2 Changes to the licensees’ project development process
Many operators on NCS in recent years have made concept selection earlier than before. While this used to be done immediately before or at the same time as the decision to continue (BOV), several examples have been seen more recently of the choice being made about half a year before this point
The NPD’s 2013 report concluded that several of the projects suffered significant deficiencies in their planning phase. Allocating time to maturing the concept before the BOV could make a positive contribution to project execution.
At the same time, conceptual choices made early could involve greater uncert ainty. Estimates for recoverable resources, costs and profitability become gradually more certain from the decision to concretise (BOK) to the BOV.
Early selection can thereby increase the probability that later changes will be needed. This applies particularly to decisions taken before the BOK, where the risk could exist that good solutions are rejected too early. The authorities want the concept with the highest socio-economic value to be chosen, and for this to be adequately documented by the operator.
Project development
Licensees pursuing projects on the NCS utilise varying development processes. A common feature is that they have several decision gates (DGs) over the life of the project, with defined requirements for the level of engineering and estimating to ensure the right quality at the various DGs. A schematic presentation of the project execution model as defined by the authorities in the PDO/ PIO guidelines is presented in figure 1.
Oil and gas projects are split primarily between planning and execution phases.
During the former, various concepts are evaluated in order to identify the best development concept, and the one selected is further matured towards an investment decision. A PDO of a petroleum deposit or PIO of facilities for transport and utilisation of petroleum is submitted. In the execution phase, detail engineering is completed and the selected concepts/facilities are built, installed and brought into operation.
The authorities define DGs for a project planning phase in their PDO-PIO guidelines.
- Concretisation decision – BOK: milestone where the licensees have identified at least
one technical and financially feasible concept which provides a basis for initiating studies that lead to concept selection. - Decision to continue – BOV: milestone where the licensees decide to continue studies for one concept which leads to a decision to implement.
- Decision to implement – BOG: milestone where the licensees make an investment decision which results in the submission of a PDO or PIO.
Choice of concept is an important DG in a project’s planning phase. A shift then occurs from studying many options to focusing on a single concept which will be matured up to an investment decision.
The guidelines also describe expectations for cooperation between the licensees and the authorities and the documentation to be submitted to the authorities during the planning phase. Among other requirements, the licensees must inform the authorities at the BOK, the BOV, and possibly the choice of concept if this occurs earlier than the BOV. The aim is to lay the basis for efficient official consideration of the final plans.
Figure 1 The project development process
3.3 Strengthened follow-up of projects in the planning phase
Norway’s framework for petroleum operations provides a clear division of roles and responsibilities between the authorities and the industry. The authorities regulate the sector by defining parameters which the companies operate within.
Players in the industry have the greatest knowledge, expertise and information about opportunities and challenges in their business, and therefore conduct exploration, development and production activities. Full responsibility for operations, including project planning and execution, rests with the companies.
Given that certain projects have experienced big cost overruns and delays, the NPD has increased its expertise since 2013 on the subject of project execution and strengthened its follow-up of projects in the planning phase.
A dialogue will normally be conducted during the planning phase between the licensees and various government bodies.
This is important in order to address the various development options and challenges during the planning process, including facilitating efficient final consideration of the plans.
Since 2013, the NPD’s feedback to licensees at BOK and BOV has become more formalised. It will normally cover expectations which the authorities regard as important for their ability to approve the final plan, and which the licensees should therefore take into account in further work towards project sanctioning.
In this phase, the NPD will also request assessments of key aspects associated with project maturation and execution. The experienced gained by the NPD is applied in its dialogue with the operators in order to achieve improvements.
The PDO/PIO guidelines were updated in 2017 as a consequence of large cost overruns in certain projects, and some further changes were made in 2018 on the basis of comments from KonKraft. Section 5.6 on organisation and implementation now requests more information on project execution than before, along with details of partner involvement and quality assurance.
The PDO must contain a description of the project’s management system, the contract strategy for the development, and the overall method for bid evaluation and supplier choice. It also has to describe experience transfer from recently executed and comparable projects, involvement of the partners in planning and execution, and the experience of the operator and the project organisation from comparable developments. Furthermore, a description must be provided of the licensees’ risk assessments, including risk management and follow-up of the project.
