From improving cost transparency and efficiencies to navigating complicated regulations related to foreign investment, health and safety, and environmental protection rules, the oil and gas industry faces unique complexities within its contracts directly tied to their success. And while crude oil prices have come up since the lows of early 2016, with values still middling, effective contract management has become an increasingly significant means for oil and gas companies to control costs and improve profitability.
Trends within the industry only add to the importance of effective contract management: for example, a shift away from production sharing contracts and towards service level agreements to govern relationships with foreign governments and other players within the energy sector adds new considerations and opportunities to oil and gas contract management.
That the industry is heavily reliant on third-party suppliers for key services and equipment further underpins the importance of effective contract management in overall company performance. Though contract negotiation will dictate terms and pricing of vendor arrangements, it’s the implementation of these contracts that ultimately determines their value and results.
Here are three keys to successful contract implementation within the oil and gas sectors.
1. Have a clear chain of command
While it’s never a good idea to file away a new contract without a concrete plan for implementing it, the complexity and risk of the oil and gas sector increase the importance of having a clear chain of command to which to hand off contracts post-execution. For each of the terms outlined within your contracts, determine what actions will be involved in successful implementation and who is responsible for fulfilling and/or monitoring each item.
These actions and responsibilities required under your contracts may not be unique to each new agreement signed. You will likely find that certain types of agreements—for example, vendor agreements with equipment suppliers—may have commonalities. In turn, these commonalities allow you to develop consistent processes or chains of command that can be implemented in a similar fashion, with tasks assigned to same individuals or teams, each time you sign a new agreement. In these cases, you can reduce the amount of manual work in your implementation plans by using templates to build this information into your contract metadata. But regardless of whether a contract fits the standard process, or is uniquely complex in some other way, it’s important to ensure that roles and next steps are clearly defined.
2. Take a proactive approach to reduce risk
Even leading oil and gas companies and their providers can fail to hit performance goals – a prospect that can be costly to all parties. But in order to minimize the fallout of under-delivering, it’s important to establish an early warning system which allows problems and risks to be identified early and fixed as quickly as possible. Within the oil and gas sector, there are numerous key performance indicators which may tell a helpful story throughout the contract lifecycle about its health. These can include:
- Financial metrics such as research and development costs, operating expenses, maintenance costs and lease-related expenses
- Health, safety, and environmental factors
- Strategic metrics such as market share in basin and quality of access
While the specific metrics you track may vary, it’s helpful to create a contract scorecard to utilize from the time of implementation. Your scorecard should include both the metrics you wish to track as well as indicator values to help you determine whether a contract is performing as expected, is at early risk of under-delivering, is already under-delivering, or is performing better than expected. Your scorecard is not complete without a measurement plan, indicating which metrics need to be looked at, when and by whom. Contract management software can help you automate this last step with reporting and notification features to ensure that those responsible never miss a milestone.
3. Ensure your contracts deliver to their fullest capacity with a plan to identify value leakage and risks
Value leakage – the loss of value that occurs during the lifespan of a contract – is a common source of unrealized returns. For example, your service level agreements (SLAs) might include penalties to your provider in the event of equipment failure. But the onus may be on you to claim those benefits should those circumstances arise; if you fail to do so, this would be a source of value leakage within your contract. But tracking every potential source of value erosion within a contract is a hefty manual task. Fortunately, contract management software can help – once you’ve identified areas to which you’d like to pay close attention, you can set up reports and automated notifications to remind you of the potential sources of value leakage related to each different contract.
How can you tell which parts of your contract may be the most likely to leak value? One good tactic is to have a strategy in place for evaluating past agreements for performance, comparing your projections to actual results and identifying potential areas on which to focus your monitoring. There’s a good chance that as you evaluate your previous agreements, certain trends about common sources of value loss will reveal themselves. As you spot these common areas, you can develop a strategy for flagging potential leakage and other contractual risks at the outset, so that can pay closer attention to them as you implement your agreement.