Newbuild FPSOs: What can go wrong

Feb. 1, 1999
To date, purpose-built floating production, storage, and offloading vessels (FPSOs) have been constructed in traditional shipbuilding facilities with existing systems. The construction contracts were typically administered with the pre-conceived contractual culture of a shipyard.

Construction problems and solutions

Graham Parker
Intec Engineering
To date, purpose-built floating production, storage, and offloading vessels (FPSOs) have been constructed in traditional shipbuilding facilities with existing systems. The construction contracts were typically administered with the pre-conceived contractual culture of a shipyard.

The 12 newbuild FPSO contracts for Northwest European waters have been made by the vessel's owner or speculator, either directly with the respective shipyard or with the shipyard as a member of a contracting joint venture. Four are owned by single operators - Gryphon 'A', Kerr McGee; Captain, Texaco; Anasuria, Shell; and Schiehallion, B.P. - in the UK Sector, and five in the Norwegian Sector.

The first true monohull FPSO in the North Sea was the Petrojarl 1, delivered in 1986, and was intended to be a production test vessel with a small crude oil storage capability. As the Seillean was designed and built as a single well oil production system (SWOPS), it cannot really be called an FPSO. The title of second North Sea FPSO therefore falls to Gryphon 'A', which started out life as a speculative build floating storage unit. The role changed during its design development into an FPSO.

The Gryphon 'A' was delivered seven years after Petrojarl 1 and the next newbuild FPSO delivered for the North Sea was the Captain in 1997, another four years later.

Of the 12 newbuild FPSOs now installed or under construction for the North Sea, 10 have been the product of the last four years of FPSO history and designs are still evolving.

Market environment

Until the beginning of the 1960s, the principals in shipowning companies would order a new ship by making a telephone call to a shipyard's managing director. The shipyard's managers would begin to develop the detailed design and order steel materials without a contract being discussed - only the price would have been settled. In the 1950s, even the price would be open to some extent as it would often be "cost plus." The "cost plus," however, would include a gentleman's "plus" based on similar, recent or sister ships, and quite easily calculated.

All that would change with the advent of intense worldwide competition from the developing nations and increased inflation. Between these two factors, the numbers of countries still capable of major ship construction has dwindled to a comparative handful mostly in the Far East.

In today's shipbuilding environment, the contracts for trading vessels have become a little more specific, but they still convey some of the mutual goodwill that was fundamental to the old contracts.

The discussions that follow, although targeted at monohull FPSO's, are equally relevant to the construction of other offshore sector floating structures built by a shipyard.

It involves a technical solution that solves a commercial problem and conversely, commercial effort that solves a technical problem. This is singularly applicable to the design and construction activities for newbuild FPSO's due to the early historical phase of their development and the ample opportunities for inspired innovation.

Contracting strategy

Although, in general terms, shipyards seem to prefer fixed, lump-sum contracts attached to a fully detailed engineering package, this is usually not equitable with the current fast-track FPSO field development philosophy. Not being equitable affects both contracting parties.

Delays can be caused by poor or incomplete engineering. This also leads to contractual confusion or dissension, which may affect the quality of the engineered vessel. One of the best reasons for the beneficial inclusion of the shipyard in an alliance partnership is a case where the workscope is not sufficiently defined at the time of contract. At this time tolerance and help are needed from the shipyard and contractor, but instead there is often disruptive and unproductive contractual wrangling.

If it is determined that all parties would benefit from the shipyard's inclusion in an alliance or joint venture then further detailed analysis will be required before the final step is taken.

Contract structure

Eventually a construction contract will be offered to the shipyard for signature. It is therefore necessary to pre-define the contract structure and its backing documentation. The Crine Network in the UK has recently published its model "General Conditions of Contract for Construction" to provide an industry basis for major construction. The model contract also has a set of guidance notes to complement its use. The complete presentation is the product of years of work and formulation by the Crine Standards Contract Committee comprised of senior representatives from major operators and the contracting industry.

