General EPC contractors in oil & gas markets

1
 Our Clients: Energy and Petrochemical Companies

Impossibile visualizzare l'immagine.

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General EPC Contractors in oil & gas markets
Challenge from new entrants
“Western” and Japanese Contractors have recaptured some ground lost to Koreans

2013 Awarded Contracts (*) 2014 Awarded Contracts (*)

Peer Group Peer Group
Contract EPC Value = 28.6 b US$ Contract EPC Value = 41.0 b US$

Samsung L&T
4% Group Saipem
5% 12%
7%
24%
Hynday Petrofac
Group 12%
11%

Maire
GS E&C Tecnimont
13% 7%
10%
Linde
Tecnicas 4%
60% SK E&C Reunidas
2%
13% 4%
JGC KBR
Fluor CB&I
4% 2%
3% 3%

PEER GROUP

EUROPEAN AMERICAN JAPANESE KOREAN (*) INDIAN EUROPEAN AMERICAN JAPANESE KOREAN INDIAN

 •Bn US$ Source: Saipem Data (2015)

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Typical project execution sequence (1/2)

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 Typical project execution sequence (2/2)

ƒ Evolution: from designers

to overall constructors of the entire new Engineering

investment project
Procurement

ƒ Active control of all

project phases Construction
Construct
Construction
uction

ƒ Search for tailor-made

EP(I)C Contract
‘engineered-to-order’ Often on Lump Sum basis
solutions

6
Investment in Front End phases is essential

Major Influence Rapid Decreasing Influence Low Influence

FINAL
AUTHORIZATION

EXPENDITURES
INFLUENCE

INFLUENCE EXPENDITURES

FRONT END LOADING

MECHANICAL
COMPLETION

Business Facilities Basic Detailed Design Construction Turnover

Planning/ Planning/ Design & Procurement & Startup
Studies Studies

PROJECT LIFE CYCLE

7
Key factors in EPC project success

ƒ Maximize expenditures in Front End Loading

ƒ Work in multifunctional teams,

jointly with the Owner Company

ƒ Use throughout the experience in construction

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From project to portfolio risk management

Pre-Bid Acquisition Execution

Project Risk Profile identification Project Risk Profile monitoring

input Project Risk Profile input Project Risk Profile

1.Risk 1.Risk
Identification Identification

5. Montecarlo 5. Montecarlo
Analysis Analysis
2. Qualitative 2. Qualitative
Evaluation Evaluation

4. Quantitative 4. Quantitative
Evaluation 3. Action Evaluation 3. Action
Strategy Strategy

…in a portfolio view

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Example: Saipem

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SAIPEM TODAY: A MAJOR MULTICULTURAL
E&C & DRILLING CONTRACTOR

9 Operating in more than 60 countries

9 ~ 40,000 employees from >120 nationalities
9 More than 20 engineering and project execution centers
worldwide
9 11 fabrication yards in 5 continents
Drill Ship
LNG Carrier
Oil & Gas LNG
Production Regasification

Gas Liquefaction FSRU

Plant Pipelayer
Refinery

Compressor FPSO
Station Power
Drilling Rig
Gas-to-Solids
Semisubmersible
Pipelay Vessel
Field
Development Ship

Pipelaying Heavylift Petrochemicals

Plant
Semisubmersible
Yard Drilling Rig
Subsea Construction
Vessel

REVENUES
9 2015 11.50 B€
ROV
Remotely Operated Vehicle
9 2016 9.98 B€
Sircos - Pipeline Beluga - Deepwater
Repair System Trenching Machine

BACKLOG
9 December 31, 2016 14.2 B€
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Shah Gas Development, U.A.E.

12
CNRL Oil Sands Refinery, Alberta, Canada

13
Engro Fertilizer Complex, Pakistan

14
14
Pipelaying for Nord Stream

Castorone

15
New Technologies, New Industries
The Consolidation of Deepwater Subsea Production Systems

Brazil

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World First Offshore-Moored FSRU

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Offshore Wind Farm for Statoil

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High tech-applied in difficult, inaccessible, distant markets

Russia Nigeria

Kazakhstan
U.A.E.

