energy contracts & disputes presentation slides - 25 september 2012

Contract management and dispute avoidance

Managing operational and financial risk to

keep your energy projects on track

Tuesday 25 September, 2012

Date here

Effective Delivery of the offshore wind programme: Conclusions of the Task Force

Chris Hill

Chief Operating Officer - Offshore

25th September 2012

Offshore Wind’s Potential

● 18 GW of capacity installed around our shores by 2020

● With yet more in the next decade

● Serving some 20% of the UK’s electricity needs from clean green sources

● Employing thousands of people in manufacturing, construction and operations for decades

● Improving security of supply, with less reliance on imported fuels

● Making the UK a global leader in offshore wind power

Experience thus far

● Some 2 GW installed today

● With mixed success

● Many projects have over run on cost

● Delivery gaps in next few years, not good for supply chain

● Supply chain often constrained and hesitant to increase capacity

● Construction risks unattractive to many financiers

● Regulatory processes sometimes inadvertently adding to risk

● Backdrop of economic & political climate

• The DECC 2011 Renewables Roadmap stated:

“we are determined to drive down costs and are establishing an industry Task Force to set out a path and action plan to reduce the costs of offshore wind, from development, construction and operations to £100/MWh by 2020”.

Our Challenge

Cost Reduction Task Force Industry experts across the entire value chain

Developers Centrica, DONG Energy, Mainstream

Supply Chain Alstom UK, Gamesa, Siemens, Vestas

Installation & Construction Technip

Innovation Carbon Trust, Energy Technologies Institute

Cross Sector Eversheds, Garrad Hassan

Grid SKM

Oil & Gas Wood Group

Finance Lloyds Banking

Rising to the challenge

● Task Force has considered evidence and bench marked best practice including

● The Crown Estate’s Pathways as it emerged

● Oil & Gas Sector

● Offshore Wind Sector

● Electricity sector and elsewhere

● We examined our ways of working

● And questioned were they optimal?

● We identified cost barriers

● And considered ways of removing them

1. Supply chain

● Identify key risks and tackle bottle necks (Industry and Gov’t)

● Give greater project clarity to supply chain to allow more informed decision making (Industry)

2. Innovation

● Seek to standardise development and deployment (Industry)

● Deliver and make best use of Offshore Wind Test Centres for greater confidence in new turbines and deployment (Industry and Gov’t)

Key Recommendations

3. Contracting Strategies

● Seek to adopt “Alliancing” model to contracting as used successfully by the Oil and Gas Sector. Evidence taken from National Grid, SSE & DONG

● With more integrated collaboration vertically across supply chain and horizontally working with competitors (Industry)

4. Planning and Consenting

● Ensure planning reforms are fully embedded and working for Offshore Wind (Industry and Gov’t)

● Ensure appropriate flexibility in planning practices and guidance to allow for offshore wind’s emerging technology issues (Industry and Gov’t)

● Ensure appropriate resourcing of Statutory Advisors to meet project needs (Gov’t and Industry)

Key Recommendations

5. Grid

● Increase and standardise sub sea cable voltages (Gov’t and Industry)

● Review potential to standardise transmission and substation design including via a central Design Authority (Industry)

6. Finance

● Simplify deal structures where possible (Industry)

● Deploy GIB to facilitate and leverage finance (Gov’t)

● Look to pool assets to help diversify risk to investors (Industry)

● Increase engagement with finance sector to educate and inform (Industry)

Key Recommendations

7. Monitor and Manage Risk

● Create a new Programme Board comprising representatives of development, supply chain, statutory consultees and various Gov’t departments

● To assess and address offshore wind industry risks

● Demonstrating to 3rd parties the industry is making progress

● Improving delivery

● Reducing cost

● Improving investor confidence

Key Recommendations

Contracting Strategies: CRINE & PILOT

CRINE (Cost Reduction In the New Era)

• Was the first Oil & Gas initiative and was established in 1992/3

• It involved Oil Companies and Contractors/Suppliers

• Objective - to reduce the cost of new Oil & Gas Projects in the UKCS

PILOT

• Was set up in late 1999 in response to a very low oil price

• It involved Government (DoE, Treasury, HSE), Oil Companies, Contractors/Suppliers and Trade Unions

