Print View

Your printed page will look something like this.

https://www.interface-consulting.com/lng-plant-construction-contract-dispute/

LNG Plant Construction Contract Dispute

The following is an excerpt from an Interface Consulting work product issued for use in litigation, arbitration, or mediation (dispute resolution). Names, dates, and other information has been modified for client confidentiality purposes.

 

Ray Interface Engineering v. Saudi LNG Company

London Court of International Arbitration

1. Introduction

1.1. Contract and Project Background

1.1.1.  Saudi LNG Company Ltd. (SLNG) was the developer of an LNG facility in Saudi at Balhaf on the Gulf of Aden coast. SLNG is comprised of several companies including the following....

1.1.4.  The LNG facility was scheduled to be ready to receive gas in December 2008. As part of this endeavor, SLNG was also adapting and modifying three (3) cryogenic gas processing plants and constructing one (1) new cryogenic gas processing plant, also known as the upstream portion of the project (project). The following graphic summarizes the relationship among the parties.

 

Relationship Among the Parties

 

1.1.6.  As part of this overall project, SLNG entered into an Engineering Services Contract (ESC or contract) with Ray Interface Engineering Company (RIE). The contract had an effective date of....RIE’s work consisted of two (2) phases: Phase I related to the modifications of three (3) existing cryogenic plants, two (2) existing plants located at the Kline Production Unit (KPU), and one (1) existing plant at the Aro Central Production Unit (CPU). Phase II consisted of the work related to the front end engineering, procurement, and construction of a new cryogenic plant at the CPU facility.

1.1.8.  Initially, Hill Oil was administering the SLNG/RIE contract....

1.3. SLNG’s Termination of RIE’s Contract

1.3.1.  The project did not go as planned. There were delays and increased costs due to various reasons that will be discussed....SLNG became increasingly disgruntled with the progress of the project and solicited the assistance of Arsenal Corporation (Arsenal) to aid in completion of the project. Sometime in late 2007 or early 2008, SLNG solicited a proposal from Arsenal for additional engineering support on the project. Arsenal submitted its proposal on....

1.3.10. The following timeline illustrates the timing of the key events associated with the issue of contract termination.

 

Timeline of Events – SLNG’s Termination of RIE’s Contract

 

1.4. The Dispute

1.4.1.  At the time of termination, RIE was not in “substantial breach” of the contract, and, therefore, there was no legal ground for terminating the contract. In addition...,

1.4.3. SLNG filed its Answer and Notice of Counterclaims on 24 July 2009. SLNG states that it properly exercised its rights and terminated RIE from the project after a lengthy period during which SLNG attempted to work toward....

 

2. Discussion of the Issues

2.1 Project Management

2.1.1.  SLNG’s management of the project resulted in delays and cost overruns. We will discuss how SLNG’s actions and inactions negatively impacted the project, such as the lack of site-specific information and SLNG’s direction of RIE’s work, including excessive changes, which resulted in additional costs and schedule delays....

2.2. Project Information Transfer

2.2.1.  RIE and Hill Oil representatives traveled to the SLNG CPU and KPU plants in late…for an initial preliminary site visit….RIE did conduct the initial preliminary site visit....

2.2.5.  Interface Consulting understand that, shortly after the site visit, a dispute arose between SLNG and FEPOC. Documents produced in this arbitration by SLNG have shown that....

2.2.7.  SLNG indicates in its monthly reports…that the lack of responses/information from FEPOC is impacting the costs and schedule of the project. The following illustration from SLNG’s monthly reports outlines the lack of communication between SLNG and FEPOC and the effect SLNG acknowledged that the dispute was having on the costs and schedule of the project.

 

SLNG Monthly Reports: July 2006 through October 2007 Part 1

Source: …

 

SLNG Monthly Reports: July 2006 through October 2007 Part 2

Source: …

 

2.2.9.  The dispute between SLNG and FEPOC was not resolved until…,which then allowed communication and cooperation between SLNG and FEPOC to begin. RIE did not have the information it needed to perform its engineering work until….

2.2.12. Due to a lack of SLNG/FEPOC support, RIE was forced to make certain assumptions relating to the actual site information....Based on SLNG’s monthly reports, it is evident that SLNG had knowledge of this fact and agreed with RIE’s efforts to progress its work by leaving gaps and “holds” in its work due to lack of tie-in and existing site conditions. It was not until late 2007 and into early 2008 that RIE could verify the site data and received the critical technical responses from FEPOC….The following timeline illustrates the time periods and events relating to the lack of information that SLNG was receiving from FEPOC.

 

Timeline of Events – Lack of Information to RIE

 

2.3. SLNG’s Actions and Inactions on the Project

2.3.1.  SLNG’s Changes to the Design

2.3.1.3. It appears from the documentation examined and research that SLNG was heavily involved in RIE’s engineering and design, well beyond....