The objective of the Model Standard Contract is to significantly reduce the inefficiencies associated with the repeated drafting and reviewing of contracts. It is also intended to facilitate a greater sense of partnership between operators and contractors and will reduce the need for a full contractual review for each tender.

The Crine Model should form a good basis for conventional contracting relationships. There may be some advantage to be gained in the future by the identification of those clauses that would benefit from specific modification for contracting for the construction of FPSOs and create a modified FPSO version of the model.

Bid invitations

Most shipyards under consideration for participation in a prospective project will be easily identified based on their strong profile and capabilities. In some cases, these features are less apparent. They include, for example, when the first choices are full to capacity, when they have changed their market sector interests, or for any reason they are no longer interested in floating production construction.

The list of invitees should be as large as is sensibly possible within the project constraints. A typical prequalification questionnaire will include expression of firm intention to bid request, shipyard facilities and manning levels, current workload and schedules, relevant experience in the sector, ownership and corporate relationships, management systems in existence, quality assurance qualification, safety and environmental records, industrial relations records, financial information and accounts.

The prequalification documents will be vetted and evaluated in order to provide a final list of shipyards to be invited to bid for recommendation for management approval.

The status of the front end engineering completion will determine the shape and extent of the formal bid invitation documentation. This can range from just a collection of functional specifications, the design basis and the environmental and geotechnical data or be a full-blown pre-engineering package.

The depth of this engineering will be measured against the speed the project schedule needs, but all floating production projects will have some degree of grease applied to the schedule for early commercial returns. The FPSO vessel design itself will always have the field development principal critical path straight through it and the front end engineering activities are the first consideration. Any of this engineering pushed into the post-award construction schedule will generally impact the schedule on at least a day-for-day basis.

The bid period will depend on the project schedule, tempered with the bid content and complexity, but will probably be in the 3-6 weeks range, with 4 weeks being the likely median requirement. Miscalculating the bid period will only cause dilution of the quality of the bid in terms of accuracy and technical content. It can also have a greater negative impact on the project than almost anything else except the definition of the scope of work.

In order that supportive and qualitative pricing information responses are received from the shipyards they should generally be instructed to complete a price breakdown matrix. This will allow interrogation of individual line items for credibility and validity by comparison with each competitor's figures side by side. The value of this form of evaluation by the comparison of line item breakdown cannot be overemphasised.

All omissions and deviations from the instructions to tenderers requirements will need to be identified, interrogated, and closed out by the bid clarification process. If the shipyards under consideration are also being considered for fabrication and HUC of the process plant, then this would also be incorporated into the matrix for comparison. Apart from consideration of the price breakdown and total cost the overall evaluation will also consider the following principal aspects of the individual offers; total lump sum price, towage cost and schedule impact, site supervision team requirements, averaged rates for variation, payment schedule and methods, financing arrangements and benefits, construction schedule, process plant capabilities, quality assurance assessment, safety record assessment, financial health report, and simple ranking of all offers.

It is imperative that before any final commercial commitment is given to a short listed or recommended shipyard a multitude of other relevant considerations should be evaluated and satisfied. Initially the following aspects of the management systems should be considered; project management system, management culture, communication abilities, business language, document control, QA/QC organisation, procurement and expediting, certification, scheduling abilities, health and safety, cost control, and pre-outfitting experience. The following physical facilities and resources should be evaluated; current and future workloads, building berths and dry-docks, steelwork prefabrication, pipework prefabrication, berth craneage, outfitting quay logistics, undercover storage, engineering manning levels and abilities, steelwork and outfitting trade levels and experience, electrical and instrumentation resources and experience, and hook- up and commissioning resources and experience.

After consideration of all of the foregoing, the bid evaluation teamleader will conclude the evaluation with a formal bid evaluation and recommendation report. This will include all records of the bid clarification negotiations, shipyard assessment visits, and the normalization factors utilized in arriving at the recommended choice of shipyard.

Post-bid refinement

The recommendation to proceed with a shipyard and acceptance will provide an excellent opportunity to fully refine the design, price, and construction schedule in readiness for final pre-award commitment:

The final pre-award discussions and negotiations include design/cost optimisation modifications, final agreed scope of work, contract pricing structure and values, milestone payment values and schedule, rates and units for variation, contract currency and exchange rates, master construction schedule, insurances, P.C. guarantee, and performance bonds.