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Some little known facts about Saipem

ƒ In oil & gas markets, the largest

Engineering & Construction general
contractor in the world
(by revenue)

ƒ In Italy, autonomously,
~7th largest company
(by revenue)

ƒ Activity and backlog:

International markets 97%
Italy 3%

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Saipem: Pivot in Italy

ƒ Global headquarters, 5 engineering, production and R&D centres

ƒ > 7000 Italian employees

of which:
• > 3000 engineers
• ~ 40% on international assignments

ƒ Purchases of ~1.8 B€/y from >3800 Italian suppliers

ƒ Subcontracts of 1.7 M man-hours to Italian Engineering Companies

ƒ In addition: total indirect, induced, employment: ~ 15,000 people

ƒ Contributing to 0.2% of Italian GNP

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A new chapter in Saipem history

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 The EPC Process
Improving project execution
in today’s scenario

1
“Some heavy pounding, Sir”

Wellington at Waterloo

2
 Time for Resilience
For the General Contractors in the oil & gas industry

ƒ Lower new CAPEX demand, ƒ Pressure to reduce cost

particularly in upstream of Capex
E&C Industry Vs. recent cost explosion
“Risky Business”
ƒ Impact of geopolitics ƒ Unclear Clients’
objectives and criteria of
success

ƒ Shifting markets
ƒ Increasing
execution
complexities

ƒ Often unclear new policies

(e.g. Local content, permitting, ƒ Substantial competition
environmental) from new entrants

Great transformations, complex and contracting markets

but

many opportunities for the most competitive and flexible players

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4
5
6
Oil & Gas services industry

Main critical issues

… other than shrinking markets

¾ Industry costs out of line with today’s needs

¾ Decreasing project execution success

¾ New entrants, new competitors

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"Less Bang, More Buck"
Rapidly rising project execution costs – 2000 – 2015

IHS Regional Upstream Cost Indexes

ƒ More complex and remote environments

ƒ Tight skilled labor market

ƒ Decrease in efficiency and productivity

Source: IHS (2013)

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Example: LNG liquefaction plants capital cost escalation (US $)

Source: Author, Oxford Institute for Energy Studies (2014)

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Drama in “mega projects” execution:
increasing cost overruns and delays

500 B US$ incremental cost increase

(from US$1,200 BUS$ original estimate
to US $1,700 B US$)

on a sample of 365 projects reviewed

Project delivery success is decreasing,

especially in industry segments
where complexity and risks are considerably higher

10
Key factors of success

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Clarity of Owner’s objectives: crucial guidance for the contractor

ƒ Set and clearly communicate Owner’s project goals

ƒ Firm or evolving project definition – market, internal or local influences
ƒ Owner’s desired role in the project
ƒ Third parties’s involvement: e.g. Authorities, approvals, …

ƒ Communicate Owner’s key success factors

ƒ Achieve schedule ? ƒ Fast track execution ?
ƒ Achieve cost certainty ? ƒ Achieve lowest cost ?
ƒ Optimize the project ? ƒ Value Engineering ?
ƒ Satisfaction of other stakeholders

ƒ Define the level and availability of technical and execution competences

ƒ Owner’s ƒ Contractors’ and Suppliers’

ƒ Openly discuss threats and fears

Unclear and undefined project objectives and possible pitfalls:

one of most frequent causes of failure
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 New Investment Preparation and Execution Process
Front End Loading

Investment
PROJECT STUDY AND DEFINITION Etimate
± 25%

Pre-feasibility Feasibility Preliminary

Company Opportunity Investment
Strategy Identification Study Study
Decision

Investment
PROJECT SETTING PHASE Etimate
± 10%
Front End
Project Basic Basic Final
Engineering
Start Process Engineering Investment
Design (FEED)
Decision

DESIGN AND EXECUTION

Project Management
Control System

Hand Over

Contract Detailed Construction

Procurement Commissioning
Award Engineering

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For project success, need tighter cooperation between Project
Owner/E&C Contractor/Supply Chain

From the earliest project phases – Front End Loading

¾ Maximize investments in Pre-FEED and FEED

(and then stop any changes)

¾ Utilize experienced contractors with thorough

construction experience

¾ Form integrated teams with "win-win" objectives

¾ Involve critical equipment vendors and certification

companies throughout the process

¾ Join forces to broaden vendors list

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Investment in Front End phases is essential

Major Influence Rapid Decreasing Influence Low Influence

FINAL
AUTHORIZATION

EXPENDITURES
INFLUENCE

INFLUENCE EXPENDITURES

FRONT END LOADING

MECHANICAL
COMPLETION

Business Facilities Basic Detailed Design Construction Turnover

Planning/ Planning/ Design & Procurement & Startup
Studies Studies

PROJECT LIFE CYCLE

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In EPC/EPIC contracts we need to avoid the “Avalanche Effects”
of poor or changing FEED / Technical Package

