Master’s degree thesis

LOG950 Logistics

Tendering in the Norwegian Petroleum Industry

Author: Mariami Suarishvili

Number of pages including this page: 150

Molde, 24.05.2016

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ECTS credits: 30

Supervisor: Associate Professor Per Engelseth

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Date: 24.05.2016

Preface

This thesis has been written at Molde University College, Norway, as final work of Master of Science in Logistics from January to May 2016. During this period I conducted qualitative research, namely, survey under the supervision of associate professor Per Engelseth. The survey was carried out through face-to-face interviewing and entails 11 companies. I am proud to say that during the research I travelled and interviewed all informants at their offices. This method allowed me to obtain valuable data and provide vivid evidence. Tendering has been acknowledged as an efficient method of procurement. It is especially common in public sector where public authorities have to ensure transparency. The idea behind tendering refers to ‘best value for money’. This method of procurement is widely used in the Norwegian Petroleum Industry. The thesis address the process of tendering within industry. It emphasizes key factors that influence qualification and evaluation of vendors. The thesis also reveals bidding process from vendors’ perspectives, risk management and incentives and drawbacks of tendering.

Acknowledgement

“Just as eating against one's will is injurious to health, so studying without a liking for it spoils the memory, and it retains nothing it takes in.” - Leonardo da Vinci

First and foremost, I would like to thank my supervisor, associate professor Per Engelseth, for his guidance and support. His energy and encouragement gave me passion throughout the entire study. Second, I am grateful to all informants for their kindness and willingness to contribute to my thesis. I am lucky that I met such respondents. Without their help this study would not have been possible. My gratitude goes to Jan Borkelmans, Leading Advisor SCM Contract Establishment at Statoil. He guided and motivated me during this study. Face-to-face interviewing created trust between the respondents and I. As a result, despite high confidentiality, I was provided with data that formed a solid part of the findings. Moreover, the respondents provided additional information and comments that navigated me to more insight and analysis. Additionally, I would like to acknowledge Roy Lien, Kathrine Sorvik, Cato Gundersen and Lisbeth Varhaugvik who shared useful data and helped me for further understanding of tendering process in the Norwegian Petroleum Industry.

Last but not least, my gratitude goes to my beloved family. Their encouragement and motivation gave me grit. I would like to thank my grandmother for the enormous support and leading to my mantra ‘when achieving your dreams, it is not so much what you get, as who you have become in achieving them’. In the end, many thanks to Bich Le, the best friend and study partner throughout the study program.

Mariami Suarishvili Molde, May 2016

ii Summary

Peter Kralijc, creator of Kralij portfolio purchasing model, in 1983 called for the procurement function to take on a larger and more strategic role in managing the supply chain. Indeed, nowadays procurement plays an important role and has been perceived as a cost center. Tendering, or as literature often refers, competitive tendering is a common method of procurement. The idea behind it stems from ‘best value for money’. This thesis sought to address tendering in the Norwegian Petroleum Industry. The study has adopted qualitative survey research that implies face-to-face interviewing companies on Norwegian Continental Shelf (NCS). The study has provided insight of tendering and post tendering process. It emphasizes qualification, evaluation and selection process of vendors. The findings showed that technical and commercial factors play a vital role in evaluation process. Moreover, evidence reveals additional drivers for choosing vendors. As petroleum industry contains high risk, risk management has been found as one of the core activities within tendering. Heath, safety and environment (HSE) and quality assurance (QA) have been found crucial within industry. The findings revealed changes in the directive rules on procurement, where Norwegian oil and gas sector are exempted from the detailed tendering rules of Directive 2004/17. This has been explored and discussed. The evidence showed that regulators conduct tendering based on three principles as transparency, equal-treatment and non-discrimination. In addition, both, demand and supply side are highly required to behave with high ethical standards while involved in tendering. Even though tendering is costly administrative procedure, findings mentions its benefits as competition among suppliers, cost savings and delivering innovative solution. Since oil and gas industry is characterized by complexity, negotiation has been found as an alternative of tendering on NCS. The thesis also looked into supply side and discussed briefly bidding process from supplier’s perspectives. The findings showed that suppliers in oil and gas industry are keen to listen to regulators and get feedback in order to improve and as a result become supplier of particular regulator. At the end of the study, theoretical and business implications have been given. The latter sought giving relevant recommendation to players within industry.

Table of Contents List of Figures ...... vii List of Tables...... viii Chapter 1 ...... 1 1. Introduction ...... 1 1.1. The purpose of the study ...... 2 1.2. Organization of the study ...... 3 Chapter 2 ...... 5 Theoretical Perspectives...... 5 2.1. Purchasing management...... 5 2.2. Public Procurement ...... 6 2.3. Tendering ...... 8 2.3.1. Tendering Process ...... 9 2.3.2. Incentives to tender ...... 14 2.3.3. Drawbacks of Tendering ...... 16 2.3.4. Tendering vs Negotiation ...... 17 2.4. From Tender to Final Payment ...... 21 2.5. Invitation to tender ...... 22 2.6. Landing the contract ...... 24 2.7. Auctions ...... 25 2.7.1. Type of auction ...... 26 2.7.2. E-auction ...... 28 2.8. Risk ...... 29 2.8.1. Definition ...... 30 2.8.2. Risk assessment ...... 31 2.8.3 Risk in oil and gas industry ...... 34 2.8.4 Risk in tendering process ...... 35 2.9. Managing Suppliers and Subcontractors ...... 38 2.9.1. Contract management...... 38 2.9.2. Downstream contracting ...... 40 2.9.3. Procurement and subcontracting in the petroleum industry ...... 42 2.9.4. Framework agreement ...... 45 2.9.5. KPIs ...... 47 2.9.6. Ethical standards ...... 48 2.10. Bribery and bid rigging ...... 51 2.11. Research background & Research questions ...... 54 Chapter 3 ...... 56 Research Methodology...... 56 3.1. Research design ...... 56 3.2. Qualitative research ...... 57 3.3. Interviewing as a research method ...... 58 3.4. Data collection ...... 60 Chapter 4 ...... 62 Secondary data ...... 62 4.1. Introduction ...... 62

iv 4.2. The Norwegian Petroleum Industry ...... 62 4.3. Main regulator in Norwegian oil and gas sector ...... 64 4.4. European tendering ...... 65 4.5. EU public procurement ...... 67 4.6. EU Public Procurement at EEA level in Norway ...... 68 4.7. Changes in the directive rules on public procurement ...... 70 4.8. Achilles ...... 71 4.9. NORSOK standards ...... 72 4.2. The interviewed companies at a glance ...... 73 4.2.1. Shell ...... 73 4.2.2. AXTech ...... 73 4.2.3. AXESS ...... 74 4.2.4. NOV ...... 74 4.2.5. Statoil ...... 74 4.2.6. Dolphin Drilling ...... 75 4.2.7. PREZIOSO Linjebygg ...... 76 4.2.8. Kværner ...... 76 4.2.9. Aker Solutions ...... 77 4.2.10. Oss Nor ...... 78 4.2.11. Navitas ...... 78 Chapter 5 ...... 80 Primary data ...... 80 5.1. Introduction ...... 80 5.2. Procurement ...... 80 5.3. Tendering in the Norwegian Petroleum Industry ...... 81 5.4. The Process of tendering ...... 84 5.4.1. Define the business need ...... 84 5.4.2. Procurement strategy ...... 84 5.4.3. Pre-qualification and qualification ...... 86 5.4.4. ITT ...... 88 5.4.5. Evaluation ...... 89 5.4.6. Contract awarding ...... 92 5.4.7. Manage agreement ...... 93 5.5. Tendering process of Dolphin Drilling ...... 95 5.6. Tendering process of Statoil...... 96 5.7. Tendering process of Aker Solutions ...... 98 5.8. Risk and mitigation actions in tendering ...... 101 Chapter 6 ...... 107 Analysis and Discussion ...... 107 6.1. Tendering process and procedure...... 107 6.2. Exemption from public procurement directives ...... 109 6.3. Focusing on risk in tendering ...... 110 6.4. Bidding process ...... 111 6.5. Incentives and drawbacks of tendering ...... 113 6.6. Negotiation as an alternative of tendering ...... 115 6.7. Auctions ...... 117 6.8. Ethical standards ...... 118 6.9. From upstream to downstream ...... 119 6.10. Business relationships ...... 121 6.11. Darkside of NORSOK Standards ...... 122

v 6.12. Findcontract.no and Findsupplier.no in the shadow ...... 123 Chapter 7 ...... 124 Theoretical & Business Implications, Conlusions, Limitation of the Study & Recommendation for Further Research ...... 124 7.1. Theoretical Implications...... 124 7.2. Business Implications ...... 125 7.3. Conclusions ...... 128 7.4. Limitations of the study ...... 131 7.5. Recommendation for further research ...... 131 Reference list...... 133 APPENDIX ...... 138

vi List of Figures Figure 1. Organization of the study...... 3 Figure 2. The public procurement process ...... 10 Figure 3. The contracting cycle: key elements ...... 22 Figure 4. A three bidder auction ...... 26 Figure 5. Risk matrix ...... 32 Figure 6. The risk management process in practice ...... 36 Figure 7. Typical cost structure of a main contractor ...... 41 Figure 8. Model of ethical behavior ...... 50 Figure 9. Research design ...... 57 Figure 10. Systematic approach of EU procurement requirements ...... 68 Figure 11. The public procurement legislation in Norway ...... 69 Figure 12. Tendering process in the Norwegian Petroleum Industry ...... 82 Figure 13. Evaluation criteria ...... 83 Figure 14. Specific stratgey and enquiry of Statoil ...... 85 Figure 15. Organization of Procurement of Aker Solutions ...... 86 Figure 16. Getting to the bidder list ...... 87 Figure 17. Technical evaluation and weighted score of Aker Solutions ...... 90 Figure 18. Performance evaluation and close out ...... 94 Figure 19. Tendering process of Dolphin Drilling ...... 95 Figure 20. Tendering process and dependency between phases of Statoil ...... 96 Figure 21. Two types of evaluation of Statoil ...... 97 Figure 22. Guideline of evaluation method of Statoil ...... 98 Figure 23. Procurement strategy of Aker Solution ...... 100 Figure 24. Tendering process of Aker Solutions ...... 100 Figure 25. Analyze of safety risk at Statoil ...... 102 Figure 26. Bidding process ...... 107 Figure 27. Ethical standards ...... 118 Figure 28. Supply chain in tendering ...... 120 Figure 29. Supplier performance management ...... 121 Figure 30. Factors favorable to tendering or negotiation ...... 127

vii List of Tables Table 1.Procurement procedures in relations of cooperation and competition ...... 14 Table 2. Advantages and disadvantages of tendered versus negotiated contract ...... 21 Table 3. Probability and impact matrix ...... 32 Table 4. Attributes of the contracting process ...... 39 Table 5. Source of evidence: Strength and Weaknesses ...... 59 Table 6. Threshold values ...... 67 Table 7. Technical evaluation criteria ...... 89 Table 8. Commercial evaluation criteria ...... 90 Table 9. Commercial evaluation of Aker Solutions ...... 91 Table 10. Joint bid evaluation ...... 91 Table 11. Qualification level for supplier ...... 99 Table 12. Probability of failure at Aker Solutions ...... 105 Table 13. Consequence of failure at Aker Solutions...... 105 Table 14. Guidelines for level of management and supervision towards supplier Aker Solutions ...... 106 Table 15. Tendering and negotiation criteria ...... 116

viii Chapter 1

1. Introduction The petroleum industry is characterized by complexity and high risk. It consists of complex projects with large financial assets and requires close collaboration between buyer and supplier. The research targets to address tendering in The Norwegian Petroleum Industry. Because of low oil price and therefore reduced activities on Norwegian Continental Shelf (NCS) contract authorities seek for cost reduction more than ever. Tendering is a common method of procurement in today’s Norwegian Petroleum Industry. The buyer tries to find pre-qualified suppliers in the compliance with technical requirements, invite them to tender, evaluate and choose the best bidder in terms of technical and commercial terms. The research is reckoned with tendering and post tendering process and aims to address following: main requirements according to NCS, incentives and drawbacks of tendering, supplier qualification and evaluation, tendering related risk and risk mitigation. In the end, awarding process and post tendering process phase will be examined.