When the PDO has been submitted, the NPD assesses the licensees’ development plans, including estimates and execution strategy. The NPD’s PDO evaluation provides a basis for the MPE’s assessment and for further consideration by the government or the Storting (parliament).
In recent years, the NPD has also had more regular meetings with operators of selected projects to address such matters as project progress, cost developments, challenges and experience.
This work gives the authorities knowledge of and experience from projects, providing the basis for looking at conditions in the planning phase which are important for project execution.
The Norwegian administrative model
Petroleum resources on the NCS belong to the Norwegian state, and the main objective of petroleum policy is to make provision for profitable production of the oil and gas resources in a longterm perspective. That goal is enshrined in the Petroleum Act, which has been adopted by the Storting to define the framework for administering the industry.
The Norwegian framework for petroleum operations involves a clear division of roles and responsibilities between the authorities and the industry. This distinguishes between regulation and commercial activity. The authorities do not develop the petroleum resources themselves, but contribute to value creation by making provision for their commercial exploitation.
They regulate the sector by establishing and maintaining a framework in the form of statutes, statutory regulations and licences. That gives licensees on the NCS both rights and duties.
The licensees create value within these parameters. They are the industry players with the greatest knowledge of, expertise about and information on opportunities and challenges in their business. They are therefore in charge of exploration, development, operation and cessation. The companies bear the full responsibility for these day-to-day activities, which includes ensuring that they are conducted in accordance with the parameters set by the authorities.
All the licensees in a production licence are responsible for project execution. While the operator has a particular responsibility for the actual implementation, the other licensees have a see-to-it duty to ensure that it fulfils its responsibilities.
3.4 Clarifying the see-to-it duty in planning and executing projects
Day-to-day management of operations is conducted by the operator on behalf of all the licensees. It therefore has a special duty to ensure that activities are conducted in a prudent manner and in accordance with the regulations in force at any given time. The licensees have a duty to see to it that the operator fulfils its obligations, including planning and execution of projects.
In connection with amending the PDO/PIO guidelines, the authorities have emphasised the seeto-it duty of the licensees related to planning and executing projects and now require more explicitly than before that licensees document their plans: The operator has practical responsibility for preparation of PDOs and PIOs. This work must take place in close cooperation with the other licensees.
The licensee group shall function as an internal control system in the production licence. The purpose is to ensure a high-quality decision basis, and a strategy for efficient quality assurance should be prepared as early as possible in the planning of a PDO and PIO, where involvement of the licensees and transfer of experience from other projects is safeguarded.
This means that the see-to-it duty represents a key part of quality assurance for developments on the NCS. Pursuant to the guidelines, all licensees other than the operator must account in writing for the activities they have conducted/are planning in order to fulfil this duty in relation to the preparation and implementation of the PDO.
3.5 Market developments
The petroleum industry is raw-material-based and, like most such sectors, its level of activity is governed by the raw material price. This has a direct impact on the projects. It is often the case that high oil prices lead to many developments being sanctioned, with consequent resource and capacity constraints at the suppliers. This can make it demanding to implement a project as planned and budgeted.
Low oil prices make it more demanding to get projects sanctioned. Resources and capacity become more available, but tougher competition and lower earnings put pressure on suppliers. The unpredictability of oil prices is a challenge in itself for such capital-intensive projects.
Since Norway’s oil activity started more than 50 years ago, the industry has experienced many price-related upturns and downturns. Oil prices fell to low levels in 1986, 1998, 2001 and 2008, leading to changes and restructuring. High and stable oil prices in 2010-14 boosted activity but eventually also the level of costs.
The breakeven price for new developments moved in some cases towards USD 80 per barrel. Oil prices fell markedly in 2014, from a peak of more than USD 100/ barrel to less than USD 30/barrel at bottom. This had big consequences for many companies in the industry, and has resulted in major changes. Although oil prices today have improved from the lowest level, licensees continue to focus on the need for new projects to remain profitable when prices are low.
Figure 2 Oil price developments and breakeven prices for projects on the NCS.
The 2014 oil price slump meant that the oil companies devoted increased attention to costs and cost efficiency. Many planned projects – both large developments and modifications – were therefore halted or postponed.