Cumulative
Cost
TOTAL COST
Project Cost RISING I
‘SNOWBALL’ FINAL
LEGEND:
C i COST
‘AVALA NCHE’
Intended EPIC Process
(e-p-c-i)
‘Avalanched’ EPIC Process
c C ORIGINAL
P COST
p
(E-P-C-I)

FEED e E

Time
FEED
POOR FEED
Contract
Co
ontrac
ontra
o c ORIGINAL CONTRACT SCHEDULE OVERALL DELAY
A ard
Awardd

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Maximize the application of new technologies

ƒ Most advanced mega-projects

today are based on “new” or
“breakthrough” technologies

ƒ Gradually the R&D effort is being

outsourced to contractors and
suppliers

ƒ Sharing Oil Companies’ needs,

criteria, targets is essential
for the service providers
Goals, feedback, certification, guidance

ƒ Joint projects best, when possible

Successful application of new technologies is

key to project success

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Conclusions

In our view, the most critical factors of project success are decided
before starting EPC:

ƒ Maximize investment in FEL

ƒ Choice of contractor experienced in construction and

outline of supply chain

ƒ Establishment of a tighter, collaborative, ‘win-win’ attitude

ƒ Broader selection of approved competitive vendors

ƒ Wider use of standardized and fully qualified solutions

ƒ Realistic and shared view of local content maximization

ƒ More balanced risk-sharing and evolved contractual forms

Intense Owner – Contractor cooperation and mutual thrust

essential for project success

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Fundamentals of the EPC process
 Feasibility Studies

Often also called: Conceptual Design

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 Feasibility Study
Feasibility Study (1/4)

Objective: Is the project feasible, prior to starting the investments?

ƒ Project description
- Project purpose, stakeholders involved, who will benefit ?
- Preliminary design

ƒ Market study
- Evaluate the market environment, goals, benefits, commercialization obstacles

ƒ Project goals
- Long-term, short-term goals

ƒ Execution plan
- How to achive the goals?
- Preliminary design/procurement/construction plan

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 Feasibility Study
Feasibility Study (2/4)

ƒ Resources
- Identify all needed resources: technical, human, advisory, equipment, inventories, IT, …
- Supplies and suppliers
- Subcontractors

ƒ Project process
- How will the project flow?
- Flowcharts, main project stages

ƒ Timeline
- Estimated timeline, individual steps, milestones

ƒ Management
- Identify needed managers, workers and relative responsibilities

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 Feasibility Study
Feasibility Study (3/4)

ƒ Cost and budgeting

- Preliminary investment cost (typically ± 30%)
- Main possible suppliers and subcontractors
- Expenditure sequence
- Financing – sources, modalities

ƒ Observations and critical issues

ƒ Calculate profitability
- Return on investment
- NPV
- Payout time

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 Feasibility Study
Feasibility Study (4/4)

Typical outcome:

ƒ Highlight project problems

- Risks? Problem areas?

ƒ Alternatives
- Analyze, recommend alternative approaches -if any

ƒ The outcome
- Conclusions: is the project beneficial or detrimental?
- Profitability analysis
- Risk assessment
- Implementation programme

Conclusion/recommendation: The feasibility study should not only

lead to a ʦJRQR-go” decision,

but it should become the basis for the project development,

indicating major criticalities
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 Technologies Selection

Technologies Selection

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Example: Synthesis of Urea Technologies Selection

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Technologies Selection Technologies Selection

ƒ Selection of fundamental process solutions and technologies

(often licensed)

ƒ A licensor will typically offer

- License: right to use, according to patents and know-how
- Technology transfer: know-how, training for its application, start-up assistance …
- Package of customized basic specifications (including key equipment)
- Performance guarantees

ƒ Technologies and licensors are typically selected on competitive basis

- Performance, references, prices, reputation

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 Basic Engineering Design

Basic Engineering Design,

Front End Engineering Design

Often called also:

Basic Engineering and Process Design Package,
Process Specifications,…

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 Basic Engineering Design
Basic Engineering Design (1/4)

A unique Basic Engineering Package, developed for each individual project, typically
includes the following deliverables:

• Design Basis
- Site-specific meteorological and ambient conditions;
- Required characteristics of utility supply systems;
- Integration with existing facilities
- Preliminary plot plan

• Process Description
- Process scheme

• Equipment List
- A list of all required process equipment, with relative sizing

• Process Flow Diagrams (PFDs) and Heat & Material Balances

- A process simulation for the plant ; definition of all process streams
- Temperatures, pressures, flow rates, and physical properties;
operating conditions defined for all process streams

• Material List
- Selection basis and diagrams

• Piping and Instrumentation Diagrams (P&IDs)

- Showing interconnection of process equipment and the instrumentation used to control the process
- Interconnection of key process utilities (hydrogen, steam, hot oil, etc.).