Decades back procurement function was perceived as a cost center. It constitutes a substantial fraction of economic activity by public and private enterprises. In Harvard Business Review article (Eatough 2014) says that leaders can no longer afford to downplay procurement because today’s corporations are directing more and more of their budgets toward a complex web of global specialist providers and suppliers to help deliver on their businesses’ core strategies. A recently released global study of nearly 2000 publicly traded companies found that 69.9% of corporate revenue is directed toward externalized, supplier- driven costs. Therefore, both public and private players try to promote efficiency in procurement, meet companies’ need and gain better service which can be defined as one of the strategic roles in managing supply chain. To do so, one of the ways is tendering, or as literature often refers competitive tendering (CT) in procurement of goods, works and services. The idea behind tendering stems from “best value for money”. The benefits of tendering has been widely acknowledged as cost reduction, competition among suppliers, better service and performance, non-discrimination, equal treatment and transparency. This method of procurement especially applies to public authorities where they are obliged to use tendering method and deal with competitive bidding.

1 To answer the issues posed above, the thesis is focused on qualitative research method with the unit of analysis of tendering in the Norwegian Petroleum Industry. As characteristics of qualitative research, the focuses is on process, understanding and meaning of tendering and post tendering process on NCS. To investigate this, qualitative interviewing method is being used. According to (Patton 2002) we interview people to find out from those things we cannot directly observe. For this purpose, interview guide was created which specified important issues in advance and the extent to which it is important to ask questions in the same order to all respondents. This shall give promising findings and make a solid conclusion. The qualitative interviewing encompassed 11 companies with 13 respondents on NCS, both from demand and supply sides. The research was conducted through face-to face interviewing with the objective of gaining findings with high validity. In addition, the thesis will examine the theory of tendering in order to understand and address how theory applies into practice and how it corresponds to the findings. The theoretical review covers purchasing management, tendering and post tendering process, risk and risk management in tendering, managing suppliers and sub-contractors, auctions, recommendations and guidelines on bid rigging and ethical purchasing behavior.

The secondary data of the thesis introduces Norwegian Petroleum Industry, regulations and changes in procurement rules on NCS. Furthermore one of the common qualifications systems used among oil and gas players will be discussed. At the end of the secondary data, all interviewed companies and informants will be presented.

1.1. The purpose of the study The thesis objects interviewing of several companies on NCS in order to find out how competitive tendering take place in the Norwegian Petroleum Industry. Namely, how buyers qualify suppliers, what drives them to choose the bidder, how they handle the existing risk in tendering process and what type of resources are involved in tendering. Moreover, the study seeks to look into supply side and address bidding process. Additionally, incentives and drawbacks of tendering should be revealed. In order to have reliable and vivid findings, the study aims to examine both buyer and supplier sides. The latter also serves to check validity of the information gained from contractors. In the end, the reader shall make conclusion objectively and get understanding of whole process from tendering until close out.

2 In addition, the study should guide the researcher to develop theoretical framework. As for secondary and primary data - serve as milestones which shall build foundation of the study that will guide reader to findings from NCS.

1.2. Organization of the study The thesis consists of seven chapters. Each chapter is also accompanied by sub-introduction to give an overview and short guidance of upcoming discussed topic. Particularly, why the specific topics will be examined and to what purpose. The figure 1.below visualizes organization of the study.

Chapter 1 Chapter 2 Chapter 3

Purpose & Theoretical Research Organization Perspectives Data Introduction Design & of the & Research Collection research Questions Methodology

Chapter 4 Chapter 5 Chapter 6 Chapter 7

Secondary Primary Analyze & Conlusion & Data Data Discussion Recommend ation

Figure 1. Organization of the study

3 Chapter one introduces the reader to the topic of the study, its foundation and purpose. Chapter two is anchored to theoretical perspectives and serves as a support and formulation of the thesis. In addition, at the end of the chapter research background and research questions will be revealed. While chapter three represents research methodology and research designs, interviewing as a research method with its strengths and weaknesses and eventually data collection will be exposed. Chapter four is dedicated to the secondary data which informs about Norwegian Petroleum Industry at one glace with its regulations and directives. Most importantly, it reveals changes in EEA (The European Economic Area) public procurement rules and directives. In addition, one of pre-qualification systems and all interviewed companies will be introduced. Chapter five provides primary data gained from interviewed companies from NCS. As for chapter six, discussion and analysis are exposed. And eventually, chapter seven exposes theoretical and business implications before it concludes and gives recommendation for further research. Additionally, limitation of the study is discussed.

4 Chapter 2

Theoretical Perspectives This chapter provides the theoretical perspectives of the study. Purchasing theory and tendering process have been addressed. Risk management and risk mitigation are also important to be covered. The chapter also introduces auction theory, incentives and drawbacks of tendering, downstream contracting and ethical standards in procurement. Additionally, bid rigging is discussed. Eventually, this theory should serve as a fruitful framework for organizing the study.

2.1. Purchasing management Purchasing and supply chain management are increasingly recognized by top managers as key business drivers. Indeed, purchasing plays a vital role to fulfill company’s goal and to contribute cost reduction. Widely used definiton of purchasing management by Van Weele is as follows: “the managemnet of the company’s external resources in such a way that supply of all good, services, capabilities and knowledge which are necessary for running, maintaining, and managing the company’s primary and support activities is secured under the most favorable conditions”. In addition, he mentiones that “purchasing management relates to all activities necessary to manage supplier relationship in such a way that their activities are aligned with the company’s overall business strategies and interests” (Weele 2010). He also adds that purchasing management is related to supply chain management and difference between them is that SCM encompass all logistics activities and entails the management of relationships with first tier suppliers and lower tier supplier.

(Scheuing 1989) says that purchasing management is the acquisiton of needed goods and services at optium cost from competent, reliable sources. In purchasing and supply chain management book, purchasing can be observed as a functional group with the objective to buy materials of the right quality, in the right quantity from the right source delivered to the right place at the right time at the right palce (Lysons and Farrington 2012). In addition, Michael Porter said that purchasing is a supportive activity for the primary activities in the value chain management. Gadde and Håkansson wrote that efficient and effective purchasing requires a supply network perspective, meaning that buyer benefit from cooperation with its suppliers.

5 What differentiates purchasing from procurements is that the latter is somewhat broader term. Weele (2010) defined procurement as “all activities required in order to get the product from the supplier to its final destination”. It encompasses the purchasing function, stores, transportation, incoming inspection, and quality control and assurance. He mentions that procurement is related to bying based upon total cost of ownership in a project driven manufacturing envinorment. The term procurement is widely used in construction projects, governmental buying, oil and gas industry, furthermore, in these industries the use of tendering process is common used mainly in high investments. (Diaz 2014)

Van Weeele defines good procurement as getting value for money. It will ensure that “fit for purpose”, supplier selection and evaluation is undertaken. In Exellence in Procurement book can be observed that procurement recognises SC as a series of internal and external cross funtional processes where procurement will be an active part of the internal cross funtional structure that connects to all of the external supply processes. (Emmett and Crocker 2008)

2.2. Public Procurement The petroleum industry in Norway used to be highly governed and regulated by public authorities. This means that companies with high public shares needed to procure particular service and supply within oil and gas industry, had to follow to specific public procurement procedures and principles. Therefore, this section shortly describes and gives overview of public procurement.

According to European Commission, every year, over 250 000 public authorities in the EU spend around 18% of GDP on the purchase of services, works and supplies. Public procurement refers to the process by which public authorities, such as government departments or local authorities, purchase work, goods or services from companies. Efficient public procurement practices, plays a key role in modern economies as they ensure reduction of wasteful activities. It involves spending money, and it is important for buyers to always act in the best interest of their agency. Dealing with public money opens the door to scrutiny of business practices. In light of this, it is important that the public buyers are keenly aware of the need for transparency in their dealings. In his 2009 inaugural address, President Obama emphasized the importance of transparency in government practice and its value in holding government accountable for its actions:

6 “. . . And those of us who manage the public’s dollars will be held to account, to spend wisely, reform bad habits, and do our business in the light of day, because only then can we restore the vital trust between a people and their government.” (NIGP 2010)

According to the Organization for Economic Cooperation and Development (OECD 2015) 22% of businesses in Norway reporting having completed a tendering process online in 2014. (Scheuing 1989) defines tendering as a method of procurement whereby competing suppliers are invited to submit their “best” prices for a specified item “with the intention of awarding a purchase order or subcontract to the vendor offering the most attractive price”. Van Weeles emphasizes important characteristic of public procurement its public accountability and governmental activities. The latter is not subjected to the rules of free markets. They are funded by the tax income provided by taxpayers, whereas private companies get their income from customers and market. A third characteristics, that is specific for the central government, is related to how finances are managed within the government. He emphasizes that specialist within public procurement function are much more dominant than in the private sector.

It is an important function of government for several reasons. Sheer magnitude of procurement outlays has a great impact on the economy that needs to be well managed. And as an important tool for achieving economic, social and other objectives (Thai 2001). Public procurement law is based upon the body of international, European law, national laws and directives and jurisprudence. The low prescribes in a formal way how governmental contracts deal with suppliers and award public contracts (Weele 2010). Philosophy of public procurement stems from obtaining best value for money that will support the development of a single market. It has have been adopted by European Union (EU) in 2004 to improve competitiveness through developing the inner market into one single market. The European directives apply to all governmental institutions, including the State, regional or local authorities and bodies governed by public law.

A crucial part of the public procurement function is a tendering. The latter includes supply market research , developing a sourcing strategy based on detailed specification for the delivery of goods and services or construction, selecting the right procurement procedure, preparing the tendering documents, which will include the technical requirements, supplier selection and award criteria, contractual conditions, as well as evaluating supplier data and supplier bids, contracting, writing up the final version of the contract, and follow-up of the tender procedure (Weele 2010).

7

2.3. Tendering “Tendering processes results in competitive outcomes and that taxpayer money is spent efficiently”. -Melanie L. Aitken, interim Commissioner of Competition in Canada, quoted in (Fingleton 2010),4)

The original ideas behind tendering process related to cost-effectiveness and open accountability for the use of public funds, both of which were entirely consistent with the various reforms that were introduced under the Conservative administration of the 1980s and 1990s (Spurgeon and Hicks 2003). In many literature and articles can be found the usage of term competitive tendering (CT). (Hensher and Wallis 2005b) Competitive tendering is a service delivery strategy and member of the broad class of contractual regimes. The latter is a crucial part of procurement, especially in a high investment project, as defined: “The procedure, by which potential suppliers are invited to make a firm unequivocal offer of the price and term which, on acceptance, shall be the basis of the subsequent contract”. (Emmett and Crocker 2008).

In another words, tendering is a binding offer to perform specific job, deliver goods and services according to specific terms and conditions defined by buyer. This is the administrative procedure of sending out drawings and bill of quantities or specification to contractors, to submit a price for the construction of the project with the intention to be awarded (Ogunsamni 2013). It encompasses procedure, preparing tendering documents, which includes the technical requirements, supplier selection and award criteria, contractual conditions, as well as evaluating supplier data and supplier bids, contracting, writing up the final version of the contract, and follow-up of the tender procedure.

