Disputes between parties in the oil and gas plants construction projects: Case study (EPC contract) and implications

The construction projects are unique in nature and each construction project has its own unique characteristics. The reason for this is that there are many variables coming from inside and outside the construction projects. Some of these variables are human factors (personal characteristics), cultural differences, development, global and local economy, geographical conditions, ground conditions, supply chain, accessibility, duration and extraordinary conditions. Even if all variables are kept constant and only the human factor, i.e. the staff working for the construction project, is changeable, it is very difficult to complete two construction projects at the same quality and at the same time. The reason for this is that the human factor is also dependent on variables such as health, attention and care. Or the supply imbalance of a material or a product that is always available causes a change in the duration of the project if it is to be delayed for some reason, such as; raw material constraint, global economy, etc. Another example is that the material that can be used instead of original one will change the quality of the project. As a result, it is impossible to construct any two of structure completely identical. Construction projects, such as; power plants, production facilities, chemical plants, nuclear power plants, oil and gas facilities are projects in which various financial institutions are included due to these projects' investment sizes, which require special engineering skills and know-how. The use of EPC contracts has gained popularity because of these factors and because it allows fixed contract price and project duration in advance. In EPC contracts, the client or proprietor notifies contractor regarding criteria and requirement schedule and the contractor is expected to carry out the related concept design, preliminary design, detail design, procurement, construction and often commissioning works. When the project is delivered to client or owner, it wants to take over it to be ready to operate. In the simplest sense, a construction project can be defined as the transformation of any product from imagination to real by the contractor to which an employer or a property owner has assigned. It is clear that the employer or the property owner must provide the best explanation for the desired product to the contractor at the bidding stage. Because the contractor determines the price requested by the employer or the property owner based on these criteria. However, due to the increasing competition in today's market, short-term bidding periods, poorly defined work scopes, uncertainties, changing standards, new technologies and the consequences of employers or property owners wanting to transfer all risks to the contractor, especially in EPC contracts, numerous disputes are seen. These disagreements and conflicts cause increasing effort spent during the project, leading to loss of productivity, delays and additional costs. For this reason, it is of great importance nowadays to overcome or minimize the possible disagreements and conflicts that may arise between the parties to provide a healthy project management. This is possible only when the issues that may lead to disagreements and conflicts are identified before the contract and when the responsibilities, scope of work, project boundaries are clearly defined as much as possible. In order to define the disputes arisen between the parties, case study method has been used and two projects executed by international oil companies and contractors have been taken as a case in the thesis study. The first project is the oil treatment plant in Southern Iraq and the second one is the natural gas conversion plant project in Southern Iraq. The oil treatment plant is constructed to separate crude oil from the water, gas, salt and other foreign matter and to prepare it for processing. On the other hand a simple cycle power plant is built with the purpose of generating electricity by burning natural gas in gas turbines. The first part of the thesis study is the introduction section. In this section, the process of determining the subject is explained, the purpose of the study is defined, and the method used in thesis study are discussed. The aims of the thesis study are summarized below: • Examination and determination of the issues causing disagreement between the parties in EPC oil and gas plant construction contracts, • Identification of deficiencies causing disputes in EPC oil and gas plant construction contracts, • Propose solutions to the shortcomings of the contract that led to the dispute in EPC oil and gas plant construction contracts, • Establishing a checklist, so that disputes, which may arise during the project, can be foreseen and necessary measures can be taken by contract administrators and/or project managers of the parties before contract signing. In the second part of the thesis study, a general overview of the EPC contracts is made in the light of literature review and history, standard contract types of the EPC, such as; FIDIC Silver Book, LOGIC, NEC, Orgalime, AIA, ICC, ENAA, IChemE etc., organizational structure and advantages and disadvantages are mentioned. In addition, strategic business association types for contractors, such; as joint venture and consortium and widely used EPC pricing methods are discussed. In the third chapter, claims, which are one of the main causes of disputes, and their reasons have been defined by using literature review. It has been seen that the claims widely arise from change, delay, time extension, cost due to time extension, work acceleration and efficiency loss. Also in this section, the notification obligation of parties and the calculation methods for additional costs and time regarding claims are mentioned. In addition, the route followed by the parties in cases where disputes cannot be resolved according to the contract procedures between the parties and the commissions assigned by parties to resolve disputes are defined. Lastly, conflict factors and conflict management process are addressed. In the fourth part of the thesis study, the phases of the oil and gas plant projects from concept design to delivery, specialties of these projects and distinctions from the other projects are indicated. In addition, the relationship between governments and stakeholders and the other parties is described for these types of projects. Finally, the disputes that have arisen during the case studies / projects are explained in detail. As one of the participants who assigned for the case studies / projects, letters written by parties with regard to disputes, change and cost registers and meeting notes have been obtained and used for describing of disputes arisen between the parties. The fifth part of the thesis study is the conclusion section. In this section, the disputes arisen in the case studies / projects are divided into the following categories: • Contract clauses and scope of work • Design documents and technical issues • Expectation of parties • Risk sharing When comparing the numbers of disputes under these categories, it is seen that the disputes appeared mostly in the categories of design documents and technical issues. Expectation of parties, contract clauses and scope of work and risk sharing are the following categories respectively based on dispute numbers. Finally, in the fifth chapter of the thesis study, suggestions are developed to prevent or to reduce disputes in EPC oil and gas construction contracts as well. In addition, a guide is prepared for project managers, coordinators and contract managers, and added to the suggestion section. The findings indicate that the following issues should be examined thoroughly by the parties before signing the contract: • Employer or owner requirements and performance criteria, • International design norms and standards that will form the basis for technical requirements, • Performance obligation in case of employer instruction, • Value engineering, • Assigned suppliers, vendors and subcontractors, • Order of precedence of contract documents, • Geographical boundaries of project, • Scope of work, • Handover of the site and determined starting date of the project, • Definitions, • Change management procedure, • Claim management procedure, • Submittals and document management procedure, • Inspection procedure, • Schedule, • Contract law and dispute resolution procedure, • Specific conditions which are not common in the industry, • Unit price definitions, • Performance award for contractor (e.g. in case of early completion), • Risk sharing. In the light of thesis study, above issues need to be clarified as clearly as possible in the contract and, if necessary, changes should be made.