In the current days of low commodity prices, operators and contractors are suffering – be it in Oil & Gas, mining, and energy in general. I hear a lot about the need to redefine the contractual setup, and the wish for operators to transfer more risk to the contractors.
Let’s be clear. Risk transfer is tactical. It’s not a sustainable solution. You can transfer more risk to the other party, but if that’s systematic and if it’s not priced in, this solution will sooner or later lead to the disappearance of that party.
Transferring risks sustainably to another party only makes sense if the other party is better geared to manage that risk, in terms of competencies or capability.
What operators in the commodity markets need right now:
- projects that cost less,
- and which outcome is more reliable in terms of cost and schedule.
Lowering excessive specifications and being more clever in terms of standardization to seek gains from series effects are key for the first point. More effective project execution practices and less complexity in execution are the levers for the second point – and there is a lot of knowledge now in the industry to make it successful, because project governance and management practices are still sometimes poor.
The contractual setup between operator and contractor is essential, but on the long term it should be geared towards these two objectives rather on the short term tactical risk transfer. This also means that operators need to have an industrial policy where they develop contractors that can meet their expectations in terms of capabilities and develop long term relationships that allow to fully deploy series effects over several large projects.
Risk transfer is short term and tactical. Lowering the cost by developing a proper contracting landscape is the sustainable solution to commodity projects’ woes.
