Understanding Energy | Explaining the contracting process

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EXXON’s development plan for its Payara oil field is currently under review and waiting for final approval from the Department of Energy. The department is bringing in outside experts, in collaboration with the World Bank, to help conduct a thorough review, with approval expected sometime in early 2020.

While the development is in its planning stage, the first contracts have been signed for some of the major elements of Guyana’s largest oil project to date. Exxon has signed new contracts with Saipem and SBM in the past few weeks for Payara, which will be the third major project in the offshore Stabroek block.

The timing of these contract awards is hardly unusual in such complex engineering projects. In fact, to wait longer could result in huge cost overruns and lengthy delays. Deepwater offshore oil development, to be done safely and efficiently, requires significant time and preparation to put into place the necessary infrastructure. Careful, long term coordination between multiple parties is essential.

During the review process, most companies begin to lock in key contractors, suppliers, technical, environmental and safety experts so that they are in place when approvals do come through. This preparation is critical, as the alternative would mean costly lulls in activity that could delay creating new jobs and economic opportunities for local companies while stifling investment.

Signing contracts early in order to keep costs down ensures everything is in place for development in the long term. This also keeps the costs down for its partners, including host countries like Guyana.

The companies that Exxon is currently signing agreements with are Tier 1 contractors– like Saipem and SBM– who provide highly sophisticated and expensive systems that need years of lead-time for planning, design and construction.

These independent companies play vital and highly specialized roles in the industry. SBM, for instance, designs and engineers floating production storage and offloading (FPSO) vessels around the world. A longstanding partner of Exxon around the world, SBM designed the Liza Destiny, which will be the ship producing Guyana’s first oil from the Liza Phase 1 project. SBM also designed the Liza Unity, which will produce oil from Liza Phase 2 when it completes construction.

The latest contract for SBM is a standard example of the kind of work that needs to be done in the early stages of development.

This deal was a “Front-End Engineering and Design” contract for the Liza Prosperity, the FPSO that would be deployed to Payara after approval is granted. This process of design and engineering takes multiple years, with long gaps between preparation and actual production.

These kinds of early stage contracts normally include provisions restricting the contracted companies to some form of “limited activities” in advance of final approvals. This allows them to prepare without racking up exorbitant costs, just in case an issue arises with the approval process. These are normally areas like supply procurement or design that require advance notice, bidding processes, and extra time.

For its part, Saipem will be handling most of the underwater systems installed on the seafloor that will “include 130 km of flow-lines, risers, associated terminations and jumpers together with the installation of manifolds, flexible risers, dynamic and static umbilical, and flying leads,” according to reports.

The signing of these contracts is likely a good thing for Guyana’s path to oil production. Exxon estimates that Guyana will be producing more than half a million barrels per day by 2025 and Payara will account for more than a third of that.

Bringing in third parties to review plans, train regulators, and apply the lessons learned on Liza Phase 1 and Liza Phase 2 is a natural step forward in managing our oil industry.
But it’s equally crucial that responsible development proceed as far as it can while those reviews are being finalized. When and if final approval is given, everything will be in place to keep Guyana’s oil industry moving forward.