During this period of refinement and final contract negotiation it is imperative that any concurrent negotiations between the shipyard and other potential clients are careful monitored. The opportunity at this stage for the shipyard to "play-off" one client against another for a schedule slot in the yard is often too good to miss, particularly in a strong market situation. The risk to both clients is obvious and probably schedule critical to all.

Contract payment methods

Until about 40 years ago, all of the world's major shipyards contracted for vessels on an almost cost-plus basis, but then fixed, lump-sum contracts, with penalties, became the norm. The days of fixed, lump-sum contracts may now be over as current contracting strategies reflect some form of alliancing arrangement with others and/or the owner/operator.

Some of the FPSO developments recently contracted for consist of joint venture partnerships comprised of contractors whom together will supply the total field development scope of work, from conception to first oil.

This form of contract can be based on the target price contracting mechanism which is founded on the principle of shared risk and reward. Payment of a bonus for early production may also be provided.

The target price itself consists of three main elements; a management fee which includes fixed profit and overheads for the joint venture, the estimated cost of the facilities, this would to be charged to the operator at cost. A contingency provided to compensate the joint venture for those unforeseen events often experienced in an offshore project.

The above costs will be declared at the pre-contract stage and have been clarified and agreed.

If the project is to be completed below the target price level then the joint venture partners and the owner would share the savings on an equal basis and the joint venture would retain the fixed profit and overheads.

Should the final price exceed the target price then the excess costs would be shared on an equal basis between the joint venture partners and the owner. This situation can be limited by a fixed amount, the total of which is termed the cap price, after which the owner would pay 100% of the actual costs incurred without limitation.

The amount between the target price and the cap price is set such that all of the fixed profit and overheads element could be lost by the joint venture partners. All members of the project, whether joint venture partners or owner will have an incentive to minimise expenditure, thereby maximising the cost benefits to all parties. Each partner will also be responsible for the rectification of his own defective work, at no cost to the joint venture or owner.

The estimated cost of the project would be based on contract scope of work, pre-award and intermediate engineering deliverables, design basis and reports. No change to any of these documents, which diminish the requirements of the design basis, would be permissible without the approval of the owner. Similarly, no changes to the contract documentation which reduce the availability or quality of the facilities as agreed during the development of the design would be permitted without approval.

Where such changes are approved, any cost increase associated with increased scope would be added to the target price and similarly decreases in scope would be deducted from the target price.

Design development changes which will not effect the target price will be controlled and approved by the joint venture and finally approved by the owner. Cost savings derived by efficient design development will enable the joint venture to earn proportionally more profit under the target price mechanism, again subject to owner approval.

The fixed overheads and profit for the shipyard's scope within the overall project should be agreed between the partners before contract award and built into the target price. The construction cost compensation for the shipyard as a joint venture partner would be determined by breaking out the obvious components of the vessel and topsides in a way that is fair, sensible and can easily be defined and measured.

An incentive related payment schedule should be developed and agreed and this should act as a motivation device and reflect the shipyard's cashflow profile. A typical milestone-related payment schedule for a target price mechanism construction contract is shown below.

Delivery liabilities

The philosophy for the imposition of liabilities and damages on the shipyard will be based on the commercial losses that would by incurred by the owner, and his partners, in the event of delayed delivery. Although generally the contract will include provisions for termination after a stipulated delay in the delivery date for provisional acceptance they would only very rarely be activated.

Recovery of an owner's losses by the shipyard's payment of liquidated damages is generally of more interest and it also acts as an incentive to the shipyard merely in its avoidance.

The delayed contract delivery considerations should be contract schedule inherent delay risks, contract price comfort or risks, delay repercussions on installation windows, rights of termination clauses, liquidated damages free period and activation, per diem liquidated damages value(s), and liquidated damages period and payment limit.

Both parties will have the right under the conditions of contract to raise a variation order request, which may or may not eventually become an approved variation order depending on the particular circumstances.