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 Basic Engineering Design
Basic Engineering Design (2/4)

• Equipment List

• Process Equipment Data Sheets

- Process data sheets provided for all Inside Battery Limit (ISBL) equipment items

• Instrument List
- Control valves, level instruments, flow instruments, pressure instruments, temperature instruments
and relief devices, identified and specified

• Piping
- Piping specification and piping classification index

• Plant or Process Control

- Control logic and interlock schemes.

• Effluents Stream List

- Quantities and characteristics of all effluent streams are defined. Specifically:

• Quality Assurance and Laboratory Information

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 Basic Engineering Design
Basic Engineering Design (3/4)

• Utilities and chemicals consumption

- Required chemicals and utilities identified and consumption rates shown: treating chemicals, catalyst,
steam, water, nitrogen, air, hydrogen, etc.

• Flare loads summary

• Hydraulic calculations

• Piping and Instrumentation Diagrams (P&IDs)

- Showing line sizes, line specifications, instruments, controls, valves, insulation etc.

• Maintenance & sparing philosophy

• Conceptual fire fighting requirements

• Fire water demand calculation

• HAZOP (Hazard and Operability) study

• HAZID (Hazard Identification) study

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 Basic Engineering Design
Basic Engineering Design (4/4)

On the basis of a typical BED package:

• 7KH2ZQHU&RPSDQ\ZLOOLVVXHDʦRequest for BidsʦWR(3&

General Contractors

• General contractors will develop a detailed offer for project

execution, including schedule and firm Lump Sum or indicative
bidding price

• On the basis of the above, the Owner Company will make a Final
Investment Decision (FID)

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 Detailed Engineering

Detailed Engineering

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Detailed Engineering (1/3)
Detailed Engineering

Process Engineering
x Review for consistency Basic Engineering Design or FEED Package developed by third party / client
x Develop / Review hydraulic calculations
x Develop / Review pressure safety valve calculations for final equipment layout and relieving scenarios
x Obtain / Review package equipment quotations from vendors for process suitability
x Develop utility requirements with regards to vendor data for process suitability and update the utility sizings

Equipment Engineering
x Confirm design basis
x Develop mechanical design for fabricated equipment
x Develop engineering data sheet for fabricated equipment
x Prepare engineering datasheets for package units
x Prepare standard specifications for fabricated equipment and vendor designed equipment
x Prepare fabrication drawings / review the ones prepared by vendors

Piping Design
x Confirm piping design basis
x Develop piping and pipe support standards
x Prepare piping and valve material specifications
x Develop plot plan
x Develop equipment layout plan and elevation drawings
x Develop foundation layout plans
x Prepare equipment nozzle orientations
x Develop 1st MTO (Material Take-Off) for piping, valves, fittings
x Develop piping layout plans / sections
x Prepare isometrics
x Carry out stress analysis
x Prepare isometrics for tie-in points
x Prepare pipe support details
x Prepare specifications and MTO for insulation and painting
x Develop final MTO for piping, valves, fittings, and other piping items.

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Detailed Engineering (2/3)
Detailed Engineering

Instrument Engineering
x Confirm instrumentation design basis
x Develop Instrumentation Index
x Prepare standard specification for valves, pressure instruments, temperature instruments, level instruments and PLC system
x Prepare engineering datasheets for field instruments including control valves, relief valves, temperature instruments, pressure
instruments, flow instrument, level instruments etc.
x Develop specifications for control system including system architecture and remote data acquisition system.
x Prepare control room layout
x Develop cable and Junction Box schedule
x Prepare instrument hook up diagrams
x Prepare loop wiring diagrams
x Prepare specification and layout for gas detection system
x Prepare instrument installation standards
x Estimate bill of materials for bulk items