• Objective – to maximise the recovery of hydrocarbons from the UKCS

CRINE

The initiative addressed a number of areas but the four main ones were:

• Contracting relationships and risk allocation

• Standard contracting terms

• Forward planning and visibility of activity

• Improving the efficiency of the prequalification and bidding process

CRINE Outcomes

• Contracting relationships and risk allocation. Industry had tended to be adversarial which was viewed as wasteful. There was therefore a move to collaborative “Alliancing” relationships where there is cost transparency, pragmatic risk allocation, shared contingency and all parties are rewarded based on the overall project outcome

• Standard contracting terms. A number of standard contracts were produced covering specific topics such as Design, Construction, Offshore Services, Well Services, etc

• Forward planning. To give the supply chain a better understanding of the future activity levels, thereby enabling them to plan their resourcing and investment accordingly, annual “Share Fares” were established where the Oil Companies and Main Contractors would present their workload plans

• Improving the bid process. The primary outcome on this was the establishment of First Point Assessment Ltd (FPAL), an industry registration system which was intended to avoid contractors and suppliers doing multiple submissions and proposals

Standard contracts

Amongst other things, these addressed the following issues;

Back to back indemnities

Limits of Liability

Clauses on Variations, Force Majeure, Suspension, Dispute Resolution

Third Party liability

In addition, the industry developed a “Mutual Hold Harmless Deed” whereby different Contractors, working on the same facility, indemnify each other in respect of personnel/property and consequential losses. In 2003, all of these were re-badged as LOGIC (Leading Oil & Gas Industry Competitiveness)

PILOT

PILOT had a much broader remit than CRINE due to the wider stakeholder participation, and assumed ownership of the ongoing work that had been started by CRINE

Other topics addressed included such things as;

Licensing and regulation

Fiscal

Technology

Access to infrastructure

Safety

Training and development

Task Force: Conclusions

● We can make far reaching changes to practices across the offshore wind sector

● We can reach £100 / MWh by 2020

● We need sufficient project momentum, supply chain capacity and competition, and stronger intra-industry and stakeholder cooperation

● Barriers are surmountable, with both the industry and Gov’t willing to address them

● The UK offshore sector can deliver vast quantities of low carbon generation, in an affordable manner

● While providing thousands of jobs for decades to come

Managing international contracts

as a business asset

Tim Cummins, IACCM

25 September 2012

Contracts: Are We Wasting Our Energy?

Negotiation Disputes

What we negotiate … and dispute Top negotiated terms

1. Liabilities

2. Indemnities

3. Price / charge

4. IPR

5. Payment

6. Liquidated damages

7. Performance G’tees / SLA

8. Delivery/acceptance

9. Applicable law / jurisdiction

10. Confidentiality /NDA

Top disputed issues

1. Scope and goals

2. Change management

3. Delivery

4. Performance

5. Responsibilities

6. Pricing

7. Sub-contractors

Copyright © 2012 IACCM. All rights reserved.

‘Troubled relationships’ =

disappointing outcomes

Research shows that

commercial issues

are the primary cause in ~70%

of ‘troubled relationships’

The likelihood of

significant

innovation or

incremental value

is reduced by

≥ 60%

So achieving improvement is important

Factors that reduce dispute probability

1. Risk allocation 2. Problem solving 3. No-blame culture 4. Joint working 5. Communication 6. Gain and pain sharing 7. Mutual objectives 8. Performance measurement 9. Continuous improvement

What is the scale of loss or potential for

gain?

the average impact to bottom-line

performance that results from

weaknesses in contract

management / commercial

assurance

Copyright © 2012 IACCM. All rights reserved.