Within tendering operator provides services at best practice cost levels for a given level of service deliver, says (Hensher and Wallis 2005a). Best value for money is seen as main objective of tendering in both public and private sector. The principles of tendering is as similar as four major principles of public procurement underlined by EU procurement directives. This implies non-discrimination, equality, transparency and proportionality.  Non-discrimination. This principle should safeguard the market for government contracts so it is accessible to every contractor, regardless his nationality and country. (Puil and Weele 2014) This principle also implies that all bidders can access the same information. If the operator changes the perception of how the final product

8 will be, or technical requirements for instance, the company must inform all tenderers by post, e-mail or by calling.  Equality. This implies that all competitors should be dealt in similar way and provided with the same information at the same time.  Transparency. (Puil and Weele 2014) The principle of transparency force byers to make the process of tendering transparent. For instance, evaluation process, selection criteria and award process of suppliers should be well defined, explained and documented. The principle of transparency also demands that buyer communicates in advance what procurement procedure will be used, what requirements will imposed and how the contract will be awarded. In general, these procedures might also include that contractors should be informed about the reasons for not being selected.  Proportionality. This means that conditions and requirements that are imposed on the future are reasonable. This implies that they are in balance with the scope and volume of the contract. (Puil and Weele 2014)

Eriksson and Westerberg (2011) emphasized that the whole essence of a tendering procedure is to select a suitable supplier at the right time and circumstances, yet obtaining from him at the appropriate time, an acceptable offer upon which a contract can be continued. In addition to this, to enhance transparency and competition can be seen as purpose of tendering. The increased competition through tendering can result in lower bid prices, more innovative ideas, and more competent contractors that excel in terms of quality, safety and environmental performance (Eriksson and Westerberg 2011). However, according to Kadefors, drawback of competitive tendering is that it increases the risk of conflict and hampers long-term development in lasting relationships since actor constellations are changed in every project (Kadefors 2005).

2.3.1. Tendering Process In general, the tender process is split into two different stages: (1) pre-qualification of contractors; (2) bid evaluation and the award of the contract to the best contractor. The procurement responsible needs to prepare a strategy where he defines how to handle the process of tendering. In detail, tendering process follows these general steps: organizations will firstly define its requirements/needs and then the procurement department will start to arrange their purchasing strategy. Starting with sending an invitation to the candidates based

9 on the contract authority’s desired qualifications. The invitation can be sent directly to the tenderers, or it can be public. The latter can be done via web-sites, press or using special vendor-buyer data base. In the tender document, the vendors get familiar with the condition of the contract, and the requirements for each specific tender. Next step is to make a supplier selection and invite specific suppliers to participate, and then the interested companies will submit their proposals to the client in order to accomplish their demanded requirements. The client then will decide which offer is suitable for them and the wining company will perform the work by a contract. Each step needs to be carefully analyzed considering that any decision taken in one will affect the next one; therefore, the end results. In brief, tendering process embrace strategic steps for companies to obtain the right partner and therefore less risky contracts. The figure below visualizes the different steps involved in a general tender similar to the public procurement process model (Government 2008).

Define Prepare Develop Supplier Contract Implement Post Tender Business Business Procurement Selection and Award and and Monitor Clarification Need Case Stratgey Tendering Debriefing Contract

Figure 2. The public procurement process (The Scottish Government) In many literature or articles can be found the term of competitive tendering (CT). Competitive tendering aims to obtain compliant tenders from qualified tenderers in a single round of tendering (Emmett and Crocker 2008). All the purchaser’s requirements should be set out in the Invitation to Tender (ITT) documents and is made up as follows:  instructions to tender  form of tender  contract award criteria  technical specification

10  drawings  health and safety plan  pricing schedules  terms and conditions of contract

The purpose of tendering, in addition to getting best value for money, is to enhance transparency and competition. The increased competition through tendering can result in lower bid prices, more competent contractors that excel in terms of quality, safety and environmental performance (Eriksson and Westerberg 2011). However, according to Kadefors, drawback of competitive tendering is that it increases the risk of conflict and hampers long-term development in lasting relationships since actor constellations are changed in every project (Kadefors 2005). There are three general methods used to obtain tenders, as follows:  Open tenders – implies that any interested supplier may submit a tender. Or it can be an invitation to everyone where a small number of suppliers are expected to respond (Emmett and Crocker 2008). The latter is mostly for simple, standardized and low uncertainty project (Eriksson and Westerberg 2011). In addition, selection of supplier might be based on price. Open tendering is usually initiated by the client making advertisement in local newspapers or technical press; inviting contractors to apply for tender in documents and to tender in competition for carrying out the work. (Adedokun, Ibironke, and Babatunde 2013). Open tenders mostly does not allow negotiations.

 Restricted tenders – (Weele 2010) says that this procedure is split into two distinct stages: the stage of selecting suppliers that are interested, and the stage in which the preselected suppliers are invited for tender. Only few suppliers who can meet the selectin criteria and been pre-qualified can become bidder (Emmett and Crocker 2008). One of the features of this process is that it decreases project duration due to shortened tendering stage where eligible vendors will get the opportunity to submit their tenders. (Adedokun, Ibironke, and Babatunde 2013) It provides a restricted but adequate list of technically suitable and sound firms of comparable standing, capable of carrying out the projects in a reliable manner. Moreover, the promoter is required

11 to inform the stakeholders on the requirements that underlie the reason for their election, and what screening method it is based upon.

This type of tendering, as it provides a restricted but adequate list of technically suitable and sound firms of comparable standing, capable of carrying out the projects in a reliable manner. It should be highlighted that the number of vendors selected is not to low, so that it is still possible to maintain a real competition (Bævre 2015b). Restricted tender is common in private sector, using pre-qualification of a limited number of trusted-worthy contractors (Eriksson and Westerberg 2011). Tenders may also be “rigged” and inflated by collusion if the firms get to know the probable limits of tendering list in a particular area. High tendering may also occur if the selected firms consider it impolite to decline the invitation to a tender and as a result put in tenders which are either so high as to put them out of the running list or sufficiently high enough to ensure that if they secure the job, they will do so on really attractive terms (Adedokun, Ibironke, and Babatunde 2013).

 A competitive dialogue – implies a dialogue conducted with the candidates who are admitted to the procedure, with the aim of developing one or more suitable alternatives capable of meeting stipulated requirements, and on the basis of which the candidates chosen are invited to tender. Competitive dialogue procedure (CDP) allows authorities to hold discussion with shortlisted candidates regarding the authority’s requirement before the latter invites final written tenders. The public procurement directive defines the competitive dialogue procedure as “a procedure in which any economic operator may request to participate whereby the contract authority conducts a dialogue with the candidate admitted to that procedure, with the aim of developing one or more suitable alternatives capable of meeting its requirements, and of the basis of which the candidates chosen are invited to tender” (OJEU, 2004) quoted in (Uttam and Roos 2015).

Burnett and Oder (2009) have highlighted that the way the dialogue phase is conducted affects the entire CDP. If a consultative approach to the dialogue phase is not adopted, it might be time consuming for the contracting authority to enter the dialogue phase with the shortlisted contractors. Moreover, in the consultative approach the dialogue phase can be launched only when contracting authority has a

12 clear understanding in of the technical solutions to be proposed, the strengths and weaknesses of those solutions and approximate costs, quoted in (Uttam and Roos 2015).

 Negotiated tenders – At this stage the procurement entity consults with suppliers of its choice and negotiate with them the term of the contract with one or more of these. This may be applied in specific circumstances and for very complex projects, where the technical complexity of the project being bought restricts the marketplace, or where there is a monopoly (Emmett and Crocker 2008). In this procedure, contracting authority is not able to come up with a detailed specification and when the legal and financial terms and conditions of the project cannot be defined. In such cases, competitive dialogue may be used. According to (Weele 2010) this procedure is as follows. First, just like the restricted procedure, a preselection of qualified market parties is made. Next, these parties are consulted for the solutions that best fit the functional specifications that have been submitted by buyer. The dialogue ends when buyer has selected the best possible solution that was presented by one of the market parties. Afterwards, contracting authority will put a detailed specification and the market parties, are invited for their detailed bids. The contracting authority evaluates the bid on the basis of the most economical offer (rather than price only).

(Eriksson and Westerberg 2011) propose procurement procedures in their paper related to competition, coopetition, and cooperation relationships. They point out that companies choose different governance form depending on procurement procedure. For instance, construction projects that are characterized by complexity, uncertainty and time pressure, then there is a need for flexibility, coordination, knowledge exchange and cooperation, as quoted in (Eriksson, 2008a; Pesamaa et al., 2009; Ruuska et al.2009 in Eriksson and Westerberg 2011). In addition, (Eriksson and Westerberg 2011) refer procedures related to cooperation (illustrated below) as a procurement related successful factors.

Bying stage Procedures related to Procedures related to Procedures related to competition coopetition cooperation Design By the supplier (or by Joint specification with Joint specification wish the buyer) one party responsible shared responisbilities

13 Tendering Competitive tendering Selected tendering Direct negotiation (one (mutiple bidding) bidder) Bid evaluation High weight on price Equal weight on price and High weight on soft soft parameters parameters Subcontractor By the contractor (or Joint selection with one Joint selection with shared evaluation by the buyer) party responsible responsibilities Output based (fixed Fixed price and shared Including incentives Payment price) profit (shared profits) Collaborative Low extent Medium extent High extent tools Performance By the buyer Both by client and by By the supplier evaluation supplier Table 1.Procurement procedures in relations of cooperation and competition (Eriksson and Westerberg 2011)

2.3.2. Incentives to tender The main objective of tendering stems from the idea of getting best value for money. The latter creates a competition among suppliers and makes it possible for buyers to get bets possible terms out of it. The main advantage of tendering is widely proclaimed as a cost reduction.

It is argued that tendering improves quality of the tendered services. Domberger and Jensen (1997) report on the findings of the Australian Industry Commission’s study in which it was founded that competitive tendering leads to quality improvements. This was mainly for three reasons, one is because it provides much clearer focus on what is required in the service, second, it presents opportunity to choose among alternative providers, and last, it encourages the buying entity to improve performance monitoring, quoted in (Mwesiumo 2001). Another advantages of tendering is transparency and equal opportunities among suppliers. This leads to prevent corruption and bribery.

Competitive tendering has the potential to improve accountability in service delivery (Australian Industry Commission 1996). The justification behind this argument is that when competitive tendering is applied, contracting agencies are required to specify clearly, not only the service to be delivered, but also the criteria on which the contractor’s performance is to be measured and monitored. This instills a sense of responsibility among suppliers and

14 provides a basis for ‟punishment‟ in case the suppliers fail to deliver as required by the contract (Commission 1996).

(Longva and Osland 2008) in their findings of competitive tendering in Norwegian bus industry, found out that picture of tendering regime has mainly resulted in real efficiency gains rather than redistribution of welfare. Moreover, they refer tendering to subsidy savings for the government. (Hensher and Wallis 2005b) found a considerable cost saving in short and medium term. However, they added that the measurement of cost savings is inconsistent since countries have different legal backgrounds, and changes in service and quality levels and institutional restructuring are simultaneous with the introduction of the new contractual regime.

(Ogunsamni 2013) says that the way a project is tendered for can affect its performance. Several approaches of tendering allowing new comers, selecting from existing performing vendors and approaches allowing contractors to compete with each other, have resulted in successful construction projects.

(Manso and Nikas 2015) mention that the buyer views tendering as advantageous process as it lowers acquisition cost by allowing the buyer to pit several suppliers against each other. In their research, the authors found that post tender negotiation follows the same principles as tendering and therefore adhered strictly to fairness in competition. However, they mentioned for value for money contracts to be awarded, success in negotiation at post tender stage is critical and the research identified cooperation, interdependence, communication and social motive approach to negotiations as key success factors.

Contractor become more dependent on suppliers for serving their clients. (Horst 2013) found that competitive tendering forces contractor to depend even more on its suppliers. Literature and practice showed that to win a tender in Oil and Gas contracting, the supply or procurement part should convince the client that the contractor has access to the right goods and services at the right price. The author also mentions the importance of supplier relationships in tender process which are shown to improve quality and reduce price of supplier proposal, thus increasing overall competitiveness of the bid.

