Vive les Français! Vive la différence! As the CEO of American company Paragon Engineering Services and French company Paragon Litwin, I have come to better understand and appreciate the French way of thinking. It is in some cases different from an American way of thinking. Not better or worse, just different.
Case in point: "Beyond the Horizon" (Offshore, February 2003, EPIC/LSTK: Do you play soccer or football?). This article attributed the recent announcements by some international companies of poor performance on engineering, procurement, installation, and cons-truction (EPIC) or lump-sum turnkey (LSTK) contracts to the fact that "the United States plays football, while the rest of the world is more used to soccer." That is, US-based contractors grew up performing reimbursable contracts and therefore do not understand or play well under the rules of EPIC contracts. It goes on to say that because the author's company was initially established in France and could participate only in areas of the world that utilize the EPIC approach, it knows the rules of this type of "soccer," had developed its skills accordingly, and is both quite capable and willing to play this risky game.
This is an interesting thesis and worthy of further thought. Though a generalization, it has some basis in fact, but I think the author overlooked a critical differentiator. I would argue there is a difference between the way in which EPIC onshore plant projects have evolved and the type of risky EPIC offshore projects that companies such as KBR, McDermott, Stolt Offshore, and others have found very painful.
I think I have some basis to see this difference. Paragon Litwin bids quite competitively against Technip and other European "soccer playing" companies for onshore EPIC plant, cogeneration, and energy projects. I get to serve on the tender board and understand the risks and contractual obligations associated with these tenders. In addition, in recent memory, Paragon Engineering Services was associated with several of the companies that have made public statements about their desire to no longer accept certain risky EPIC offshore projects. I have seen this difference from an EPIC contractor's standpoint.
The "K" of KBR comes from the former M.W. Kellogg Co. This company was one of the most successful onshore EPIC contractors, having built an excellent reputation for successfully constructing certain types of onshore plants, e.g., LNG, ethylene, etc. It is impossible to conclude from Kellogg's history that KBR is unaware of what it takes to play "soccer" with a good chance of success. Clearly, there must be a reason why the new KBR wants to limit those contracts where it will play "soccer" offshore, while at the same time it is quite willing to continue to play "soccer" for some very large onshore projects.
The French interpretation that US-based companies like McDermott and Brown & Root grew up in a US cost-plus-fixed-fee contract world is hard to reconcile with my experience over the last 40 years. During that time, both at Shell and at Paragon, I signed off on a number of lump sum bid awards to these two companies. In addition, the other company that has had the courage to address this problem publicly, Stolt Offshore, is a recent merger of Stolt Comex Seaway (a British-Norwegian company) and ETPM (a French company). Certainly, ETPM knew how to "play soccer."
The main difference I see is that, in the past, the oil companies included in their offshore bid packages better definition of what they wanted to build. These bid packages coincided with the firm definition one normally encounters in an onshore EPIC request for proposal.
The recent specific contracts that were the cause for so much pain to some offshore contractors tended to suffer from poor or inadequate definition and requirements that the contractor assume all risk for these shortcomings. The contracts also imposed specific host country supply requirements that had significant schedule and quality risks associated with them. And finally, many of them were anything but "cash neutral."
It is, of course, a failure on the part of the contractors that they did not take exception to these contracts. On the other hand, even though they may have tried, exceptions were not acceptable to the operators and their national oil company partners, and the contractors would have had to walk away from some very expensive bids. At the end of the day, oil companies have been lucky today that they have always been able to find someone who would fool himself into thinking he could control this risk. But this cannot continue to go on.
So what is the solution? The oil companies must take back the responsibility for defining their projects sufficiently so that the EPIC contractors can know what they are to build and have only to perform the detailed engineering and the construction engineering. Oil companies must take responsibility for the design, major equipment purchases, and risks that appropriately belong to them. Thus, I propose that operators hire consulting engineering companies (like Paragon, of course) to help them take charge of the definition engineering and the procurement of big-ticket, long-lead equipment. This front-end work should be performed on a professional reimbursable basis. Bids can then be let for detail engineering, procurement, installation, and construction under terms where the contracting companies can truly control their risks. Perhaps there is room in the world for both soccer and football.
It is only by reading the thought-provoking prior article that I was able to crystallize my thoughts on this subject. Once again, as I have learned in my corporate life, better insights are obtained when we combine both the French and the American points of view.
Kenneth E. Arnold
Chief Executive Officer
Paragon Engineering Co.
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