Contracting and alliancing

Peter Scurlock, Eversheds LLP

Trevor Jones, National Grid

25 September 2012

Overview

• Current procurement strategies

– Turnkey and multi-party contracting

– the challenges of multi-party contracting

• Current contracting strategies

– forms of contract

– choosing the right forms

• Alternative contract structures

– the drivers for change

– alliancing

– different types of alliancing and partnering arrangements

– Pros and cons of alliancing

– Lessons learned from other sectors

Procurement strategies

• Turnkey approach

– Single point responsibility

– Majority of risks associated with time, cost and quality “wrapped” under one contract

– Still used in certain biomass projects


Turnkey contracting

Developer

Turnkey Supplier

Sub-Contractor Sub-Contractor Sub-Contractor


• Multi-contracting approach

– No single point responsibility

– Developer enters into series of EPC contracts with suppliers

– Developer retains the interface risk

– Used in on and offshore wind and large-scale biomass projects

Developer

Turbine Supply


Multi-party contracting

Balance of Plant

Developer

Turbine Installation

Foundation Supply

Foundation Installation

Onshore Cable

Onshore Substation

Turbine Supply

Offshore Cable

Installation

OffshoreCable Supply

Offshore Substation

OFTO Consultant Appointments


Multi-party contracting

Transportation and installation

contracts

Site investigation

surveys


• The challenges of multi-party contracting

– dealing with the interface risk

– multiple number of contracts that need to be negotiated and administered

– need for a proactive approach to project management

• Dealing with the “known unknowns”

– weather downtime

– seabed conditions

– supply chain constraints

– claims

• Marginal project economics

Contracting strategies

• Different forms of contract currently in use

– FIDIC

– LOGIC

– BIMCO

– NEC

– Bespoke forms

• Hybrid approach


• Different contracts have different approaches

– to risk allocation

– to delay

– to additional costs

– to liability

– to indemnities (“knock for knock” v. conventional approach)

– to project management and contract administration

– to dispute resolution


• Choosing the right forms of contract

– the need for consistency, flexibility and the right approach to risk allocation and risk management

– the need to be bankable

• Ensuring a consistent approach

– standardised contracts for offshore wind and other types of project?

– use of contract checklists

Alternative contract structures

• Drivers for change

– the need to reduce costs

– the drive for continuous improvement

– the need to align interests



– the need to reduce costs

• visibility of programme

• long-term relationships

• avoiding duplication

• unlocking technology innovation and efficiencies

• reducing the number of claims



– the drive for continuous improvement

• incentivising and motivating good performance

• inadequacy of damages

• encouraging teamwork and collaboration

• developing and sharing technology innovation and efficient ways of working



– the need to align interests

• incentivising collaborative working and sharing of know-how

• ensuring all key suppliers have a stake in the success of the whole project

• ensuring that the commercial incentivisation drives the right behaviours

• sharing risk and reward

• moving towards a “no blame, no claim” culture


• Alliancing

– a formal relationship formed between two or more parties to pursue a set of mutually agreed upon goals

– a contracting strategy which aligns the goals of the developer and supply chain with a view to minimising cost, increasing profitability and contributing to each others’ long term future


• Different types of arrangement

– Incorporating partnering and collaborative working provisions in existing contracts

– Target cost contracts

– Framework agreements

– Individual alliance agreements

– Project alliances

– Strategic alliances


Degree of Integration Traditional ‘EPC’ Contracting ‘Pure’

Alliancing

Shared Cost Risk

Shared Programme Risk

Shared Quality Risk

Pan Alliance Incentivisation


• Pros and cons of alliancing

– Pros

• Integrated delivery = best for task

• Minimises duplication

• Maximises purchasing power

• Secures supply chain and availability of resource

• Reduction in claims

• Alignment of interests encourages focus on mutual goals

• Incentivises innovation and sharing of know-how and IPR

• Improves health and safety performance

• Early contractor involvement improves “buildability”


• Pros and cons of alliancing

– Cons

• Lack of accountability and clarity

• Potential blurring of responsibility in relation to key issues such as health and safety

• Lack of competitive tension

• Heavy reliance on commercial model

• No single point responsibility for defects

• Requires total buy-in and a complete cultural shift

• Conflicting cultures

• Knowledge and skills leakage


• Lessons learned from other sectors

– Make sure that you are comfortable with the extent of integration and risk sharing

– Ensure sufficient competitive tension

– Get the commercial model right

– Agree meaningful incentives and adopt the right performance measures

– Agree exit strategy and implement post-alliance protections


• Lessons learned from other sectors

– The need for consistent contracts

– Invest time in educating alliance members to ensure that right behaviours are adopted from the outset

– Incentivise knowledge sharing

– Don’t hold back

www.eversheds.com © EVERSHEDS LLP 2009. Eversheds LLP is a limited liability partnership.

