Beyond Engineering: EPC Lessons learnt from a Lenders' Technical and Environmental Advisor
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This document discusses lessons learned from a lender's technical advisor perspective on engineering projects. It contains the following key points: 1) Pre-EPC due diligence is important to identify technology, design, execution, and contractual risks and ensure realistic cost benchmarking and mitigation plans. Interfaces and reliance on third parties also require assessment. 2) During construction, regular independent monitoring can help assess contractor and sponsor performance while representing lender interests. Performance testing at completion is crucial. 3) Common risks include contracting strategy, interface management, technology integration, environmental/social compliance, and testing regimes. Thorough planning, transparency, and applying mitigation measures are important to reduce risks.
Beyond Engineering: EPC Lessons learnt from a Lenders' Technical and Environmental Advisor
- 1. Beyond Engineering: Lessons learnt from a Lenders’ Technical Advisor European Contractors’ Conference 103rd Conference - Paris, France May 26th 2016 Sailesh Patel
- 2. Presentation Objectives • Bridge Financing, Engineering, and Project Execution.. for mutual benefit • Identify, mitigate, and reduce Project stakeholders’ risks during development, implementation, and execution (whether financed or not) • Understand and relate Project technical risks from a Lender perspective 1
- 3. Introducing BlueTech Advisors • Investor-oriented technical and environmental riskadvisory, launched Mar ‘16 • Cover Process and Power projects, includingrenewables • Chris Sanderson • 40 years experience: 25 in PF, advised on over $200 bn in project capital value inc.,but not limited to, all Qatari LNG, APLNG, Ichthys LNG, Cameron LNG, Mozambique LNG, numerousLNG terminals and Regasification, Refineryexpansion, Pipelines inc Nord Stream, etc • SaileshPatel • 15 years experience: 5 in PF, advised nearly $30 bn in PF capital value inc. Cameron LNG Expansion, Nord Stream, Barzan Gas, YemenLNG, refineryupgrades,LNG and gas to power, and petchem • Experienced Associates • bluetechadvisors.com 2
- 4. Lenders’ Technical Advisor role • Help Lenders (and effectively, Sponsors) identify and mitigate ‘material’ investment risks. i.e. gaps against Lender requirements and expectations • Pre-EPC Due Diligence -> FEED/FEL, contractexecution, and early works • EPC Construction Monitoring -> Project execution • Project (Lenders’) Completion Support -> Lenders’ Test etc, outside EPC scope • Operations Monitoring -> outside EPC scope • Interface with Lenders’ other advisors (typically Financial, Insurance, Shipping, and Legal) during financing process • NOT an Engineering Advisor or Auditor! 3 • Engaged during financing, through construction and operations up to Lender exit
- 5. Pre-EPC Due Diligence objectives • To achieve Lenders’ financing requirements, considers: • Technology, engineering and design – identify use of untried / untested and assess risk exposure • Third party interfaces - feed supply, utilities, Contractor and product offtake • Execution and construction strategy • Geography and logistics • Commercial and contractual gaps – EPC, Licensing, PMC, SPAs, OMAs • Permitting, regulatory and fiscal requirements • Environmental and social impacts • Operations strategy • Performance • Schedules and Economics – inc. benchmarking • Financial Model – EPC drawdown, sensitivities, O&M costs • Objective is to identify and differentiate between typical, normal industry risks and project specific risks 4
- 6. Pre-EPC lessons learnt (1/2) • Technology and design risks are understood EPC Risk: frequently technologies considered ‘low risk’ within overall execution strategy, technology risks inadequately recognised EPC Mitigation: technology risks assessed, risk mitigations demonstrated (e.g. comparable design and operating references), implementation risks assessed for cost, schedule, reliance on third-party workload and quality • Execution and contracting strategywith responsibilities and possible cost and schedule overruns recognised EPC Risk: over-optimistic client requirements, forecasting, and contract commitment, esp. in downturn environment (though applies also in upturn) EPC Mitigation: recognise potential skills and resourcing shortages, possible impact of dependence on subcontractors similarly affected by downturn/upturn;project site conditions and logistics may require social management and engagement, timely permit issue; realistic cost benchmarking EPC Risk: shortage of capable contractors and skills shortage with all too obvious results of poor design, increasing cost and extended schedules EPC Mitigation: resourcing plan demonstrated, impact and reliance on local requirements assessed, including interfaces and possible impacts due to other projects both locally and internationally (e.g. yard and transport requirements) 5