15 2.3.3. Drawbacks of Tendering It is important to be mentioned, unless tendering is properly designed and implemented, the potential benefits of it cannot be realized. Even though tendering gives open competition, fairness, best value for money, improvements in service and cost efficiency where operators compete for a market that has been created through the award of contract (Schaaffkamp 2014), still some drawbacks can be found. Major reasons for its use. Indeed, tendering may be merely “going through the motions” as tendering process can be influenced by those who have power and influence over the eventual selection process. Tenders may be selectively issued and suppliers’ responses can be influenced. (Emmett and Crocker 2008) recall when they were said by one procurement manager: “we are always able to precook the tender board.”

According to the authors tendering is a time-consuming, slow, administrative complexity, and expensive procedure which prevents post-tender negotiation. The literature also points out that tendering may produce bets economic offer, but it might not obtain the best quality. Moreover, (Filippini, Koller, and Masiero 2015) tendering may generate administrative costs to operators and regulators. It may be exposed to regulatory capture by powerful providers. As it fosters market concentration, this risk becomes more severe in the long run. Another disadvantages can be mentioned lack of trust, asymmetric information and high transaction cost. Additionally, tendering hampers innovation and limits room for flexibility.

The paper by (Walters and Cloete 2008) argues that within tendering it becomes more difficult to achieve network integrity, integration and cooperation. Moreover, tendering is less flexible where operators tender based on tender specifications. It is also stated that operators could lose their businesses where especially new entrants tender very low to obtain services, or are not aware of the real cost of operating the service.

In a nutshell, according to the literature, the benefits of tendering can be summarized as ‘best value for money’, cost reduction, clearer focus on required service, competition among suppliers that gives alternative providers and better quality and performance. Additionally, transparency and fair treatment that prevent bid rigging and bribery. However, tendering has some dark sides as time consuming and costly administrative procedure, transaction cost and

16 prevention of innovative and flexible solutions. Moreover, within tendering network integrity becomes more difficult and the process can be influenced by a party that has power.

2.3.4. Tendering vs Negotiation In many articles and books, negotiation is considered as an alternative of tendering. A review of success and failures of tendering worldwide is given by (Hensher and Wallis 2005b). The authors find evidence of considerable cost savings in the short and medium term. However, authors point out limitations of previous studies. Firstly, they stated that countries have different legal backgrounds, and changes in service and quality levels and institutional restructuring are simultaneous with the introduction of the new contractual regime. Secondly, cost of retendering may increase due to unreasonable law initial tender prices and a decreasing number of competitors. Also, as mentioned above, tendering may generate administrative cost to operators and regulators. And finally, Hensher and Wallis emphasized that tendering may be exposed to regulatory capture by powerful providers. The later fosters market concentration which can become severe in the long run (Filippini, Koller, and Masiero 2015).

(Filippini, Koller, and Masiero 2015) also point out that contract can approximate tendering outcomes if they are benchmarked to best practice context-specific costs. However, negotiation can avoid some drawbacks of tendering such as asymmetric information, high transaction cost, lack of trust and hold-up problems between the incumbent and public authority. The authors also underline, the choice between tendering and negotiation depends on specific circumstances. Among others, they highlight the need for periodic market testing though tendering in order to provide outside information on benchmarking costs as an input to any negotiation strategy. However, (Filippini, Koller, and Masiero 2015) in their empirical study in Swiss public transport showed no significant difference observed between tendering and negotiation. Both contractual regimes enforced in Switzerland are incentive regulation scheme.

(Hensher and Wallis 2005b) state that negotiation is less transparent process with a greater danger of regulatory capture. However, tendering is not free from such dangers. Under tendering, incumbent operator accumulates extensive market knowledge, much of which is not made available to the regulator. This may give the incumbent operator a substantial

17 advantage in retendering. When talking about negotiation, the authors add that key performance indicators and appropriate benchmarks are an important feature of negotiation since they form the basis for negotiation of contract renewal. In addition, the regulator must have a good knowledge of best practices, and cannot be dependent on advice from operators. (Hensher and Wallis 2005b) highlight that tendering is likely to lead to periodic new entrants to the local market. While negotiation may tend to result in ossification of the supplier market.

(Wallis, Bray, and Webster 2010) say that an effective negotiation approach needs to incorporate a set of “tactics” designed to stimulate the incentives and pressures involved in tendering. And negotiation always needs to allow for the option of reverting to tendering if agreement cannot be reached though the negotiation process. They also highlight that tendering might lead to adverse selection. Meaning that selection of the bidder who is most successful in identifying and exploiting the flaws in the tender appraisal and contract documents, rather than who offers best value for money.

Furthermore, with tendering transaction cost can be higher for both contract authority and operator Transaction cost economics contributes to an important framework within which to develop the scenario for the roles of the market and governance. Transaction occurs when one stage of activity is finished and another begins. The author states that transaction cost economics theory establishes that it is impossible to concentrate all of the relevant bargaining action at the ex ante contracting stage in a competitive tendering principally with a deficient ex post monitoring, further, it determines business boundaries. “High transactions costs of re-tendering through competitive processes (which is essentially an ex ante competitive process), in the context of contracts that are typically incomplete, causing ex post adaptation to become an important feature of the transaction.” (Hensher and Stanley 2008). They underline that negotiation and competitive tendering offer for both contract authority and operator how to face the process of tendering, saying that “this can be achieved under a strong continuing trusting partnership through negotiated performance-based partnerships that have strict rules on commercial relationships and deliverables.

However (Hensher and Stanley 2008) mention that negotiation can be classified as a soft or hard. Under soft negotiation, the agents are ‘friendly’, the objective is agreement and concessions are permissible, where trust matters. While under hard negotiation agents are

18 somewhat adversarial, objective is ‘victory’ and concessions are demanded as a condition ‘friendship’. With this, they underline that negotiation implies non-trust position, presence of threat and game playing in terms of revelation.

Whereas tendering operates in market situation with several providers, defined needs with information flowing though bids and a focus on outcome, but negotiation is mostly framed as one buyer and supplier situation where needs and services not be defined before negotiation. In addition, relationship between parties is crucial. In a very real sense, negotiation and competitive tendering might be seen not as alternatives but as complements in a sequence as quoted in (Ivanova-Stenzel and Kroger, 2005), where competitive tendering stage is only necessary where certain conditions are not satisfied within negotiation stage and during agreed service delivery period (Hensher and Stanley 2008).

(Tadelis and Bajari 2006) suggest that for simple well specified projects favor a fixed-price contract to be awarded by a competitive tender while for complex and incompletely specified projects favor a cost plus contract to be awarded using a negotiation with a reputable supplier. They state that competitive tendering may leads to a problem of ex-ante opportunism that is more problematic when projects are complex. While in negotiations, however, the procurer and supplier typically spend a good deal of time discussing the project before work begins. During such negotiations the procurer can elicit the supplier’s views about where the designs and specifications can be improved, so that negotiations might be preferable to competitive tendering. However, they underline important question is whether one can design a set of objective rules for awarding negotiated contracts to minimize transaction costs. The authors conclude the paper by saying that in public sector strongly favor the use of competitive tendering, and particularly open competitive bidding when feasible. As for private sector firms are more sensitive to cost minimization, therefore it is reasonable to conclude that their behavior is more responsive to optimal choices. The authors give main arguments for using competitive tendering, quoting that competitive tendering “...gives everyone an equal chance to bid, eliminates collusion, and saves taxpayers’ money (Tadelis and Bajari 2006).

The paper by (Walters and Cloete 2008) where authors conducted case study negotiated contracts versus competitive tendering in bus service in South Africa suggested many advantages and disadvantages of both methods. They point out that tendering results in

19 transparent pricing and competition while negotiation is less transparent and services/costs must be negotiated. They also add that one of the drawbacks of negotiation is the ability of the state to direct the service costing process. Furthermore, negotiation implies that authority use some form of cost benchmarking to determine a contract price, while tendering market forces determine tender price. Another differences is when it comes to expertize, contract authority sets tender design, evaluation and reward, whereas in negotiation the authority need significant specialized expertise to negotiate the contract. However, one of the drawbacks of tendering is that it is difficult to achieve network integrity, integration and coordination compared to negotiation, where network integrity is achieved easier, integration and coordination as services are negotiated.

To sum up literature review of negotiation and tendering, can be concluded as follows: firstly, it should be mentioned that the choice between these two methods depends on specific circumstances. Secondly, negotiation compared to tendering is less transparent with great danger of regulatory capture. However, the former can avoid some drawbacks of tendering as asymmetric information and high transaction costs. Additionally, in negotiation the post and services must be negotiated whereas in tendering there is a room for transparent pricing and competition. Thirdly, in tendering contract authority sets and designs tender with evaluation criteria and award, whereas in negotiation they need specialized expertise to negotiate contract.

The table below visualizes and widens features of negotiations and tendering further. As can be seen, the price in competitive tendering is defined by the market while in negotiation buyer has to do benchmarking. In addition, negotiation is associated with less transparency and competition. Furthermore, in negotiation there is a room only for incumbent suppliers, whereas tender offers a possibility to new entrants. However, the latter prevents innovation and flexibility. And in the end, negotiation requires high communication between supplier and buyer while in tendering it is not allowed. Highlighted Criteria Tender Negotiated Contracts Price Defined by the market Buyer does benchmarking and service should be negotiated Transparency Price and competition Less transparent since there is a are transparent need for market test New entrants Opportunity for new Only incumbent supplier entrants

20 Network integrity Should be designed Easier network integration and into the tender process coordination Buyer and seller expertise Contract authority Need for expertise designs, evaluates and awards the tender Flexibility Little room for High flexibility innovation and flexibility since suppliers need to follow certain requirements Training and development Less investment on Crucial during negotiation training and process development Table 2. Advantages and disadvantages of tendered versus negotiated contract (Walters and Cloete 2008)

2.4. From Tender to Final Payment Projects and contracts in international contracting may go through different stages throughout their lifecycle. There is a parallel with the seasons of the year is made. During springtime, contract parties first contact each other for work to be conducted. The client express his requirements and wishes, and the contractor express the intent to comply with these and conduct the project. During summertime, contract parties engage in more intimate discussions and explore each other’s values and intents. Summertime usually ends with a contract (or not). During autumn, contract parties need to work closely together to execute the project successfully. A multitude of technical and operational problems will occur and parties will be put to the test of solving these problems effectively. At this stage of the relationship, the strength of the bonds between parties will show (Puil and Weele 2014). The figure below illustrates from tender to final payment stages.

21 Invitation to tender

Landing the Claims contrcat

Sub Guarantee contracting period and procurement

Testing and Contract delivery execution

Figure 3. The contracting cycle: key elements (Puil and Weele 2014) Before invitation to tender, one important stage of tendering is prequalification. Waara and Brochner (2006), identified prequalification as the only possible way of protecting the capable and established firms with the client getting a more economical job. Prequalification is usually required for large and complex work. It ensures that invitation to bid is only given to the firms who have adequate capabilities and resources to execute the project (Ade-Ojo, 2008; Aje, 2012). Prequalification is one of the major criteria in tendering within petroleum industry. Inter-America Development Banks Report (1997) highlights that prequalification depends on the “ability of the potential contractors to carry out the works in satisfactory manner” quoted in (Adedokun, Ibironke, and Babatunde 2013).

2.5. Invitation to tender Invitation to tender (ITT) is characterized by exploring the needs and requirements of the client, analyzing the client’s upstream networks, clarifying tender documents, initial negotiations with regard to risks and variations and checking the credentials of the parties involved. It is important that a tender manager or tender team is assigned with the job of preparing a detailed bid and to submit this bid for approval to the board of management. Van Weele and Van der Puil suggest following activities to be conducted by the tender manager or tender team:  Check the completeness of the client’s tender documentation.

22  Check the specific milestones and deadlines, as communicated by the client.  Prepare a time-based work plan for effectively preparing the tender, including a list of the key persons that will be solicited for advice and actions.  Prepare a concise tender document summary, to be sent to all those concerned in the international organization.  Prepare a detailed risk assessment plan, covering the major risks and flows in the proposed project, documents and conditions.  Develop initial ideas about the tender strategy, respecting the company’s overall business values and strategic principles.