Electrical Engineering
x Confirm electrical design basis
x Prepare load list
x Prepare single line diagram
x Carry out conceptual design for power source, equipment location and power distribution.
x Develop hazardous area classification drawings
x Develop specifications for power generation
x Prepare specifications for other electrical items like Control Stations, Lighting Fixtures, earthing material, cables & cable trays
x Carry out cable sizing calculations and develop cable schedule
x Prepare Instrument Control room layout
x Develop design & drawings for earthing & lightning protection
x Develop lighting layout
x Develop cable tray layout
x Estimate bill of materials for bulk items

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Detailed Engineering (3/3)
Detailed Engineering

Civil/Structural Design & Engineering

x Confirm civil design basis
x Review contour survey drawing and prepare site grading plan including earthworks and site preparation
x Develop general arrangements drawings for buildings and sheds
x Carry out foundation design and prepare foundation drawings for equipment, building, underground tanks and shed
x Carry out structural design and prepare structural arrangement drawings for shed and platforms
x Carry out foundation and structural design for pipe rack/sleeper and pipe supports
x Develop layout drawings for roads, drainage and paving
x Prepare Bill of Material

Fire Fighting System Engineering

x Prepare specifications and layout for fire detection and alarm system
x Carry out hydraulic calculations and prepare P&ID for fire water network
x Prepare layout for fire water network
x Prepare Bill of Material

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 Procurement

Procurement

Includes also major subcontracts

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Procurement Procurement

A highly strategic effort, since the ability to purchase certain materials or

obtain subcontracts competitively will determine the profitability or even the
continuance of Company’s operations

Typical steps:
x Overall planning
x Standards determination
x Specifications development
x Supplier research and certification
x Certified Vendor list definition
x Reconciliation of Contractor’s and Client’s Vendor lists
x Definition of Terms and Conditions (T&C)
x Issuance of Tenders, receipt of offers
x Price and negotiation
x Contract definition and signature
x Contract adiministration
x Post-order activities, expediting
x Deliveries on site
x Verification and warranties

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 Construction

Construction

39
Construction Construction

• In challenging areas, often the most complex and difficult task

• Typically represents about 30 – 50 % of total project cost

• Local experience and local mobilization critical factors of success

• Can be subcontracted to a major construction firm, or to many subcontractors

• Key areas:
- Site preparation
- Civil works
- Mechanical erection
- Electrical & Instrumentation works

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 Start-up and
commissioning

Start-up and Commissioning

41
Start-up and Commissioning Start-up and
commissioning

ƒ Typically a complex and sequential procedure

ƒ Test run and performance guarantee verification

ƒ Simultaneously, training of Owner Company personnel

ƒ Plant acceptance

ƒ Future operations
- Sometimes BOO (Build, Own and Operate) or
BOT (Build, Own and Transfer)

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Improving the EPC Process

1
Only lower-cost projects will see the light
(Cost curve by market)
Indicative cost curve of global crude oil supply from new projects in select areas to 2030
DECADE
END OF

?
NORM
NEW

AL

2
Source: IHS
Key challenge for the EPC General Contractors

Need higher effectiveness, and reduced costs

Lower Increasing
profitabil difficulties
ity
ƒ Ever more complex and
inaccessible locations
ƒ More sophisticated, advanced
technologies
ƒ Major project execution
challenges

Scilla and Cariddi

3
Drastic cost-reductions for new projects are needed

ƒ An 18-22 % cost deflation has

materialized by today, but there are
inflationary pressures for costs to rise Owners’
again by the end of decade challenge:
30 – 50 %
reduction
ƒ Further supply chain savings based on
‘squeezing’ the service sector are possible,
but probably limited

ƒ Major structural supply chain improvements are needed to:

ƒ Lower costs further
ƒ Improve reliability and quality and reduce risk

4
Our industry has been the most resistant one to reduce costs

5
Lower prices are possible

Sources: Bureau of Labor Statistics, Baker Hughes, Barclays Research (9/2016)

6
Further reductions will originate primarily from
improved designs and technologies

Source: IHS

7
More than half of offshore cost reductions due to simplification, design

8
Efforts to reduce CAPEX and improve project execution

¾ More design optimization and value engineering, to reduce overall costs

¾ More accurate, more realistic initial project estimates
To avoid changes, variations, surprises …

¾ Broader acceptance of alternative Vendors from lower cost markets

(particularly from China)