- 7. Pre-EPC lessons learnt (2/2) • Operations and maintenance ability to achieve the expected performance to budget EPC Risk: Performance tests requirements may be morestringent dueto Sponsors’ Project financing requirements (no step-away or deemed rights) EPC Mitigation: Identify, negotiate, and ensure performance risks and dependencies adequately ring-fenced (e.g. may rely on key supplier and/or subcontractor whose penalties are outweighed by EPC) 6
- 8. EPC Construction Monitoring • Regular Independent Monitoring • Site visits, meetings, and Lender reporting • Assessment of contractor and sponsor performance with emphasis on adding value to Sponsor while representing Lenders’ interests and compliance requirements • Performance testing assessment at construction completion • Lenders’ completion certification (within EPC-scope for Power, outside for Process) 7
- 9. EPC lessons learnt (1/3) • Contracting strategy, management ofmultiple contractors and management of interfaces EPCRisk: contractingstrategyexposesprojectto conflicts ofinterest duringproject execution, shortcomings in designand execution,PMC over-stretched,EPCmay riskloss ofanyfinancial incentive. Too often PMTManagementdoesnotget involvedon thegroundand believes whatit is told leadingto unexpected design changes,schedulefailureand costs overrun. EPCMitigation:Reviewteams to suit each stageoftheProject;starter,completer,finisher capabilities all requiredifferentskillsand experiencemix,and organisationalchangemanagement.Project teamsshould always includedsomeoftheclientsintendedoperationsteamfromdesignstages onwards. • Interfaces and dependence onthird parties including the integration between any upstream developments, exportand offtake EPCRisk: relianceon third-party in order toperformcommissioningand performancetests EPCMitigation:incorporatecontractualsafeguards,manageand incentivisethird-parties,identify dependencies and alternatives EPCRisk: interfacemanagement – relianceandresponsibility;consequences forE,P,C EPCMitigation:developproject interfaceand stakeholder management plan;technical interfacesshould recogniseresponsibilities,handover,and consequentialadverseeffects andliabilities Shouldberigorous matrices prepared detailingactiontimingand responsibility. Failuretounderstand Environment, Constructionand OperationalPermit requirementsand obligationsfrequentlycausedelayand additional cost – rigorous control required. 8
- 10. EPC lessons learnt (2/3) • The technologies to be applied and their integration into a successful operation EPC Risk: supplied technology does not meet schedule, cost, or performance requirements EPC Mitigation: incorporate and integrate technology supplier into project execution, monitor supplier; develop early agreement (and walk away right) during pre-award so that schedule can be met; early engagement with ECA if contingent for supplier • Environmental and social compliance EPC Risk: environmental and social management does not meet Lenders’ holistic requirements, or international standards (even where local met) EPC Mitigation: implement management and culturefrom pre-award, with accountability independent from other project management objectives • Operations and maintenance philosophy, resourcing and training EPC Risk: EPC requirement to support owner during initial operations EPC Mitigation: develop plan with owner during early development,provide flexibility through contract options 9
- 11. EPC lessons learnt (3/3) • EPC Completion testing regime EPC Risk: resourcing and readiness for performance tests, requires owner acceptance, usually more rigorous due to PF EPC Mitigation: experienced commissioning team, contract should require appropriate technical demonstration • Achievements should be demonstrated EPC Risk: reporting does not reflect real progress, shortcomings not recognised, potential material execution impact EPC Mitigation: recognise different project cultures, embed transparency between achievements, on-site management, reporting and resolution • Health and Safety EPC Risk: No lender or finance body wants to be associated with an unsafely implemented project. Too many cases known where PMT EHS policies inadequately observed and applied. EPC Mitigation: recognise requirements and rigorously apply and record. Ensure “Stop Work” policy exists and is made mandatory part of every employees obligations – management must listen to the peopleon the ground. 10
- 12. Final Takeaways • Identify and differentiate between typical, normal industry risks and project specific risks • Are the risks material to EPC success (and contractual obligations), and do required mitigation measures address the risk • In a live project with advancing timescale, are mitigations workable and compatible with Sponsors’ reporting and resolution requirements • Demonstrate that risks have been identified and can be mitigated • EPC Should ensure realistic schedules and costings and ensure PMT is appropriately organised and managed for the stages of the project execution. No one solution for all cases. 11
- 13. Thank You