According to authors, the tender process in practice is conducted under severe time pressure. The reasons for this are manifold. One reason is that the client needs a long time for its decision-making about the project and getting all financial resources arranged. Another reason is that tender managers (if available) have a heavy workload and are not able to give their attention to the incoming invitations to tender when required. A third reason is that where tender managers need to rely upon the capabilities and expertise of other specialists in the organization, these specialists are not readily available. A final reason is that senior executives, who needs to decide about final proposal, appear to have different ideas at the time proposed bids hit their desks. All of these circumstances may lead to a situation in which bids for tender are not getting attention that they deserve. As a result, the company may be subjected to unnecessary risks when decisions about these proposals need to be made.

Based on Van Weele and Van der Puil s’ experience with tender manager and project managers, they recommend for important tenders to work with the competing tender teams. The contractor will benefit doubt from the insight given by the different specialists involved. Another recommendation is to take sufficient time and spend sufficient effort in preparing a bid. At very early stage, tender manger also needs to decide what type of contracts needs to be pursued in the relationship with the prospective client. Normally it is client who chooses the contract type and the form of contract, which as a rule are part of the tender documents. Eventually, authors conclude the preferred tender strategy is always the result of a number of considerations, including for work by the contractor, the specific project characteristics,

23 the contractor’s risks policy, relationship with the client, the personalities and seniority involved in the tender team, etc. (Puil and Weele 2014).

2.6. Landing the contract Tendering process is part of the pre-contractual stage. At this stage, contract parties need to get acquainted and accustomed to each other. One way to explore the other party is to ask questions and request clarification on issues that are observed in documentation and communication. This allows parties to engage in dialogue and discussion. Form the client’s point of view it is important that a level playing field is developed in the relationship with all bidders. The client’s procurement managers generally will ensure that no single contractor comes into a favored position. This is difficult, since what is allowed at this stage is different per culture, per sector and per type of company. In general, oil companies are very strict in their dealings with contractors. No fringe benefits will be accepted whatsoever, be in the tender stage or latter in the project execution stage. The LOI can be considered as a preliminary contract, which helps parties to gain experience in working together more closely and to get a feel for the chance of success in the future collaboration for the entire project. This is the purpose of LOI.

Contract negotiation and closure - at this stage of the contract cycle, it has become clear what type of contract will be closed with the client. There are some alternatives. For oil and gas sector there can be emphasized following types of contract: Design, Build, Finance, Maintain (DBFM) contract. This is used in situation when the employer does not have the technical knowledge to design the project, nor has the financial resources to pay for the total investment up front, and nor wants to engage in the maintenance of the project. All those activities are to be transferred to the contractor. Usually, this leads to very complex contracts, which extend to a long period of time. Design, Build, Finance, Maintain, and Operate (DBFMO). Here, the contractor accepts the obligation to operate the permanent works for a certain period of time (Puil and Weele 2014).

Subcontracting and procurement – this stage is characterized by hard-pressed negotiations with subcontractors and materials suppliers, who needs to give in dramatically on their initially quoted prices and rates. Crucial elements is subcontracting are: deciding when to

24 involve which subcontractors in the project (some of them might need to be engaged at tender stage), how to pre-qualify or pre-select them, how to structure the bidding process and how to select the best offer. Their activities should be meticulously planned, and to follow up on their activities, technically, in terms of quality and financially.

Contract execution – this stage is characterized by many discussions on the variations caused by changes in the client’s requirements. Any change in requirements leads to extra costs, charged by the contractor who wants to make up for the bad project margin.

Testing and delivery – here, the client and client’s engineer are overly meticulous and ruthless in assessing the contractor’s actual performance. Variations from the initial scope of work will always be found, as well as variations in performance. These variations will be used to uphold or extend payment to the contractor.

Guarantee period and claims – the last two stages of the contracting process are the settling of guarantees and claims handling. As the disputes will continue during the guarantee period, the client will withhold final payment of the retention fee. As in most situations the client will negotiate for a retention fee, it is important to keep in contact with the client during the guarantee period to sound out upcoming problems with the work or installation delivered. (Puil and Weele 2014).

2.7. Auctions Auctions are common phenomenon in procurement. The regulator might use auctions instead of tendering. To understand the idea of auctions, and in which case it can be applied, the theory of auctions will be reviewed. Moreover, there can be found some similarities and differences between these two types of phenomenon that is discussed below.

Auctions can involve a case where the seller (auctioneer) is looking for the highest price possible or, a case, where the buyer (auctioneer) is looking for the lowest price possible. (Menezes, Pitchford, and Wait 2003) define an auction as a method for allocation the scarce recourses. The latter is a mechanism to establish a price at which supply equals to demand in a situation in which the seller does not know the value the various buyers attribute to the object to be sold. In an auction, the seller and each potential buyer know their own values or

25 estimates for the object, but do not necessarily know those of the other participants. The seller wishes to obtain the highest price possible and buyers want to win auction paying the lowest price. The figure below illustrates the mechanism of auction.

Figure 4. A three bidder auction (Menezes, Pitchford, and Wait 2003) The objective of an auction design relates to obtaining the highest possible from the bidders; equivalently, with a tender the objective is to minimize the cost of service or product required. When should be an auction used? The authors’ answer to the question is that the former should be used to sell an asset for which there is no established market, that is, when market is thin. They add that auction protects uninformed sellers. Instead of having to predict the market price, a government employee who has insufficient information about the potential value of the asset to be sold can simply let the competitors determine final price. And finally, the authors add that auctions are generally efficient from an economic standpoint: the asset auctioned tends to go to the bidder that attributes the greatest value to it. In this fashion, a well-designed bidding process can ensure that the most competitive player emerges victorious (Menezes, Pitchford, and Wait 2003).

Klemperer says that the most important features of an auction are its robustness against collusion and its attractiveness to potential bidders. The author also adds that auction design is not “one size fits all” (Klemperer 2002).

2.7.1. Type of auction The literature on auctions identifies a wide variety of auction.

 The English auction is often used to sell art and other collectibles, for example. In this process bids are replaced by higher bids to obtain the highest price for a given item.  The Dutch auction is commonly used to sell perishables (Lysons and Gillingham 2003). In the ‘Dutch auction’ the auctioneer starts with at a high price and then

26 descends by steps until a bid is received. The successful bidder then decides whether to buy the whole or a proportion of the items on offer at that price. The auctioneer increases the offer price for any items remaining in the current lot and then again descends by steps and continues in this manner until either the whole of the items comprising the lot are sold or a reserve price is reached (Lysons and Gillingham 2003).  Sealed bid auction are most often used in procurement situations (Wurman, Wellman, and Walsh 2001b). In this auction, bidder simultaneously makes a single “best and final” offer. As a result, firms are unable to retaliate against bidders who fail to cooperate with them, thus collusion is hard (Klemperer 2002). Sealed-bid process is similar to tendering. A potential purchaser issues a request for bids to be submitted by a prescribed date and time under a sealed format. At the specified date and time the purchaser’s representatives will evaluate and compare the bids according to a rating grid. The winning bid is the bid that achieves the maximum score (Lysons and Gillingham 2003).

(Wurman, Wellman, and Walsh 2001a) point out three core activities in auction:

 Receive bids: Bids are the messages sent by agents to indicate their willingness to participate in exchanges. On receiving a bid, the auction verifies that it satisfies the auction rules, and if so, admits it into the active set of bids.  Clear: The central purpose of an auction is to clear the market, determining resource exchanges and corresponding payments between buyers and sellers.  Reveal intermediate information: Auctions commonly supply agents with some form of intermediate status information.

Nowadays the most used auction in procurement is seller-bid auction which also called a reverse auction where multiple sellers submit price bids to an auctioneer that who represents a single buyer (Ghawi and Schneider 2004). The bids are for a given amount of a specific item that the buyer wants to purchase. The prices go down as the bidding continues until no seller is willing to bid lower. Reverse auctions are sometimes used in business-to-consumer (B2C) transactions, but the vast majority of these auctions involves buyers and sellers that are both business organizations. The main objective of a reverse auction is to obtain the lowest cost possible. Because the reverse auction event is conducted online, the buyer’s procurement staff and executives can observe the event as it occurs. The results gained from

27 reverse auctions can be made highly visible within the buyer organization. The authors say in industries where suppliers are larger and more powerful than buyers, the former do not agree to participate in reverse auction.

2.7.2. E-auction An e-auction can be defined as: An electronic market, which can exist in both business-to business and business-to customer contexts. Sellers offer goods or services to buyers though website with a structured process for price setting and fulfilment (Lysons and Gillingham 2003). Electronic auction occurs towards the end of the procurement process after full evaluation of tenders. E-Auctions are being held on an online platform. The most common type of online auction is reverse auction. Say that this is an effective procurement tool since both buyer and supplier benefit from it: buyer benefits from a significant price reduction, and the supplier benefits because of e-auction is, open and transparent competition among its rivals. And finally it will lead tangible savings regarding money and time as for contracts can be awarded faster. The greatest advantage though e-auction for suppliers will be the gain in transparency. This results from the fact that the latter will be able to benchmark themselves against the market place. Additionally, this will lead to the fact that suppliers will get clear information regarding the question why they have not been awarded the contract. Furthermore, an electronic auction will lead to fair results, as by strictly objective standards “the best in class” will obtain more business (Batoev and Schlosser 2013).

Electronic auctions are justified by the idea that electronic means may help to facilitate an increase of competition and streamline public purchasing, particularly in terms of the savings in time and money which their use will allow. Electronic auctions can include non- price and price stages. The latter implies that after pre-qualification of suppliers, they are invited to compete in an electronic auction, mainly on price. E-auction as mentioned above, will take place at the final stage of a tender procedure and may be used in open, restricted or negotiated procedure (Batoev and Schlosser 2013).

(Maffei 2013) says that the preparation for a successful e-auction is exactly the same as for running any successful tender process. This implies: to engage stakeholders, ensure that procurement strategy is appropriate to for the product’s complexity and importance to

28 business, pre-qualify the suppliers, explain the process to everyone and potential suppliers in particular, (especially whether pricing is the sole criterion and if not what the other criteria are and how these will be assessed) and be clear about product requirement. The author says that the reason why e-sourcing has become widely embedded is speedier and more transparent business as usual. She also highlights that e-auction adds the end point of procurement process improvements and when the products auctioned is are not highly strategic.

There have been mentioned two common sources of resistance to procurement’s desire to run an e-auction. The first is due to the suppliers’ understandable desire to avoid the commoditization of their products and the inevitable, associated margin squeeze. The second comes from the internal stakeholders who are also the users of the product. Their concern tends to be that the process will lead to impairment in working relations with the supplier especially where high pricing is a result of internal process inefficiency (Maffei 2013).

E-auctions shall be used when there are competition, a sufficient number of suppliers and sufficient scope for more competitive pricing. According to the rules for dynamic purchase systems, there is a set of specific rules that must be followed in the context of using electronic auctions methods: all participants must be invited simultaneously by electronic means to submit new prices and /or values. There must be also a timetable for the respective phases of the auction in the initial invitation to participate therein. Moreover, throughout each phase, the contracting authority is obliged to submit information to all tenderers that enables those to ascertain their standing within the auction. And finally, an invitation to participate must contain a list containing information regarding the conduct of the process (Batoev and Schlosser 2013).

2.8. Risk “All tendering projects involve risks and challenge is how you manage that risk” – Richard Myhre, CEO of AXTech

Risk and risk management are unavoidable and vital part of tendering. Namely, they are the essential elements in procurement strategy while conducting tender. Buyer before executes and describes how tendering process would be handled, first performs the risk assessment. As identified risk and success factors are defined, the risk mitigation act is carried out. This is especially relevant in oil and gas industry that is characterized by specific regulations and

29 requirements. Therefore, this part of the literature review addresses risk and tendering related risk. In addition, risk in oil and gas industry is reviewed. And in the end, most importantly, risk mitigation and risk management techniques will be discussed.

