Signing contracts ahead of development approvals minimise cost overruns and lengthy delays

SBM Offshore has signed a contract with ExxonMobil Guyana for the design phase of the FPSO Prosperity, pending government approvals for the Payara Development Project. Saipem has also signed a subsea contract for the start of limited activities for this project.

The signing of contracts with ExxonMobil contractors including Saipem and SBM Offshore for works related to the Payara development prior to final government approval is not unusual since such works require lengthy lead times for planning, design and construction.

So says the latest installment of the ‘Understanding Energy’ column published in a section of the Guyanese press on Sunday.

The development plan for Payara is currently under review and awaiting 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,” the column stated.

Reports in sections of the local media have said that development of the project in terms of engaging contractors was ongoing despite no final approval from government and that this was unconventional.

But according to the Understanding Energy column, “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.”

It is in this regard that SBM Offshore was recently awarded a contract by ExxonMobil Guyana to perform Front End Engineering and Design (FEED) for the Floating Production, Storage and Offloading vessel (FPSO) for the Payara development project. Saipem was also awarded a contract for the proposed Payara Development that would allow the start of limited activities, namely detailed engineering and procurement before the necessary government approvals and project sanction occur.

The column stated, “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.”

The column explained that 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” noting that 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.”

According to the column, companies that Exxon is currently signing agreements with are prime contractors like Saipem and SBM, “who provide highly sophisticated and expensive systems that need years of lead-time for planning, design and construction.”

The 220,000 barrels per day Payara Development Project is expected to come on stream by 2023, closely following the Liza Phase 1 and 2 developments at the 6.6 million acres Stabroek Block.