Types of Contracts for the Petroleum Industry

Today, my thoughts have revolved around contract signing in the Petroleum industry, a scenario in which individuals and entities (contracting companies and clients) engage in contractual agreements to carryout different task in refinery construction ranging from design, fabrication, construction, maintenance etc.

Building upon this idea, considerations for contract selection will be highlighted, various types of contracts in the petroleum industry will be briefly discussed, and contracts for petroleum refinery construction phase in particular will also also be briefly discussed.

To enrich this article, your wealth of knowledge on this topic will be highly appreciated.

Contracts for Petroleum Industry

#Refinery projects are usually much too large to be constructed pursuant to a single construction contract. There are normally several contracts signed with contracting consortia for specific parts of the plant. These different contract packages typically cover specific elements of the refinery, including the basic refinery process units, specific licensed technology packages, utilities, infrastructure and so on. The #management of multiple contracts with diverse consortia is a complex undertaking and hence strong integrated project management teams are an essential feature of refinery project development. The issues that need to be considered concerning construction and development contracts for refinery projects are similar to those for other processing plant projects.

Due to the wide variety of contract applications, and the because of variation of the natures of different business activities, special issues in contracting procedures should be taken into account such as:

• #contractors pre-qualification,
• number of bidders invited to tender,
• tender practice,
• tender evaluation,
• #electronic communication,
• #insurance,
• #taxation,
• #termsandconditions of payment,
• warranty,
• #health,
• #safety and Environment,
• types of contracts,
• #riskassessments,
• change orders/variations
• and #documentations.

in the occasion that some of these conditions are not thoroughly ascertained and included in the agreement stage, several conflicting occurrences will come up in the future between the contracting company and the client.

Consideration for Contract Selection

There are a lot of factors that contracting company/clients may consider in selecting and negotiating the types of contract for contractors. They are: -

• Prices Competition
• Costs analysis
• Types and difficulty of requirements
• Contractor’s technical and financial capabilities
• Necessity of the requirements
• ?Time of achievement/completion.

Types of Contracts in Petroleum Refinery

The most common types of contract used in oil and gas industry are:?

Lump Sum Contracts

The distinguishing feature of lump sum contract is that the contractor is responsible for performing and completing the work as defined in the scope of work for the fixed price stipulated in the contract. The Contractor is responsible for the assessment of all costs he will incur in fulfilling the specified requirements; it is preferable to include the long-term maintenance as an integral part of the lump sum tendering or negotiating exercise.

Unit Rate Contracts

Unit rate contract types are an agreed to rate for the performance of specified work. Contract rates are fixed for specific items of measurable work and the contract price is then determined by the measurement of work actually performed. These types of contract are most prevalent in the building industry.

EPIC Contracts

The Engineering, Procurement, Installation, and Commissioning (#epic) concept involves awarding to a single contractor or contracting consortium a major project, from preparing detailed design throughout commissioning. A principal reason for choosing an EPIC is to achieve a substantial saving in time by overlapping the design/procurement activities with the fabrication phase. A pre-requisite for EPIC contracting therefore is that line management must have decided exactly what the end result of the project will be on basis of a completed and “frozen” conceptual design.??

Reimbursable Cost Contracts

The key features of this type of contract are that contractor shall pay all direct and indirect expenditures he has incurred on the basis of actual cost without an overlay for profit. Usually, an incentive scheme is built into the contract, which provides the contractor with his profit if the criteria established in the scope of works have been met.? Under this contractual arrangement, the client undertakes to pay the contractor the prime cost (i.e. the actual cost of labor, plant and materials utilizes in the execution of the construction works). In addition to the prime cost, the contractor is paid an agreed sum to cover profit and to establish charges.? Payment of the incentive occurs gradually over the life of the contract at specified milestones if, and only if, certain agreed project objectives (time, budget, and Health, Safety and Environment HSE have been met.?

Work Order and Direct Work Order

The work order is used to obtain material or services of low value and short time work duration in case of emergency or operating necessity for which the formal contract processes are not fit. Work order can only be legally binding contract when accepted in writing and signed by contractor.

Financing Contracts

FC’s are a type of contract that involves the raising of debt and equity during the project duration by the contracted party. The financing contractor ultimately bares the risk of profitability in this type of agreement. Financing contracts are used in the mining, building, Petroleum, transportation and infrastructure projects.?

Petroleum Refinery Construction Contracts

During the construction phase of a refinery complex, several contractual agreements are signed between the contracting company and various clients for sole purpose of completing the project. Some refinery construction contracts are as follows

Contracts of Engineering

Engineering contracts are intended for engineering activities such as site, process simulation, survey, data checking, definition and preparation of technical specifications.

Contracts of Civil work

Civil work contracts intended for preparation of detailed engineering, procurements, construction and installation of civil parts.

Contracts of geophysics

Geophysical contracts are intended for data achievement, data amplification, data understanding and data management for studying subsurface with the purpose to discover hydrocarbons’ presence.

Contracts of Mechanical and electrical/instrument works

This contract is intended for preparation of detailed engineering design, construction, installation, pre-commissioning, commissioning and start-up. Oil, gas and petrochemical industry, generally, require certain policies and procedures concerning the contracting process, so that a high standard procedures, ethics and fairness are maintained.