As current projects were completed and the level of activity declined, substantial downsizing took place at all levels of the industry. Hardest-hit were the supplier and service sectors. That has led to restructurings. Companies were taken over or merged, and some went out of business.
One factor which helped to moderate the downturn after 2014 is the Johan Sverdrup discovery in 2010. This meant that the level of activity on the NCS since 2014 has been higher in relative terms than might normally have been expected. Many of the contracts have been awarded to Norwegian suppliers and thereby helped to maintain the level of activity at a time of low oil prices.
A number of measures have been implemented by the industry in recent years to improve efficiency and reduce the level of costs. These steps have yielded results in the form of reduced costs for investment in new projects, production wells on producing fields, and operation and exploration.
Oil prices rose to about USD 60/barrel in 2019. Earnings in today’s market are good – in some cases, as good as or better than in 2014. However, the supplier and service industry reports that its earnings are still under pressure, and that it must improve this in order to continue delivering good services.
The NPD has noted that many development projects over the past year have faced risks related to shortages of labour and capacity in certain areas. Such a development could lead to cost increases and capacity constraints which might have a negative effect on project execution.
3.6 Changes to forms of contract and collaboration
The contract strategy says something about how suppliers and competitive prices will be secured for the project, and how it will be managed and followed up in the execution phase. This strategy must take account of many elements, including project size and complexity, operator and supplier expertise and experience, and capacity in the market.
The operators can choose to divide up a project and award contracts in various ways. Their degree of follow-up work could vary according to contract types and who is awarding them. Putting together various parts of a project in a single (turnkey) contract means that a main contractor deals with the interfaces between the different deliveries.
One of the NPD’s recommendations after its 2013 project review was that the operators should consider accepting greater direct contract responsibility in connection with the delivery of key equipment packages.
Turnkey assignments have been the most widely used form of contract for building platforms on the NCS. On the basis of its experience with the most recent big projects, Equinor has opted for a mix of approaches – both turnkey contracts and a split into engineering/procurement and construction assignments have been used.
Several of the oil companies, such as Aker BP and Centrica (now Spirit) have emphasised long-term contracts (alliances) with a few selected suppliers rather than competitive tendering for each project. Collaborating with the same suppliers over a longer period could be advantageous. This achieves continuity from planning to execution and thereby avoids the risk associated with changing supplier along the way.
At the same time, such long-term agreements can have the disadvantage of limiting competition between suppliers and reducing the number of technological solutions assessed. The licensees in the production licence determine the contract strategy, and thereby also decide if the operator’s alliance agreement with the suppliers is appropriate for the relevant project.
Alliance:
An alliance is a collaboration model between oil company and supplier, and often also between suppliers where several are in alliance with the oil company. Through this approach, the oil company seeks to engage the suppliers at an early planning stage and create incentives (common goals and financial interests) which motivate the identification of good solutions. The suppliers generally follow the project through all its phases, from planning to construction.
Aker BP has also chosen a model where the project organisation can be staffed with personnel from both operator and suppliers. According to the company, this can contribute to more efficient work processes which help in turn to shorten planning and execution times and reduce costs. Operators who have entered into alliances usually base these on a frame agreement.
Frame agreement:
In this context, a frame agreement is a contract entered into between an oil company and a supplier. It specifies key contractual terms (price, what is to be delivered and so forth) for later call-off to the contract. Frame agreements are generally entered into with several suppliers within a segment, which opens for competition when call-offs are made.
Turnkey contract:
This term involves assembling various parts of a project into a single assignment where the main contractor is responsible for the interfaces between the various deliveries. Such a contract typically covers engineering, procurement and construction (EPC), but can also include transport from yards to Norway and possibly installation (EPCI) on the field. Commissioning (c) may also be covered.
The table below explains some of the concepts utilised in connection with contracts on the NCS and later in this report.
| Explanation of some concepts utilised in connection with contracts | |
|---|---|
| FEED | Front End Engineering Design |
| E | Engineering |
| P | Procurement |
| C | Construction |
| F | Fabrication |
| Ma | Management assist |
| I | Installation |
| H | Hook up |
| C | Commissioning |
Table 1 Main activities normally included in contracts for offshore projects.