National Grid

Eversheds – Energy Contracts & Disputes Conference

25th September 2012

Trevor Jones – Senior Project Manager,

Offshore Development

UK/EU Business Development

What were the Drivers for change?

Stagnant Safety Performance

Increasing/Uncommitted CAPEX Forecast

Efficient Outage Management

Optimise customer Relationships

Project Processes/Interfaces

Poor Supply Chain Performance & Management

Subcontracting Relationships Complex, Costly & Risky

Environmental Consents Getting More Difficult

Shortages of Key Resources

Partnering Relationship Spectrum

Traditional Project

Partnering

Supply Chain

Partnering

Client

Partnering

Full Alliancing

Competition

Project Based

Risk Transfer

Cooperation

Project Based

Risk Mitigation

Collaboration

Long Term

Risk Mitigation

Collaboration

Long Term

Risk Sharing

Coalescence

Long Term

Risk Embracing

Each side has

clearly established

responsibilities

Little or no trust

Disputes often

resolved

adversarially

Each side knows and

commits to the goals

of the project and to

each other’s goals

Requires a degree of

trust

Disputes typically

resolved in some

degree of compromise

and harmony

Integrated supply chain

team focused on meeting

program goals

Usually Design & Build

Often create separate

legal entity to contract

with client

Team has one set of

goals for a successful

program with some

shared risk/reward

senior level‘ sponsors’ to

remove barriers and

support the project

One integrated team

consisting of both

client and contractors

personnel

Early involvement in

design lifecycle

Requires a high

degree of trust

Team has one set of

goals for a successful

program with shared

risk/reward

Integrated into whole

project lifecycle

Total alignment

around driving mutual

goal and sharing gains

and liabilities for

failure

Both sides share their

goals and cost

Requires extremely

high trust

Alliance Efficiency Model

Improved SHES & Quality Performance Right Model, Right Responsibilities & Interfaces Clear & Defined Scope Deliverables Leveraging Value From Suppliers Demonstrate Value For Money Cost Certainty – No Surprises, Risk & Cost Management Robust & Deliverable Programmes Earlier, Dedicated Resource Availability & Allocation

Alliance Contracts – National Grid Principles ?

• Create the optimum construction vehicle to deliver a programme of works

• Alliances comprise NG and partner as equals

• Mutual Objective

• Single management structure and culture

• Best person for the job, multi-discipline project teams

• Actual cost schedule/target based contract

• Shared common objectives

• Shared risk and reward

• Pan-Alliance incentive mechanism

Traditional Construction

Designers

BUILDING IN WASTE MANAGING THE MESS LOSING THE LEARNING

Client

Stakeholders

Constructors Operators

AREA OF

WASTED

POTENTIAL

COST OF

PUTTING IT

RIGHT

Project Partnering

ANOTHER

WAY

CAPTURE THE

LEARNING & USE IT

RIGHT FIRST TIME

JOINT PROBLEM SOLVING

INPUT FROM ALL

BEST VALUE SOLUTIONS

POTENTIAL

FOR ALL

PARTIES

TO ADD

VALUE

AREA OF REALISED

POTENTIAL

(INCEPTION) (IMPLEMENTATION) (OPERATION &

EVALUATION)

Client + Designers + Stakeholders + Constructors + Operators

COST OF

PUTTING

WHAT RIGHT?

Alliances Create Value By Jointly Managing Risk

Reduction in Level

of “Hidden Risk”

NG

Risk

Cont’r

Risk

Previous

Operating

Model

Shared

Risk

NG Risk

Cont’r Risk

Alliance

Shared

Risk

Model

Hidden

Risk

25 September 2012 National Grid – VfM support

Focus on priority KPIs – introduce hurdles to

understand the best performers

Safety

Non-negotiable

VfM

Economic & Efficient

Customer service

Value for NG & customer

►There is no negotiation on safety, this

is a key aspect of all that NG do.

►Anyone failing to clear this hurdle will

not be considered for KPI reward

►A commercially focused team must

achieve in these areas and will be

incentivised for doing so. Anyone

not clearing this hurdle will not be

considered for KPI reward

►On target costs, all members of the

integrated supply team need to

know their individual costs, which

they are incentivised to keep to a

minimum

►The target price has to be set at a

level that gives sufficient incentive

and value for money for the type

and complexity of facility being

constructed.

