Norwegian Continental Shelf – A New Dawn for EPC Alliance Contracts?
Simonsen Vogt Wiig Press
Following the collapse of oil prices – from their peak of an average of $112 per barrel in 2012 to their lowest point of $28 per barrel in 2015/2016 – a significant number of developments became commercially unviable. During the lowest period, oil prices were substantially lower than the breakeven price of most new developments. With the subsequent recovery and stabilisation of oil prices to above $50 per barrel, an increasing number of oil companies on the Norwegian Continental Shelf (NCS) are looking for new ways to advance these developments by cooperating with contractors. Some oil companies have entered into agreements with contractors, under which alternative solutions to regulate the economic effects of oil projects have been introduced, such as: cash-flow management; open-book management; integrated project organisation; and target pricing.
Some oil companies are looking for a stronger commitment from their suppliers and have introduced a cooperation scheme whereby the parties share a greater portion of the risk for profit or loss under the contract.
This type of cooperation is not new. Over the years, various alternatives relating to such cooperation have arisen under different names – ranging from loose cooperation arrangements to fully-fledged alliance or partnering contracts. An 'alliance' is understood to mean cooperation at any level, whereby the parties agree to share risk and reward without creating a joint venture or a single entity. This update will take a closer look at some of the challenges that may arise from such contractual structures with regard to NCS projects.
As a starting point, it is notable that the production licences awarded pursuant to the Petroleum Act 1996 require licensees to enter into a contract for goods and services subject to Norwegian law and contract traditions when such contracts or activities concern or arise from NCS licences. Licensees and their contractors may select a conflict resolution mechanism other than one recognised by the Norwegian courts under Norwegian law, including international expert determination or arbitration.
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