2.8.1. Definition There are many definition of “risk”. How one defines risk depends upon his/her field. Indeed, one definition of risk is not applicable for all disciplines. (Puil and Weele 2014) define risk as the effect of uncertainty on the realization of certain objectives, whether positive or negative. In the construction industry risk is mostly associated with a negative effect: “Risk is a threat to an organization (or a project) that reduces the likelihood that the organization (or project manager) will achieve one or more of its objectives.” There can be noticed another definition of risk as follows: “Risks are possible occurrences, which, in the event they occur, have a negative effect on the achievement of the prior chosen boundary conditions of the objective of the project.” (Matland 2013) highlights the definition of risk, quoting Petroleum Safety Authority in Norway, “risk means a combination of probability and consequence.” According to ISO 31000 risk is “the effect of uncertainty on objectives” and an effect is positive or negative deviation from what is expected (Praxiom 2010). Another approach to define risk is as follows: Risk = probability of risk occurring x impact of risk occurring (McNeil et al., 2005) quoted in (Agerberg and Ågren 2012).

Hence, in many articles and books can be found the definition where risk refers to uncertainty or likelihood of outcomes, actions and events. (Athearn 1986) points out the risk definition of several authors, as “uncertainty of loos” or “measurable uncertainty”. Bickelhaupt says that an essential element of risk is unpredictability, a tendency that actual result may differ from predicted result. Williams and Heins define risk as “objective doubt concerning the outcome in a given situation”. Another perception of risk is perceived as the chance of loos or the occurrence of unfavorable or undesirable contingency, quoted in (Athearn 1986). (Dima and Vlăduţescu 2012) say that risk reflects the variations of distributing the possible results, their subjective probability and values.

30 Risk into different categories can be mentioned as follows: operational, financial, quantitative, credit, enterprise, market, technology and IT risk (mapsofworld 2015). Whereas (Harland, Brenchley, and Walker 2003) divide risk into: strategic, operational, supply, customer, assets impairment, competitive, reputation, financial, fiscal, regulatory and legal. Whereas (Puil and Weele 2014) categorize risk as follows: market risk, credit, operational, financial, legal and regulatory, strategic, business, reputation risk, contractual risk, executional, political, risks in local labor and risk concerning health, safety and environment (HSE).

2.8.2. Risk assessment Risk management implies the identification, assessment and prioritization of risks, followed by coordinated and economical application of resources to minimize, monitor and control the probability and/or impact of unfortunate events (Puil and Weele 2014). This is crucial in tendering for both parties. Risk assessment can influences the decision while pondering to enter tender. It should be mentioned, that each project has its own risk profile. (Puil and Weele 2014) suggest that risk policy and risk management may serve as a compass while mitigating risk. Different tender teams may arrive at different risk assessments, and as a result, may come to different tender prices and proposals.

(Weele 2010) points out that outsourcing is related to technical, commercial, contractual and performance risks. By technical risk is meant the extent to which the provider is able to provide desired performance. In commercial risk, the author highlights the uncertainty with regard to price contractor will pay and the cost occurred while outsourced. As for contractual risk, it implies whether contract, scope, size of the project describe the performance that is expected from supplier. The last type is performance risk which is related the chance of incapability of supplier doing the jobs it was hired for.

(Weele 2010) underlines that risk factors should be assessed on the basis of two criteria: (1) the negative impact on the company’s financial performance or operations, and (2) the likelihood with which the risk factor probably would occur. Based on this these two criteria, a risk assessment matrix can be developed, that allows the development of specific risk mitigation strategies and activities per risk factor (Figure 5). The risk matrix technique is one of the most used qualitative methods and is often used in organizations which exclusively perform a risk analysis based on negative risks. This technique is often the initial

31 step to a more comprehensive risk analysis and used as a basis for a quantitative risk analysis (Agerberg and Ågren 2012).

Figure 5. Risk matrix (Puil and Weele 2014) Another risk matrix constructed by Project Management Institute (2004) categorizes risks into five colors, which can be seen in a grayscale. The risk consequence interval is divided in five fractions and stretches from events with severe impact to events which are negligible. The probability interval is also divided into five fractions, and cover risks which are very likely to very unlikely. However, each organization should decide on the translation of the matrix’s colors and establish criteria that decide which risks are accepted and which cannot. It should be mentioned that even though the matrix is qualitative approach to risk assessment, it can be designed in a semi quantitative approach with numerical values as well.

Negligible Minor Moderate Significant Severe Very likely Low-med Medium Med-Hi High High

Likely Low Low-med Medium Med-Hi High

Possible Low Low-med Medium Med-Hi Med-Hi

Unlikely Low Low-med Low-med Medium Med-Hi Very Low Low Low-med Medium Medium unlikely

Table 3. Probability and impact matrix, PMI (Agerberg and Ågren 2012)

32 Effective risk assessment, especially in construction project and oil and gas industry is especially crucial because of their unique and uncertain characteristics. To estimate construction project risk in a precise way, project manager should address these uncertain and unique characteristics of projects. Three approaches are common in construction project risk assessment: probability analysis, interval analysis, and fuzzy set analysis. Probability analysis techniques include sensitivity analysis, basic probability analysis, decision-tree analysis, and Monte Carlo simulation techniques. While interval analysis estimate plausible ranges of results based on ranges for the input variables. As for fuzzy analysis, recently it has been used to solve uncertainty problems, especially when probability information is limited and the boundaries of variables are not obvious (Kuo and Lu 2013).

(Agerberg and Ågren 2012) say that risk management techniques are best developed within industries with heavy engineering events or in organizations where there are high levels of technical risk involved. As mentioned earlier, construction project is characterized by large number of risks. (Smith et al, 2006) suggests that those risks should be structured. The author identifies following risk associated with construction project: financial risks, legal, weather related risks, political risks social, third party risks, environmental, communications, client related risks, geographical and geotechnical, subcontractor risks, construction risks, technological, contract risks ,supply risks, force majeure risks, commissioning risks, completion risks, injury and safety risks and Design risks, quoted in (Agerberg and Ågren 2012).

(Hillson 2003) claims risk breakdown structure (RBS) as one of the most effective methods to structure and organize risks. The RBS can be used in the risk assessment. The method is based on a hierarchical allocation of project related risks. RBS can be defined as “A source- oriented grouping of risks that organizes and defines the total risk exposure of the project or business”. The author propose that the identified risks should be allocated to its source in the structure which highlights significant risk sources. It will provide a comprehensive view of the risk exposure for each of the projects risk sources. The total risk exposure can be compared with the impact of each individual risk. Additionally, the analysis will give decision makers knowledge about the critical and most important risks in a project. In contrast, analyzing the risk exposure in an unstructured risk list, the RBS provides a comparable measurement of the risk exposure for the project portfolio (Hillson 2003).

33 ISO 31000:2009 suggests that choice of risk analysis technique will depend on the identified risks characteristics, the analysis purpose, the project size and scope, and finally the available resources (ISO 2009). However, in every risk management process such as identifying risks, analyzing its probability and impact and finally handling plan are crucial.

2.8.3 Risk in oil and gas industry In 2009, four of the top ten fortune 500 companies were classified within the oil and gas industry. The major risks within oil and gas industry were highlighted as operating, financial and strategic risks. The latter encompasses: start-up timing, operational outages, reservoir performance, exploration risk, volatility of crude oil and natural gas prices, weather events, regulatory changes, political and technical risks, geo-political risk, transactions risk, changing macroeconomics condition risk and inflation/currency valuation risk (Rogers and Ethridge 2016).

The oil and gas industry is operating in increasingly remote geographical locations and harsher environmental conditions. That is why HSSE (health, safety, security and environment) remains number 1 priority in oil and gas industry. In this industry, managing capital projects, in particular large capital projects, in a global environment is becoming increasingly complex. This means the more complex the project is, the more risk to manage. The objectives of oil and gas companies are to avoid personal injuries, occupational illnesses, and harmful or unintended spills to the environment and no damage to material assets or financial losses.

(Bigliani 2013) suggests that oil and gas companies need to establish access and visibility of information, right information at right time. The companies should create intelligence from the massive amount of technical and business data, both structured and unstructured, that they have collected. The ultimate goal in collecting all this information is to reduce risks, and meet compliance requirements with information life-cycle management. The strategic, operational and tactical decisions to the risk management in oil and gas industry are also considered crucial.

Baker et al. (1999) quoted in (Agerberg and Ågren 2012) points out that the oil and gas industry is known for advanced quality risk management and claimed to be more successful compared to the construction industry. Baker et al. (1998) investigated how risk

34 management was executed in the oil and gas industry where study classified into qualitative and quantitative methods. He found out that 80% of the studied firms used a combination of both methods. Furthermore, the most often used qualitative methods were the risk matrix and the decision tree analysis, which also were the most successful qualitative methods (Agerberg and Ågren 2012).

2.8.4 Risk in tendering process “Success in contracting is decided by the way in which you are able to manage risk in the relationship with your key stakeholders. Risk management should be at the core of the activity of any tender team.” (Puil and Weele 2014, 83)

Supplier-based risk have caused headaches for procurement, as new research of Achilles reveals (Sawers 2016). (Achilles is a global network of qualified suppliers within several industries where buyers can easily have an access to qualified suppliers). The author explains that this might be because of the fact that people tend to think ‘it will not happen to me’, although the evidence suggests that there is a good chance that it will. Moreover, too many procurement functions are being adversely affected by the risk that they simply are not prepared for. Hence risk assessment and it mitigation should be at core activities within procurement process. The author emphasizes that the serious source of concern are following: 27% of procurement functions do not hold information as basic as financial reports on their potential suppliers – and 16% have no information about potential suppliers’ health and safety matters.

James Palmer, director of strategy at Achilles says that “the big change that has been happening over the past few years is that you are being held accountable for what is going on three of four tiers down in your chain”. He also adds that “knowing who your suppliers are goes a long way and then you have to understand complete supply chain and map it all the way down”. Then it is about creating a sensible risk model and understanding where your exposure are, collecting the right information on those suppliers, says James Palmer. He concludes that understanding exposed risk and keeping it up to date and checking its right is important (Sawers 2016).

(Bævre 2015a) The risk assessment is initially basis for the decision whether to enter the tender. The latter is also crucial for the financing of the project and form the basis for the

35 selection of contract formats and contract content between the involved parties. Once a company has decided to prepare a tender, the assessment should be delved. (Puil and Weele 2014) say that the risk assessment should be conducted together with the tender team, which is requested to: identify the most important risks and access how these risks will be managed. With this regard, the authors classify risks as: risks that should be accounted for the firm, risks to be accounted for the client; risks that should be carried jointly; and risks that should be transferred to other parties. (Agerberg and Ågren 2012) illustrated though their findings how risk management in tendering process occurs in practice (Figure 6).

Figure 6. The risk management process in practice (Agerberg and Ågren 2012) (Kwak et al. 2009) say that risk in tendering projects can be divided on two types and of risk allocation: global and elemental. The first ones are the ones outside of control from the parties, factors like: “political, legal, commercial, countries’ economies and environmental”. The second ones can be allocated to the parties like: “design, operation, technical, management, legal, maintenance, financial and revenue risks”.

In the preparation of the bid the estimated cost is adjusted by the addition of mark-up to cater for risks, overheads and profit (Harris and McCaffer, 1995) and the assessment of these conditions vary from company to company. The difference in mark-up determines the bidding outcome and subsequently the survival, growth and profitability of the contracting organization, quoted in (Adedokun, Ibironke, and Babatunde 2013). The bidding process is basically the determination of a contractors mark-up or margin. One major factor in the determination of the bid is the degree of risk inherent in the project. (Adedokun, Ibironke, and Babatunde 2013) point out that the riskiness of a construction contract depends on the form of contract adopted by the client. Therefore, the degree of risk borne by the parties is determined by the contractual arrangement. (Sung and Kao 2014) In the stage of tender can be mentioned two main principal risks, one is the risk arising from strategies, and the other is the risk of the term of contract.