2.3.1.6. It appears that SLNG made a number of changes to the P&IDs after the HAZOP study was completed. RIE was then required to implement SLNG’s changes and conduct another HAZOP study, which increased RIE’s costs and....

2.3.2.  Glycol Dehydration System

2.3.2.6. Under SLNG’s administration of the contract, the process of approving SGR’s engineering took much longer than expected, as SLNG engaged in an 18-month-long process of changes to SGR’s engineering and drawings. The following table illustrates the various drawing revisions that SLNG made to the glycol dehydration system.... The level of changes presented in the following table is similar to the extensive changes and delays caused by SLNG on other systems.

 

SLNG Directed Revisions to SGR’s Glycol Dehydration System
Drawing No. 0706

 

2.3.2.9.The excessive SLNG comments resulted in SGR’s Glycol Dehydration System drawing being revised.... Common types of changes included the addition of numerous relief valves, modifications to design conditions, changes to instruments (alarms/indicator/switches), additions or changes to access manways, and piping changes.

2.3.3.  Glycol Dehydration Drain System

2.3.3.1. The glycol dehydration unit also required a drain and sump system. SLNG instructed RIE to model the drain system from a drawing created by....The following is a list of revisions that Drawing No. 1301 went through after SLNG/Butler became involved in the project.


Revisions to Glycol Dehydration Drain System
RIE Drawing No. 1301 (CD/97A)

 

2.3.3.4. Furthermore, what may appear as a relatively simple change to a P&ID, such as adding a relief valve, had a cascading effect on other RIE documents and drawings....

2.3.4.  SLNG’s Complicated Equipment Procurement Requirements

2.3.4.1. RIE had multiple problems with SLNG when it came to the bidding of the equipment for the project. During the project, RIE experienced poor and sometimes nonexistent vendor responses on bids due to....

2.3.5.  SLNG’s Two-Part Equipment Procurement Process Requirement

2.3.5.5. In February 2007, SLNG started to require a two-part bidding process. Almost 11 months after signing the contract, SLNG changed the procurement process to the two-step process as follows....

2.3.6.  SLNG’s Additional Reporting Requirement

2.3.6.2. During the project, SLNG also requested that RIE submit more frequent progress reports. In the following e-mail exchange between RIE and Hill, SLNG is requesting progress to be reported once a week instead of bi-weekly. This additional monitoring added cost to the project and disrupted RIE’s engineering and administrative resources due to the additional progress reports burden....

2.3.7.  SLNG’s Excessive Reviews of Drawings

2.3.7.4. SLNG also required excess reviews of the drawings. SLNG performed three (3) HAZOP reviews, a HAZID review, conducted a PTR, and requested RIE to attend a HAZOP review in November 2007 for the Florida Electric compressors…

2.4. Trend Notices

2.4.1.  SLNG instructed RIE to proceed with additional work scope without SLNG’s approval. It is Interface Consulting’s understanding that RIE continued to perform any work noted in the....

2.4.5.  It appears that after SLNG’s direction to RIE to perform any work, regardless of whether the work was outside the contractual scope of work, RIE performed the work at....

2.4.6.  RIE performed the in-scope and out-of-scope work at SLNG’s direction and SLNG paid the majority of RIE’s invoices through the month that it directed RIE to stop work. Thus, by following this precedent, RIE is entitled to payment of its outstanding invoices. Interface Consulting has not seen an instance in which SLNG complains about the cost overrun or objected to RIE’s budget reforecasts....

 

3. Discussion of Responses to Walter Dodd’s Inquiries

3.1. The following are responses to....

3.1.1.  Contract Quality Requirement

3.1.2.  Project Management

3.1.3.  RIE’s Estimate to Complete

3.1.4.  SLNG’s Complaints

3.2. Comments on SLNG’s Audit Reports

3.3. Comments on the Expert Report of Mr. Crawford

 

4. Counterclaim

4.1. In February 2008, RIE provided a cost and schedule estimate to complete the contractual scope of work. RIE’s estimate included....

4.2. SLNG and its expert, Mr. Reed-Phillips claims that it cost…for Arsenal to complete or to reperform the scope of work included in SLNG/RIE’s contract.

We have not seen any indication as to when Arsenal completed RIE’s contract scope of work. Furthermore....

 

5. Conclusion

5.1. Based on our examination, both parties made mistakes in the execution of their contract responsibilities. In RIE’s case, RIE was unable to perform in a timely manner for several reasons, some of which were RIE’s responsibility and some SLNG’s responsibility. RIE’s engineering was not only delayed; it was incomplete and, on occasion, contained errors. Engineering errors are common in the design process and....

5.3. RIE’s timely performance was another matter since many of the root problems for the delays it experienced early in the project continued to undermine its performance throughout the job until....

 

6. Signature

 

7. Exhibits