¾ Re-visitation of execution approaches and contractual forms

ƒ Direct execution of certain EPC
components by some IOCs
ƒ Smaller EPC LSTK packages
ƒ Return of PMCs
ƒ Paid offers on large projects
ƒ Standardization
ƒ Modularization
ƒ Frame ageements with quantity discounts -
Collaborative sourcing
ƒ Alternative contractual arrangements
e.g. "Hybrid Convertible"
ƒ Technology development programs for cost
reduction

Cost reduction – the key factor of success in the near future

9
Saipem’s new strategic pillars – starting from August 2015

Cost Debt
Business De-risking Technology
optimization reduction
1 portfolio 2 the business 3 and process 4 and 5 and capital
refocus model innovation
efficiency discipline

Maintain More top-management "Fit for the future": Enhanced innovation Rights issue
state-of-the-art engagement on 1.7 B€ effort
fleet significant decisions overall program
savings
Technology as enabler
for commercial New credit facilities
Selectiveness,
project screening G&A optimization opportunities
Rationalization,
‘right-sizing’,
divestments ™ Proprietary Debt refinancing
Reinforced risk Eliminate technologies
management overcapacity

™ Overall system
Ongoing strategic Balanced portfolio of Rationalize design and Focus on cash flow
review of non-core E, EPC, EPCM geographical execution management
activities activities footprint

10
Way forward: Towards improved project execution
(Saipem’s example)1/2

¾ Management process overhaul

Focus on organizational structure, leadership
and human behavior

¾ Optimized and innovative project

design and execution approaches
incl. Standardization, common industry
specifications, horizontal integration,
networking solutions

¾ Technology and business processes

innovation

¾ With Owner Companies

Cooperation – particularly pre-EPC
From prescriptive to functional specs
Balanced risk sharing
Joint innovation
… through better engineering solutions

11
Way forward: Towards improved project execution
(Saipem’s example)2/2

¾ ‘Vendor Federations’ to reduce costs, allow

easier data transfer, standardization and reuse

¾ Extensive digitalization
Focus on capitalization of Information
and Intellectual Assets
Beyond just ‘lessons learned’
Much broader networks use

¾ "Smart" Supply-chain
Extensive digitalization, Post-order management,
Material tracking solutions, training for supervision

¾ Invest in and educate ‘Top quality local

content’ for bigger EPC challenges

¾ Smart logistics
… with suppliers
… with complementary and synergistic Partners

12
 A View on
EPC
Contractual Forms

Balancing the risks

22
The optimal contractual form will depend on …

ƒ Owner’s ability to set and clearly communicate firm project goals

ƒ Firm or evolving project definition – market, internal or local influences
ƒ Owner’s desired role in the project

ƒ Owner’s key success factors

ƒ Achieve schedule ? ƒ Fast track excecution ?

ƒ Achieve cost certainty ? ƒ Achieve lowest cost ?
ƒ Optimize the project ? ƒ Value Engineering ?

ƒ The level and availability of technical and execution competences

ƒ Owner’s
ƒ Contractors’ and Suppliers’

23
No single ‘one-fits-all’ contractual solution for all situations

Project Management, Start-up

Sta and
Feasibility Studies Project Definition Engineering, Commissioning
Com
Procurement, Lease and Operate
Technology Basic Design, Construction,
Front End Maintain and Operate
Licenses Installation

ƒ Customized project and contracting solutions

EPC LSTK EPIC T&I Cost-plus Convertible Lease & Operate

Historically , approx. 70% of Saipem’s contracts

are on EPC LSTK basis

24
Main EPC contractual forms
(Among many that are possible and utilized)

x ‘Reimbursable’
The contractor is reimbursed on an hourly basis according to pre-agreed unitary pricing,
for E and PM
Mostly, no targets on man-hours used or on project schedule
All schedule and cost risk with the Owner
Occasionally, incentives to finish within a target timing, or develop a project within a
target cost
Owner carries out the P - procurement and C - subcontracting
Very typical in North America

x ‘Lump Sum Turn Key’

EPC or EPIC – I is installation in offshore parlance
Very typical in most for the world (but not in Italy)
General Contractor commits to total project price and schedule, with project delay liabilities
General Contractor responsible for the entire project EPC (within the limitations defined
by Owner)
Most project cost and schedule risk on Contractor

x Numerous variations possible

T&I – Transport and installation – in offshore, where the Owner or another contractor
performs EP and C (fabrication)
EPCM – EP lump sum, only Management for C on LS basis

x Hybrid ‘convertible’ contracts

Start on reimbursable basis, then switch to lump sum (see later)
25
Generally, Saipem believes that the EPC/EPIC approach
can offer superior performance in large projects execution
Engineering
Typical Procurement
EPC/EPIC Low Cost Local Construction/
Content Fabrication
Process Rumoulumeni
Yard

