The oil and gas industry is volatile. It’s always in a state of constant flux as a result of continuous boom-and-bust cycles, the complex and capital-intensive nature of operations, ever-changing international regulations, and the increasing demand for cleaner energy.
Coupling these factors with the large number of stakeholders involved—including operators, suppliers, refiners, processors, and retailers—makes it imperative to manage the contracts in a robust manner to improve savings, maximize profitability, and mitigate the risks.
Karthik Siva Kumar is a project and contract management professional with a decade of experience with top multinational corporations in the oil and gas and construction industries. We had an opportunity to talk with Karthik about the contract management challenges in the oil and gas sector and how contract managers can overcome them.
An overview of contract management in the oil and gas sector
Contract management is complex in the oil and gas industry—notably in the upstream sector, because most of the contracts vary greatly based on the nature of the projects. In onshore projects, companies prefer to sign master service agreements (MSAs) or frame agreements (FAs) with their suppliers. These MSAs or FAs are usually evergreen; i.e., they renew automatically until they’re terminated.
Offshore projects have more complicated contracts characterized by more extended periods and a higher lifetime value. In both cases, contract managers must ensure that the terms of their MSAs are up to date. Companies are increasingly adopting performance-based MSAs to improve their return on investment, but that also further complicates their contracts in this process.
Most oil and gas industry contracts are turnkey engineering, procurement, and construction contracts. In these types of contracts, the prices are fixed for a lump sum, and the terms and contingencies are considered beforehand.
The typical roles of a contract manager in the contract life cycle management of an oil and gas sector project are defined in the table.
Some key challenges of contract managers in the oil and gas sector
"Manual contract management processes are insufficient to meet the growing complex demands of the oil and gas industry. They are inefficient, time-consuming, and prone to errors," Karthik concedes. He cites the key challenges for contract managers in the oil and gas sector below.
Given the complexities involved in the industry, drafting a contract is time-consuming and effort-intensive. Keeping in mind the number of other parties involved, myriad regulations, and internal stakeholders, contract authors must ensure that contract terms explicitly cover all commercial and risk aspects.
The negotiation process in the oil and gas industry involves multiple stakeholders, each with their own complex demands. For successful negotiations, contract managers need to consider the interests of all parties while also upholding corporate and industry standards.
Manual contracting processes provide limited visibility to contracting activities for organization members outside of the legal function. This challenge is starkly evident in large organizations where there is no digital platform that enables cross-functional collaborations, especially in resolving the qualifications or deviation requests of vendors and subcontractors before awarding purchase orders or work contracts.
Complying with the frequent changes in domestic and international regulations is a daunting task in the oil and gas industry. With a plethora of contracts that get signed, contract managers need to ensure that the clauses, terms, and conditions of all contracts—both new and existing—comply with the regulations in their current form.
Tracking activities and managing obligations
Traditional contract management processes make it arduous to track and monitor obligations, progress, key dates, and payment milestones. Missing out on obligations exposes organizations to risks of litigation, financial losses, and reputational damage.
In most engineering, procurement, and construction (EPC) contracts, there will be project-specific pass-down obligations to be addressed by the vendors and subcontractors. Tracking these requirements and obligations in an EPC contract, from ensuring their compliance to incorporating provisions—either as a part of the subcontract itself or in the special terms and conditions of the respective purchase orders or work contract—is a mandatory obligation for the contractor under the EPC contract terms.
Why a CLM solution will help in the oil and gas sector
"In today's volatile business landscape, it is difficult for an organization to function in the oil and gas sector without a CLM, irrespective of its size. Ensuring compliance and mitigating risks are the primary reasons," Karthik says.
A CLM solution solves most of the pain points experienced while managing contracts in such a regulated industry like oil and gas. It simplifies contract creation with pre-defined templates. It compiles business documents into a centralized repository, providing visibility to all stakeholders involved. Automation makes standardization easier to enforce, resulting in streamlined contract lifecycle, improved compliance, and reduced risks.
As businesses struggle to find their footing in this volatile business landscape, a contract management solution has become an indispensable necessity. Read our blog on contract management challenges in legal operations to learn more. If you're looking for an end-to-end contract management solution for your organization, sign up for a free demo of Zoho Contracts.