The shipyard shall not implement a proposed variation order until the owner has approved the order by signature. The only circumstances whereby a variation order may be implemented by a verbal instruction, would be in an emergency endangering life or property or where in the owner's site representative's opinion the safety or integrity of the project is at risk. Even under these circumstances the owner will be required to confirm the verbal instructions in writing within, say, two days.

It is preferable that a very comprehensive list of rates for variation be incorporated into the contract to ease the calculation and acceptance of variation costs. These will include for all likely labour, materials, plant and equipment costs etc. and will aid in the avoidance of contractual confusion.

Depending on the final form of contract and the type of contracting relationship intended to operate with the shipyard, the site team need for local supervision and inspection will vary. This can range from just a handful of personnel on site to 50 or more as has been seen on some recent projects.

A likely initial site team build-up for a project with a comfortable status of engineering at the commencement of the contract would include at least nine men. If it becomes obvious that further presence is required on site for supervision and inspection then the team will be reinforced as necessary, but will increase in any case towards the mechanical completion and pre-commissioning stages. The size of the team will also be dependant on the extent of the process plant scope of work being carried out by the shipyard, if any.

The owner's site representative's role will also vary again depending on the type of contracting relationship and existence or not of partnerships and alliance etc. However, it is usually intended that he will act as the sole point of contract and authority on behalf of those contractually facing the shipyard or the joint venture on site as their representative.

Contract schedule

The shipyard will be bound to produce within 30 days of contract award a master construction schedule consistent with the overall contract schedule. This will be in bar chart format for the design, procurement, construction, installation of equipment, testing and delivery of the vessel and shall identify all interdependencies of the variously related activities.

Any delays in the early phases of engineering will inevitably delay the complete project schedule due to the critical path weighting of these activities. Critical path delays can rarely be recovered due to the inherent incompressibility of the activities and their subsequent approval cycles. This is often not recognised early enough, to the detriment of the project.

Total project reporting will be produced on a weekly and monthly basis. The method of reporting will generally be by narrative, activity progress bar chart mark up and globally by percentage progress completion figures against pre-agreed S-curves.

Even if quite dramatic increases in performance were to create excellent steelwork and pipework prefabrication progress, the subsequent activities - painting units, pre-outfitting, and erection of steelwork - are all sequential activities without float. All of these activities are also sequential and on the critical path. This is when the real bottle-necks begin to occur and these are generally irreversible as they deny the ability to complete and precommission systems with obvious consequences.

In the demonstrated delay scenario shown above, in order to recover the schedule by the end of the third quartile in order to meet the original delivery date, it would require that 55% of the work volume be carried out in six months instead of the planned 35%.

One of the most remarkable facts about the average FPSO construction schedule is that the last 1% of schedule progress volume can only be achieved in the last two months and which is 8% of the total schedule period.

The only way to achieve successful construction planning in a shipyard culture is to create a belief in planning at all levels but this has to be bought by spending on effective planning systems or overspending on labour. It is important that when the construction schedule states that "Unit 330 will move from the fabrication shop to the slipway on the Friday of Week 22," that it does. This is not just to satisfy the schedule, but so the workforce, supervision and management can depend on it happening.

Contract success should be relatively straightforward to achieve as it is only dependent on four main factors which are well understood by conventional European offshore fabricators. If they weren't understood then they couldn't even get into the business and they certainly couldn't stay in it without them - they are good engineering capabilities, good fabrication quality systems, reliable schedule achievement, and effective hook-up and commissioning.

However, with a few exceptions, the construction activities of all of the Northwest European FPSOs have met with schedule, quality and cost overrun problems of varying degrees and mixes, most of which we are all aware of. Some have been absorbed and mitigated into the overall project development and some have not. Some have been commercial and technical disasters of frightening proportions even to "well-padded" operators. The rumors and estimated figures have even shown themselves to be well shy of reality when the facts finally leak out.


Graham Parker is Manager of Floating Production Systems at Intec Engineering in Houston. He is a fellow of the Royal Institution of Naval Architects and a Chartered Engineer.

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