Recent innovative concepts in offshore contracting have seen the industry move more positively in the direction of partnering and alliancing type agreements. In order to understand why this development has come about, it is necessary to examine the present climate in the oil business.

The first UK North Sea exploration licence was issued nearly thirty years ago. The sector has now reached maturity, but this does not mean that a decline in crude oil output will begin. In fact, the end of last year saw oil production moving up towards new record levels. Providing opportunities are taken, as much oil can be extracted in the future as has been produced so far. The overall climate, however, cal Is for a completely new approach and culture due to a number of reasons.

The global oil industry is confronted by the very real prospect that crude oil prices are likely to remain low for the next two or three years. After that, the level will rise only in line with inflation. With this and the current recession in mind, emphasis is on the need to reduce costs in the UK sector of the North Sea if it is to stay competitive.

Failure to take action could see companies spending more in other areas and less in the UK sectors. The UK North Sea industry now faces a critical period and needs to examine its way of doing business.
Over the past eighteen months, the major operators and contractors have met and produced 'CRINE' (Cost Reduction In the New Era). This initiative is intended to ensure that the sector remains competitive and attracts new investment. If the sector is to continue to exploit the oil in the UK North Sea, costs must be reduced dramatically in both the development and operational phases.

Some companies have already made much progress, but the real improvement will depend on an overall industry application. There is a limit to what companies can do on their own and this is why a new culture is required. Groups that previously had an adversarial stance towards each other must now cooperate and take advantage of each other's experience and expertise.

The first CRINE target is to reduce costs in the development sector by up to 30% in the next few years. The industry must eliminate as much red tape as possible in order to promote greater efficiency. thereby leading to the development of more fields and projects which hitherto may not have been viable.

With this in mind, major steps have recently been taken by a number of oil majors, together with key contractors, to establish and promote partnering and alliance type contracts.

PARTNERING

Partnering is a contracting strategy ideally suited to support the operations of producing fields and can be defined as 'a long term commitment between two or more organisations for the purpose of achieving specific business objectives'. The relationship in a partnering agreement is based upon a high degree of openness, trust and co-operation between the parties.

It is worth noting that it is generally not the intent to create a partnership or other legal entity between the parties and the agreements are not to be construed as creating such a relationship, or constituting either party as a partner of the other.

There are many different interpretations as to what constitutes a partnering agreement. They can range from a close working relationship over a number of years between operator and contractor, but which is still based upon the traditional form of contracting, to a more novel arrangement whereby work packs are established, budgets set and savings on target costs are for the benefit of both operator and contractor.

The latter form of partnering agreements are normally overseen by a management board, which consists of members of both the operator 5 and contractor's senior management. with a chairman or casting vote usually being held by the operator. This board will support, monitor and direct the project team. The decision of the management board is binding on both parties.

Whatever style or form of partnering agreement adopted, the common goal is to create a programme of improved efficiency through the creation of a relationship and work processes which encourage teamwork, improve efficiency, allow the development of new products and ensure long term survival.

The benefits of a partnering agreement to the operator can be measured in terms of the following:

• reduction in overheads due to the fact that policing or monitoring of the contractor is no longer required
• it gives the operator the opportunity to concentrate on its core business
• less likelihood of contention, which in itself has a significant cost saving
• it leads to savings due to the flexibility of contractors' scheduling (ie: mobilisations / demobilisations).

The benefits to the contractor are:
• a long term commitment, thereby giving security and stability of work force
• ability to plan capital expenditure
• removal of contention which allows the contractors' project team to concentrate on finding the best solutions to the workscope, rather than pursuing claims.
• an ability to improve profit margins, without adversely affecting the quality of work

ALLIANCING

Alliancing is a contracting strategy well suited to the development phase of operations. It is created only for a specific project and is disbanded on completion of that project. The basis of this strategy is founded on the principle of contracting work to those who have greater experience and expertise than the operator in any particular area and retaining work which the operator is better qualified to perform. The consequence is that the operator's project team size is reduced and greater responsibility and accountability is placed with the contractors.

Alliancing contracts, like partnering agreements, vary in style and construction, but a typical client / contractor alliance would consist of the operator and contractor or contractors forming an integrated project team that may or may not all share the same offices, depending on the type of work being carried out. At the outset of the project, a development target cost would be established and agreed by all the participants and a risk/reward mechanism established, such that if the final cost is less than the target cost, the savings are shared on an agreed percentage basis between the operator and contractor or contractors. Conversely, if the target cost is exceeded, then the overrun is shared by all parties.

There are a number of alliance agreements presently in existence relating to North Sea development projects and the participants include contractors from all phases of the work including design, engineering, fabrication, topside installation, hook-up, subsea construction and commissioning.

The success of an alliancing agreement will obviously be dependent on the successful interface between the various contractors and their ability to work together as a team. It is important that the team integrates at an early stage and the individual members are made aware of their contribution to the project and how this aligns with the project goal.
The aim of the alliance can be summarised as being to:

• provide the mechanism and opportunity for the operator and all selected contractors to gain financially, due to the applied team approach
• promote common objectives and commitment in alliance members
• maximise the contractor's /supplier's responsibility and accountability in their areas of expertise
• ensure an integration of client/contractor team members to maximise interfaces and to develop alliance relationships.
• where appropriate, maximise the use of existing company contracts and standard forms of contract.
• maximise the use of industry specifications and standards and standard products.

Although in its infancy, I believe that there is sufficient commitment being demonstrated by both oil majors and contractors to ensure that partnering and alliancing are here to stay and that the targets set by the CRINE initiative will in fact be met.