36 In engineering and management book, the main risk factors in bidding are summarized as follows: (1) the risk the bidder own; (2) the risks of tender documents; (3) the environment risk in the construction workplace; (4) policy and regulation risk; and (5) the bidding risk.

(1) Bidder’s own risk mainly is reflected in their own management, economic strength, or enterprises. (2) The tender document’s risks is mainly reflected in the bidder’s comprehension and judgement to the tender documents. Hence, it is vital that bidder fully understand tender document to avoid risk. (3) The environment is construction workplace entails that differences of geology, foundation, hydrology, climate conditions and so on are likely to lead the bidder’s incomprehensive analysis about the environment risk in construction workplace. (4) Policy and regulation risk implies that changes before and after the bidding may affect contract management in construction process. (5) Bidding risks implies that the selection of bidding strategy will make a bid difference in whether the bidder can bid successfully or get the guarantee after successful bid. It should be noticed that risk exist in whole bidding process and therefore bidder should analyze all kinds of risk factors (Zhang and Zhang 2011).

Risk on the supplier side will depend on the price offered in the bid. Given that the preparation of a bid will vary from company to company; the estimated cost is adjusted by the addition of mark up to provide for risks, overhead and profit (Harris and McCaffer 1995) quoted in (Adedokun, Ibironke, and Babatunde 2013). The difference in mark up determines the bidding outcome and subsequently the continuity, growth and profitability of the contracting organization.

On the buyer side risk will depend on the use of tendering to select the right supplier, where it is the first attempt to understand risk. Ian Walis et al (2010) stated that competitive tendering may lead to adverse selection, obtaining undesired results since buyers and sellers have asymmetric information. Ian Walis et al (2010) emphasize that the buyers should not focus on cost-minimization but rather on adding value to the service and quality. The authors’ solution to this issue is “that competitive tendering thus requires a sound tender assessment system that can identify trade-offs between price and quality, and can determine if a bid price is likely to be sustainable over the term of the contract” quoted in (Diaz 2014).

37 2.9. Managing Suppliers and Subcontractors When tenderer submits a bid, he/she should demonstrate how it will be able to provide a secure and timely delivery of the supply. This supply chain includes many players and most importantly subcontractors of suppliers. Regulator always takes into consideration who tenderer’s sub-contractor are and what their capacities and capabilities are. Furthermore, tenderer’s sub-suppliers and their experience within a specific required job, directly influences regulator’s decision while evaluating a bid. Additionally, regulator’s requirements and need would be directly reflected to subcontractors. Therefore, it is important to examine contract management, downstream contracting and subcontracting in the oil and gas sector.

2.9.1. Contract management Contract is a final step after negotiation and clarification between buyer and supplier are done. (Saxena 2008) defines contract as “the sum of all transactions and interactions that have taken place between the parties, both before and after the award of the contract”. The author in the book suggests following definition: A contract is a set of documents, governed and restricted by law, that clearly establish the boundaries, extent, and intent of executing the parties’ relationship, along with the rights and responsibilities of the entities involved (Saxena 2008).

Macneil (1960) says that “contract is an edifice partly built by parties but also built by society, by the law”. Macneil highlights benefit of contracting as they regulate the relationship by furnishing a plan for the future (Macneil 1980) quoted in (Campbell 2001). Additionally, (Macneil 1980) emphasizes that “contract without the common needs and tastes created by society is inconceivable”. According to (Williamson 1985) contracting is variously described as one of (1) planning, (2) promise, (3) and (4) governance (or private ordering). Adding, which of these descriptions is most applicable depends on the behavioral assumptions. In his theory, he illustrates that contracting process depends on asset specificity. The signs in the table indicate the absence or presence of behavioral assumptions.

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Table 4. Attributes of the contracting process (Williamson 1985)

Transaction cost economics assumes that human agents are subjected to bounded rationality and opportunistic behavior. The former implies when behavior is “intendedly rational, but only limited”. While the latter behavior is “self-interest seeking with guile” (Williamson 1985). The author mentions that is rare when parties eliminate non opportunistic behavior and emphasized that contract is never complete and this can lead to own interpretations, which can arise conflict among parties.

(Puil and Weele 2014) define contract management as: “the process which ensures that all parties to a contract fully meet their obligations, in order to satisfy the operational objectives of the contract and the strategic business goals of the customers”. The authors underline that major challenge within contract management is to overcome the conflicts of interests which arise between the buyer and supplier. The latter can be caused by different objectives which contract parties have. The buyer wants to pay as little as possible while the contractor wants to generate as much money as possible. Which is an example of opportunism behavior mentioned above. The authors suggest how to overcome conflict of interest between parties. One approach is that to increase and improve communication flow on the project, to ensure that all participants have sufficient information to behave rationally and to reduce possibility of deceit, on which opportunism depends. Another suggestion is to incentivize project participants to share a common objective.

In the construction industry and the oil and gas industry most contract are fixed-price, in another words, lump-sum agreements. The advantage of this type of contract is that price to be paid is established in advance, as well as the work schedule. However, it can be a

39 disadvantage that employer may not get insight into the contractor’s cost price and profits. The employer benefit from it since he knows the expectation of commencing work (Puil and Weele 2014).

(Puil and Weele 2014) point out knowing four important perspectives on contract management when designing a contract or discussing conflict between parties:

 Dyadic perspective – contract parties are limited to the employer and the contractor. This perspective applies when parties allocate risks among themselves and when parties think that all problems related to their agreement need to be solved by themselves.  Supply-chain perspective – this especially applies to oil and gas industry. In this case, completion of the work will depend to a fair extent on subcontractors and suppliers downstream on their supply chain. As a result, key subcontractors and suppliers may be consulted when preparing the contract, or even be involved in the contract negotiation itself. This happens in the case of so called back-to-back agreements, where major conditions of the contractor between client and the contractor are translated one-to-one in the contracts with downstream subcontractors and suppliers.  Value-chain perspective – when the contractors, subcontractors and suppliers are aware of their common interest. To which they jointly serve, collaborate and exchange information.  Network perspective – this builds on previous perspective and says that no company can act in splendid isolation. All parties are aware of the interdependencies that may exist in the relationships of other companies that belong to the same industry.

Contract management can be concluded with the remark that trust has always been a key and one of the most behavioral factor in managing relationship. Especially, in construction and oil and gas industry where collaboration among contracting parties is essential. Indeed, the relationship based on trust leads to reduction of opportunistic behavior and improvement of project outcome.

2.9.2. Downstream contracting (Cavinato and Kauffman 2000) define subcontract as a contract that covers the purchase of a complex item for which very detailed administration is required to accomplish successful

40 delivery. The major facets of the contracting and subcontracting task involve contract administration and contract management.

Today, large construction projects cannot be dealt with by one company only. The expertise that is needed, the complexity of the project activities and the uncertainty and risk that are related to these kind of projects warrant close cooperation among all partners of the value chain (Puil and Weele 2014). This becomes visible in the cost structure of projects, as illustrated below.

Figure 7. Typical cost structure of a main contractor (Puil and Weele 2014)

This explains why in the construction industry, strong price orientation exist in the dealings and negotiations with the external partners. However, this price orientation may work to the detriment of quality of the project, project schedule and targeted total cost of ownership. The impact of suppliers and subcontractors on the project profitability is only one part of the story. The other part of the story is that, suppliers and subcontractors are also responsible for 65% of the employer’s satisfaction with the work, project delivery and the project’s carbon footprint. Next suppliers and subcontractors will be responsible for about 65% of the innovation capability that could be mobilized to improve the project value to the employer. It goes without saying that if supplier are squeezed by their main contractors, their willingness to participate in actions to improve project solutions or project processes will be minimal. (Puil and Weele 2014)

41 Subcontractors’ strategies, structures and role within supply system have been approached from two different perspectives. The first perspective takes a static approach and classifies subcontractors on the basis of industry-wide, company-specific or relational characteristics. The second perspective takes a dynamic approach and proposes evolutionary models of subcontractors and of the industries they operate in (Furlan, Grandinetti, and Camuffo 2007).

The nature of subcontracting in the construction sector is partly due to the specialist nature of most construction works (Yik et al, 2006) and the strategic choice of by large construction firms to emphasize flexibility as a source of competitive advantage. For complex and highly commoditized work packages where main contractor depends mainly on the specific knowhow of a subcontractor, the main contractor may have to rely – far beyond price consideration – on firms with whom they have established prior relationship, quoted in (Manu et al. 2015).

(Hartmann and Caerteling 2010) propose that main contractors have to carefully arrive at a trade-off in the priorities they place on either price-driven (market) or trust-driven (relational) governance mechanisms during transactions with subcontractors, quoted in (Manu et al. 2015).

(Arditi and Chotibhongs 2005) say that late payments, charging fees to tender for work, award for contracts based on cheapest price, rather than best value, suicide bidding ( both in the case of main contracts and subcontracts) and demand for retrospective discounts and cash rebates, are typical practices that manifest in transactions between main contractors and subcontractors. Additionally, subcontractors can also be faced with unlimited liabilities in the event of project delays as there is often no pre-ascertained liquidated damage proportionate to the level of risk they pose, quoted in (Manu et al. 2015).

2.9.3. Procurement and subcontracting in the petroleum industry Van Weele says that purchasing differs from buying and ordering in one important aspect: while specifications may be given in the situation of ordering. Based on him, the purchasing function covers following activities as illustrated below.

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 Determining the specifications - here can be observed functional specifications, design specifications and technical specifications. By functional specifications is meant functionality of work to be delivered. As for design specification, the contractor is provided with the global design outlining the general features. Moreover, a detailed budget estimate, needs to be prepared by the contractor. The latter specification which is important in offshore industry, engineer provides detailed technical instructions how the work should be constructed (Puil and Weele 2014).  Selecting the most suitable supplier – this stage involves two important steps, i.e. pre-qualification and bid award. In the pre-qualification stage, detailed check-lists covering the capabilities and references of the suppliers need to be filled in. it is common at this stage to request about tariffs and rates for particular activities. Afterwards procurement specialist will shorter the list of supplier. The shortlisted suppliers will be invited for a bid to tender. The second stage of supplier selection implies invitation to bid (ITT) which can be complex and demanding. Criteria that will be used to do bid evaluation will be submitted or not suppliers prior to the award. Procurement professionals may decide to use electronic auctions or not.  Evaluation of bidders – (Emmett and Crocker 2008) Evaluation of vendors should be conducted as a joint technical and commercial assessment that allows for all criteria that meet requirements. Those two criteria can be defined as weighting factors for choosing suitable supplier. The assessment process depends on the scope and nature of the contracts. The technical assessment looks at things such as: o compliance with the specification o performance parameters o quality o maintenance over the operating cycle While commercial assessment will look at things such as: o terms of payment o program risks o any commercial qualification In addition to two weight factors such as commercial and technical assessment there are another aspects that can be assessed on a supplier’s ability, attitude, organization, finance, structure, products and production methods.

43 1. Assessment of supplier ability – this implies capacity, the number and quality of workforce, quality of equipment, environmental policies, lead time and reliability record. 2. Assessment of supplier attitude – supplier’s attitude depends on shared goals, organizational strategy, and client management. 3. Assessment of supplier organization – meaning that supplier may be evaluated on organizational culture, line of communication, level of trust and delegation, internal and external relationship and management style. 4. Assessment of supplier’s financial data - information obtained from suppliers, the financial information needs to be evaluated. The latter implies liquidity, stock turn and gearing (the long-term loans that the company uses for funding where high gearing suggests the company is open to financial instability). 5. Assessment of supplier’s organizational structure. 6. Assessment of supplier’s product data. 7. Assessment of supplier’s production process.

