BEYOND THE HORIZON: EPIC/LSTK: Do you play soccer or football?

Daniel Valot
Chairman of the Management
Board of Technip-Coflexip

Take Ronaldo from Brazil or Zidane from France. They are among the best soccer players in the world. Now ask them to play in an NFL football game in the US or Europe's Six Nations rugby tournament. Chances are that their performance will be below average, to say the least.

The same applies in offshore engineering and construction. You can have very good teams of engineers and technicians, state-of-the-art construction and marine assets, but if your people have spent most of their time delivering cost-plus-fee projects, you may end up with a poor performance under an engineering, procurement, installation, and commissioning (EPIC)/lump sum turnkey (LSTK) contract.

This is what has happened lately to some of the most prominent engineering and construction companies. Big losses on EPIC/LSTK projects led them to state publicly that they would no longer play this game.

At Technip-Coflexip, we believe that mastery of these types of projects is one of our main strengths. For what reason? Just because we have been playing this game for decades.

Born in 1958 in France, which is a rather small market for oil engineering and construction, the company had only one way to go: the international arena. At the time, the US market was barely accessible to us, due to the preference given by US oil and gas corporations to US engineering firms. By the same token, Japan and Korea were fiefdoms of Japanese and Korean companies. As a result, the main markets accessible to us were Europe, the USSR, Africa, Southeast Asia, and the gigantic Middle East sector. In all these regions, most owners elected to have their projects performed under EPIC/LSTK contracts, for the following reasons:

• To have their project's overall cost well defined from day one
• To secure outside financing for their projects because lenders obviously feel more comfortable with a lump sum project
• To make the best use of their limited in-house engineering teams.

As a result, our group was trained right from the start to perform EPIC/LSTK contracts. At times, learning how to manage large projects efficiently proved difficult. Many projects were executed over a long period (typically three to four years) for a price agreed at the time of contract award. Nevertheless, we learned our lessons and became one of the leading specialists in this type of project. Today, EPIC/LSTK projects still account for about 85% of our revenues and generate an even higher proportion of our earnings.

The United States plays football, while the rest of the world is more used to soccer. The same split applies to the world of engineering and construction. The US market is tuned to the so-called cost-plus-fee contracts, also called service contracts or contracts on a reimbursable basis, which are exactly the opposite of EPIC/LSTK contracts. In the US, most owners want to keep a full and direct control over the execution of their project. They tend, therefore, to use engineering firms as mere providers of engineering man-hours, for which they pay a negotiated fare per hour, including a generally small fee.

However, when US companies invest abroad, typically through joint ventures with international partners and/or national companies from producing countries, they are mostly obliged to switch to lump-sum contracting. This can create very painful situations for engineering companies that have not built up expertise in this segment of the business.

This is even truer today in the aftermath of Sept. 11. Insurance companies have been badly hurt and are therefore fighting hard to recover. As a result, the oil and gas companies are pushed to transfer bigger risks and liabilities to their contractors. EPIC/LSTK contracts are the right vehicle to operate such a transfer. Engineering companies with limited experience in lump sum contracting are more likely to accept, although reluctantly, this transfer of risk. On the other hand, the most experienced LSTK contractors will fight tooth and nail to keep their level of risks commensurate with their profit expectations.

So what does it take to play the EPIC/LSTK game with a good chance of success?

• A thorough estimation process, based on a permanent feedback from previous projects
• A clear understanding of the risks involved, leading to a very selective bidding strategy
• An efficient project management process, involving, inter alia, a non-complacent cost-control system
• A high level of dedication in the project teams and real hands-on management by the company's top management.

Yes, it is a risky game. But for those who know the rules and have developed the right skills, there is always a chance to win the World Cup.

This page reflects viewpoints on the political, economic, cultural, technological, and environmental issues that shape the future of the petroleum industry. Offshore Magazine invites you to share your thoughts. Email your Beyond the Horizon manuscript to William Furlow at [email protected].