Installation/
Field Construction

I/C
C/fab
E P STANDARD
Project
Cost
Time

Integrated Project
je Management
I/C
C/Fab.
P IMPROVED
E

Time
Reduced EPIC Saved Time
Contract Duration Increases: Cost, Complexity, Risk

26
The EPC/EPIC LSTK approach
Pros:
¾ Most efficient and disciplined process
¾ Predicts final project cost and
completion time
¾ Parallel processes are possible
(Indeed essential to capture program value)
¾ Continuous improvements
(Project-to-project learning curve)
¾Easier to maximize local content and manage
risks efficiently
¾ More sustainable than best-in-class
alternatives
¾ Simple bid evaluation process
¾ Lower burden on Owner’s Team
Cons:
¾ More complex/ higher risk for E&C
Contractor
¾ Requires firm and precise excecution
of each step
¾ Does not allow project definition
changes or post-FEED optimization
¾ Price affected by uncertainties/un- definitions
¾ Long bid/evaluation/award time:
typically one year
27
Who runs the project, who is responsible for the outcome
under standard‘ Reimbursable’ and ‘Lump Sum’ Contracts?

Reimbursable Lump Sum Turn Key

ƒ Project Definition Owner Contractor

ƒ Contractor selection process Short, can be subjective Rigorous and formal, but long

ƒ Overlap between main steps Easy Difficult

ƒ Design
Owner Contractor
ƒ Leadership
Owner Contractor
ƒ Location
Owner Contractor
ƒ Project Risk
ƒ Owner’s involvement High Low

ƒ Allows design development,

flexibility, adaptation to
evolving and unpredictable ƒ Guarantees defined budget
circumstances and completion time

ƒ Little guarantee on final ƒ Requires excellent project

cost/schedule definition

28
“Convertible” contracts offer a compromise contractual
scheme increasingly attractive in today’s market

Reimbursable,
Lump Sum Turn Key
Open Book

Maintain simultaneously the main advantages of the two extreme contractual forms

Optimize risk balance between Owner and E&C Contractor

Project definition,
execution plan, cost Project
estimate implementation

FEED E P C
PROJECT EXECUTION
29
Execution Approaches

Open Book Reimbursable

Feasibility FEED EPC (PMC + several subcontracts)
Studies

Bid/Award Bid/Award Bid/Award

8-10 months
LSTK
Feasibility FEED EPC LSTK
Studies

Bid/Award Bid/Award Bid/Award

Cost/Schedule Estimates
Conversion Factors
Firm Price/Schedule
Conversion into LS
‘Convertible’ LSTK
Feasibility
FEED FEED + EPC LSTK
Studies

Bid/Award Bid/Award

30
 Saipem Convertible Contracts Experience

Just
Converted

S. Aramco Qurayyah Sea Water

Treatment S. Arabia
S.Aramco-Khurais Water Injection STAATSOLIE Maatschappij
Facilities and utilities (KUC) Projects, Saudi Arabia Suriname N.V.

Eni R&M, Deasphalting and

Hydrocrackers

Execution
ongoing
Khursaniyah Central Processing Facilities - S. Arabia

Over 10 B€ of such projects either completed, ‘converted’ or today in design

Husky Oil, Alberta, Canada
phases
Sunrise Oil Sands Projects
Central Processing Facilities
… in parallel to many other projects executed on EPC LSTK or
other bases
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Convertible Contracts - Conclusions

ƒ Significant time saving vs. traditional LSTK: almost one year

Big NPV improvement !
ƒ Proven experience on parallel projects

ƒ Fully transparent process

ƒ Owner maintains full access to all project data and prices

ƒ Balanced risk sharing between Owner and E&C Contractor

ƒ Reduced risk for Contractor, lower need for contingencies/risk premium

ƒ The process fosters a co-operative mutual relationship with

Owner’s empowered project team

ƒ Possible tailoring to Owner’s needs/constraints

ƒ The nature of this approach requires a high degree of mutual

confidence between Owner and Contractor

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The EPC marketing process

33
Increased Clients focus today

ƒ Key contractors personnel

quality

ƒ Minimal prices, high

procurement efficiency

ƒ Execution capabilities and

top level project
management

ƒ HS&E

ƒ Brownfield activities
- Revamps, upgrading
- High level O&M
34
Source: adapted from Transmar (2016)
Key Clients requirements today – from EPC contractors