►Customer focused organisations

are more likely to deliver value

and align with NG values

►It is important that some

demonstration of the customer

focus is clear although this is may

not be a crucial requirement in all

cases

►The best will be recognised &

rewarded.

►Highlight & communicate

good, innovative and aligned

behaviours in the alliances.

►Challenge under performers to

raise their game.

►Reward good performance

with a bigger pipeline.

►Reduce the number of

alliances through “natural

selection”?

►Remove geographic

boundaries

•The business still requires some more detail in certain aspects and so these must by captured

•More granular and specific KPIs are monitored as “SLAs” and are expected to be BAU for the alliances

•If the alliances are not performing on these there is still potential for action

•If there is a continued poor performance on these they could be “promoted” to the “golden” KPIs

3 “Golden” KPIs are derived from the hurdles

Lower level KPIs are treated as SLAs

Conclusions

Right / Wrong

Views / Opinions

Success –

achieved

objectives

Leadershi

p – Tone

at the Top

An Alliance does

not ‘run’ itself – it

is a contracted

Delivery Vehicle

Bureaucratic –

product of T&C’s –

or failure of

relationship

Question

over

whether it

is the

right

vehicle for

everythin

g

THANK YOU

Bankability

Rob McNabb, Eversheds LLP

Richard Simon-Lewis, Lloyds Banking Group

25 September 2012

Questions

Arbitration clauses

Neil Newing, Eversheds LLP

25 September 2012

choice of forum and rules

Coffee Break

Health and safety

David Young, Eversheds LLP

Graeme Bellingham, EDF

25 September 2012

Better HSE, Time, Cost & Quality through

Collaboration, Culture & Communication

(& contracts)

Questions

Best practice contract management

Richard Ward, Eversheds LLP

Gary Carter, Centrica

25 September 2012

and dispute avoidance

Our presentation

• Some general themes on disputes and contract management

• Generic responses

• Specific clean energy issues

• Case studies

Disputes

• What are disputes?

• Any difference (broad)

• Any difference that has to be resolved by others (formal)

• In broad sense will be inherent in projects

• In formal sense are avoidable/manageable

• Avoid broad disputes becoming formal

Why avoid formal disputes

• Risk of outcomes/third party determines

• Expense, external and internal

• Damage to project

• Collateral damage

Causes of formal disputes

• Root causes. Inherent in the project

• Inappropriate contract terms and risk allocation

• Unclear commercial objectives and wrong expectation

• Poor teams/contractors

• Contract alignment across multi contract projects

Responses to root causes

• Pre-contract reviews/joint workshops. Don’t forget the detail

• Project specific analysis of expectations and contract terms/do not rely on standard responses

• Risk registers

• Align across all project contracts

• Clean energy projects tend to be sophisticated and well understood

• Remote risks

Proximate causes

• Relate to the processes around project delivery

• Communications

• Relationships between project teams

• The design process

• Contract administration

Generic Responses to Proximate Causes

• Live the contract. Don’t put it in the drawer!

• Understanding the contract workshops (with supply chain)

• Communication protocols (especially design)

• Integration of project teams

• Early warning mechanisms

Avoiding and remedying defects

• Quality assessments and inspections. On-shore/early

• Early identification/early remediation

• Self help remedies

Dispute resolution

• Tiered approach

• Continuity over all contracts

• ADR – project (or ad hoc) mediation

• Advisory opinions

• Experts

• Dispute review boards

• Arbitration – courts - adjudication

Summary

• Seek to eliminate/root causes

• Maximise proximate cause management

• Formal disputes significantly reduced and when arise well managed

Best practice contract management

and dispute avoidance

Introduction

• Clean energy construction is essentially heavy civil engineering with plant bolted on

• Common issues arise

• Good procurement/project management

– Eg CTRL King’s Cross

Clean energy specific

• New technology

• Limited providers

• Long lead procurement

Case studies

• Major design consultant

• EPC plant

• Variations

Summary

• Clear risk allocation and drafting

– include mechanisms that provide Employer flexibility

• Uniform provision/contract alignment

• Right people with access to senior management/legal

• Nip disputes early

Questions