A Multi-year Comparison In The Ranking Of Buying Factors

Buying Factors 2016 2013 2010 2005 2001

Qualification of Key Personnel 1 3 1 1 1

Contractor’ Price 2 7 4 5 3
Project Management Capability 3 2 3 2 2
HSE 4 1 2 N/A N/A
Procurement Capability 5 9 11 9 14
Project Control System 6 4 7 7 4
Experience with Similar Work 7 6 8 6 5
Construction Management Capability 8 5 5 3 6
Quality of Proposal 9 11 13 10 9
Responsiveness & Flexibility 10 12 14 11 10
Detailed Engineering Capability 11 8 6 4 8
Experience in Geographic Area 12 14 10 8 7
Quality of Senior Management 13 10 9 18 11
Ability to do Work in One Office 14 19 15 13 12
Size & Location of Offices 15 16 12 12 13
Conceptual Engineering Capability 16 13 17 14 16
Contractor Man-Hour Estimates 17 17 16 15 17
Capability of Sales Representatives 18 18 19 16 15
Start-up/Training Capability 19 15 18 17 18
INDUSTRY AVERAGE 8.12 7.62 7.27 6.39 6.43 35
EPC General Contractor selection process
Often long, elaborate and occasionally controversial

In most cases, the selection process will involve the following main steps:
x ‘Pre-qualification’ of qualified or acceptable contractors

- Typically, a formal pre-qualification request/evaluation process for every project, even to

known companies, to verify:
Experience
Willingness to bid and execute a given project
Availability of resources and know-how, workload status
Acceptance of key project terms and conditions, and any other requirement

- A ‘short list’ of qualified potential bidders is defined

Typically 4 to 6 – 7

A few months are normally given to Contractors to prepare the ‘Prequalification submission’

x General contractors will often cascade analogous requests for prequalification to their main
suppliers

x Issuance of EPC Request for Bids to this short list of selected / qualified General Contractors

- Includes Basic Design and FEED results

Owner’s approved or selected ‘Vendor List’
Any other requirement or condition
36
EPC bid preparation

x A very complex and very costly endeavor – an accurate offer is a critical factor of success

x Contractors have typically 6 to 10 months to prepare a complex EPC LS offer

- Acceptance of earlier FEED results
- Risk evaluation
- Price
- Schedule
- Execution plan
- Key personnel to be utilized, etc.

x The decision to bid is not automatic

‘Bid/No bid’ decision – involving the top management, for most large and risky projects

x Contractors will use complex databases with vendor information and prices
- Request specific and binding offers to key suppliers
- ‘Nominated Vendors’, ‘Nominated Subcontractors’

x In addition to expected costs and profits, there will be

- Currency and raw materials price hedging
- Contingencies for risk assumption, etc.

x Submission of EPC LS bids – typically with highly secret modalities

- Often sequentially: technical, then commercial proposal
- Very iterative process
37
EPC Contractor selection

x Often, a long ‘bid clarification’ and ‘bid tabulation’ process

Questions, meetings, …

x In most cases, the ‘lowest price’ wins, if all the other Owner’s criteria are met
adequately
…unless the price or the submitting company are not credible

x Occasionally, the Owner will re-calculate the bid prices according to a

(sometimes not publicly disclosed) evaluation matrix
Award to ‘corrected lowest price’

x Sometimes, the project is awarded on a ‘points system’

Highly controversial and potentially subjective

38
Different contractors have a variety of business models and risk acceptance

Generally:

x Most US and some smaller European contractors are not risk-prone, will
accept predominantly contracts on lower-risk ‘reimbursable’ basis only

x Some European (e.g. Saipem, Technip, …), Japanese and Korean contractors
will operate preferably on EPC LSTK or hybrid basis

x A few prefer to work only with their traditional and well known Clients

x In these difficult times, however, all operators are trying to reduce their risk
exposure (‘de-risking’) and to better balance the risk distribution with the
Owners

Accepting the right risk profile (i.e. appropriate to the project and
to the company experience) is one of the key factors of success

39