 Preparing and conducting negotiations with the supplier in order to establish agreement and to write up contract - the contract manager will support the project manager and will act as liaison between him and the specialist legal counsels of the firm. There may be different versions of the contract documents before final arrangement is made.  Placing the order with selected supplier /develop efficient purchase order and handling system - when contract is agreed, materials and services then need to be ordered from the supplier and subcontractor. As project schedules can change, this activity is usually done at the project level.  Expediting - This process is related to following up on actual deliveries made by suppliers and subcontractors. Where deliveries of suppliers or services are closely monitored in terms of quantity and quality.  Follow-up and evaluation - even when project is finished, the work is not yet done. It is important to reflect on the actual supplier performance during the entire project. Actual supplier’s performance should be monitored and registered. This information will help company to qualify and select even better suppliers for future projects (Puil and Weele 2014).

44 Post-tender negotiation (PTN) – (Emmett and Crocker 2008) This stage involves negotiations with tenderers. Any post-tender negotiation must be carried out on the basis of a recorded plan and strategy, setting out the objectives of negotiation and giving the same treatment to all tenderers. The researchers (Manso and Nikas 2015) revealed that post-tender negotiation have positive effects on both the buyer and the supplier and leads to the achievement of value for money procurements. It was also found that the post tender negotiation follows the same principles as tendering and therefore adhered strictly to fairness in competition. Negotiations at the post tender stage for instance, should consider discussing factors such as the supplier’s responsiveness, flexibility, dependability, capability, lowest evaluated prices or competitive value, delivery on-time, reduced operating cost and quality.

2.9.4. Framework agreement Framework agreement is common between buyer and supplier. There is often a case that buyer announces tender just for framework agreement and gets supplier for long-term. As a result contract entity and tenderer reach terms and conditions and save time and resources since the former do not need to find suitable supplier every time they have a need. Additionally, terms and conditions and prices have already been agreed. Framework agreement is defined for specific time period and can be extended if buyer and supplier agree. This type of agreement in oil and gas industry in Norway is widely used. Therefore, this part is dedicated to understanding and using of framework agreement.

A framework agreement is an agreement between one or more contracting entities and one or more suppliers, the purpose of which is to establish the terms governing contracts to be awarded during a given period, in particular with the regard to price and, where appropriate, the quantities envisaged. These terms and conditions are related to a description of the characteristics of the goods and services to be supplied, the quality of the goods and services to be supplied, special delivery guarantees, payment and delivery conditions and price escalation clauses. (Weele 2010) also adds that for the classical government organization there are restrictions to entering a framework agreement. A contracting authority is may enter a framework agreement with one or more suppliers. In the latter there should be minimum of three tenders. The other restriction is that the maximum duration for a framework agreement is four years.

45 A framework is not to be considered as an award procedure, but represent a specific variation of the normal procedures under the directives normal procedures. This is a general term for agreements with a provider, or providers that set out terms and conditions under which specific purchases can be made throughout the term of the agreement. This type of agreement is especially recommendable in situation in which a contracting authority has recurring or continuing needs to purchase certain products or service. This will be even more so in situations where the contracting authorities do not have specific knowledge with regard to quantity and timing of their requirements. Furthermore it reduces administrative costs of tendering either within or across contracting authorities (Batoev and Schlosser 2013).

The public sector uses framework agreement with the intention to ensure transparency and as well as a sufficient degree of competition. A vivid advantage of this agreement is to enable the respective parties to establish the terms regarding future transactions in advance of specific orders in order to speed up procedures and reduce costs when it comes to actually placing the order. However, the authors mention that framework agreement, after it was established, a “closed system” occurs, as it does not allow for new suppliers to enter into the agreements after it has been put in place. Another disadvantage can be the fact that the parties may under no circumstances make substantial changes to the terms in the framework agreement. This shall be particularly so in the case of a framework with single operators. Due to the fact that, regarding framework agreements, usually a longer period of time will elapse before the award of a contract. This limitation is even more complicated than it is for other options of awarding contracts to suppliers (Batoev and Schlosser 2013).

The authors highlight two basic categories of framework agreements: one would be a single supplier framework which can take the form of a binding contract or result from the setting up of terms of future contracts between the contracting authority and the respective party. Regarding the latter, a legal commitment will be undertaken only in case an actual order is made. The other alternative is called a multi-supplier contract which involves an initial competition in order to select several potential suppliers. Based on that selection, the contracting authority will in case of an arising requirement choose from that list of prior selection one of the potential framework suppliers to fulfil the order. In comparison to the single-supplier framework, here the entity may choose the best supplier for each order, while again a new procedure. Moreover, it is also able to ensure a better security of supply and remains more flexible (Batoev and Schlosser 2013).

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2.9.5. KPIs Many contracts within oil and gas industry is governed within key performance indicator (KPIs) and is often subjected at periodic meetings and reporting in conjunction with the vendor management procedure. In addition, KPIs are especially used and important while delivering service and supply. Within this method buyer monitors and measures supplier’s performance which occurs in post tendering process. Hence, this issue should be indeed addressed when it comes to managing suppliers and following up procurement strategy.

Supplier performance must be monitored in a positive manner to motivate better results. KPIs can be used to ensure control of all procurement activity and highlight any deviation from the standards expected. In other words, the measurement by which customers determine value can be translated into measurable key performance indicators for their suppliers. If the supplier can achieve their target KPIs, then they are supporting customers’ objectives and providing values.

In general terms, KPIs will cover those quality, quantity, and price and time aspects, related to the goods being purchased and also to the relationship with the supplier. KPIs are measurable and therefore objective criteria. Subjective criteria can also be involved based on the buyers’ perception, for instance to commitment, attitudes and mannerisms (Emmett and Crocker 2008). (government 2014) When deciding how a supplier’s performance should be measured, agencies should ensure that the KPIs meet the following criteria:  Completeness - all significant aspects of the goods/service should be included in the measurement of performance.  Clarity - the procurer and supplier should have the same understanding of the performance measures to be used.  Measurability - performance requirements should be expressed in measurable terms and should be based on data which it is possible to gather in a cost effective manner.  Focus - specifications should be focused on the agency’s procurement objectives (which translate to outputs and outcomes), not on processes. KPIs and internal evaluation criteria is widely used in the oil industry. (Osmundsen 2011) say that an effective company management requires individual activities to be split up and

47 operationalized – as individual projects, for instance. These are then managed and evaluated against specific project-defined targets – KPIs. The author outlines that the advantage of this type of division that each department and project knows what it has to do and what it will be measured by. However, it is always challenge to find good KPIs. Clearly measureable criteria such as volume, production cost and time could clash with quality, lifetime costs and flexibility. Taking account of these additional dimensions are important.

2.9.6. Ethical standards One of the most important elements of purchasing is ethical standards. It is important to mention that ethical code can have huge impact while conducting procurement process. This is especially crucial while selecting supplier since tender committee or tender responsible people should always apply ethical code as their integral part of the business. And therefore, buyers expect their suppliers/partners to have high ethical standards as well. For this purpose, this part covers ethical codes in procurement process that shall be taken into consideration while conducting tenders.

Nowadays, many organizations have conflict of interest policies and ethical codes of behavior in supply management. There are several forms of unethical behavior in SM, however, the most common citied is conflict of interest. A general definition for conflict of interest developed by the Institute for Supply Management (ISM) is the involvement in “any personal business or professional activity that would create a conflict between personal interests and the interests of the employer” (Handfield and Baumer 2006). However, it should me mentioned that companies use their expression and definition of conflict of interest in their code of ethics. The authors provide one of the definitions “company X defines conflict of interest as an activity that is opposed to X’s interests or gives appearance of impropriety”. The Norwegian Oil and Gas Association says that conflict of interest may occur when an issue is of "particular importance" for a board member or "someone close" to him/her, which leads one "having to assume that the member has a prominent personal or financial special interest in the case" (Association 2003). The Organization for Economic Co-operation and Development (OECD) defines conflict of interest as follows (OECD 2003) “Conflict of interest involves a conflict between the public duty and private interests of a public official, in which the public official has private-capacity interests which could improperly influence the performance of their official duties and responsibilities” (2003, 4).

48

Sigma, (Support for Improvement in Governance and Management) a joint initiative of the OECD, considers within the concept of conflict of interest - not only the situation where in fact there is an unacceptable conflict between a public officials interests as a private citizen and his/her duty as a public official, but also those situations where there is an apparent conflict of interest or a potential conflict of interest (SIGMA 2007). According to Sigma, an apparent conflict of interest refers to a situation where there is a personal interest that might reasonably be considered by others to influence the public official’s duties. While the potential for doubt as to the official’s integrity and/or the integrity of the official’s organization makes it obligatory to consider an apparent conflict of interest as a situation that should be avoided. It should be understood that conflict of interests is not the same as corruption. Sometimes there is conflict of interest where there is no corruption and vice versa.

(Forker and Janson 1990; Laczniak et al. 1995; Carter 2000) say that the most cases of conflict of interest occur in connection with procurement decisions, consulting activities and the use of company resources and services, quoted in (Handfield and Baumer 2006). There are number of situations that pose potential conflicts that are especially relevant to SCM (Forker and Janson 1990; Cooper, Frank and Kemp 1997; Carter 1998) quoted in (Handfield and Baumer 2006): giving/receiving gifts, family/personal relationships, investments (if an employee is a buyer for a corporation and is also an investor in a company that is a supplier for goods and services to the same corporation) and use of company resources for non- business related activities. Therefore, (Stevens et al 2005) suggests that managers are more likely to integrate ethics codes into their decisions when there is pressure to do so from stakeholders, when there is a strong internal culture, and when training programs direct them to do so. Figure 8 illustrates model of ethical behavior proposed by (Stevenes et al 2005) to avoid conflicts of interest.

49

Figure 8. Model of ethical behavior in (Handfield and Baumer 2006) However, it is a company’s interest to evaluate the environment in which they operate, as to predict and examine the specific conflict of interest that may arise. (Handfield and Baumer 2006) into their research through interviewing companies, identified key “best practices” that aids the prevention of interest conflict:  Identify areas of concern – the first step of prevention is to identify the major areas where the largest and potential exist for conflict of interest. The latter should be done as a collaborative effort between employees involved in purchasing, the legal department and management.  Well-defined policies and procedures – it is important that understandable and clear definitions of the key terms are presented in the firm’s conflict of interest policy so that employees are not required to develop their own interpretations. Among key terms that should be defined are: “family relationship”, “personal relationship”, “gift”, “sensitive information”, “proprietary information”, “trade secret”, “financial interest” and “nominal value”. After clear reported procedures, it should be developed and published so that employees have a good understanding of what is expected when faced with a potential conflict of interest.  Communication – all employees should know where they can easily and anonymously obtain access to the company conflict of interest policy. Online publication of company ethics and conflict of interest policies is becoming increasingly popular.  Top-down support – it is important that all levels of management have a thorough understanding of the policy, so that when approached by employees about conflict of interest situation, they are able to quickly and effectively the appropriate action.

50 Because of their leadership position, it is important that management follow the established guidelines.  Training – by providing ethical trainings to all employees, there is a great likelihood that the reputation of the company for ethical dealings remain intact.  Periodic review – this should take place to ensure the currency. Updates may be needed because of changes in the business environment, government regulations or novel situations that have a potential to impact conflict of interest decisions.

Thus, it is imperative that management adheres ethical codes and procedures. The authors emphasize that companies no longer have luxury of ignoring the importance of integrating ethical considerations into decision making, with the particular focus on SCM.

2.10. Bribery and bid rigging While writing regarding bidding and selecting bidders, it is important to be checked that in a specific country there is no corruption, bribery and bid rigging. There can be cases where bidders cooperate and end up with bid rigging. For understanding this issue and giving insights how regulators can detect and avoid bid rigging among suppliers in tendering process, recommendations and guidelines are discussed below.

All European legal systems include anti-corruption regulations. (Puil and Weele 2014) say that corruption is found in all countries. The latter is especially widespread where legal system is weak. Bribery are committed “to get things done” in a way they should not be done. They serve the contractor to develop smooth operations and relationships. They are means to speed up operations for “a few dollars more”, for which one receives immaterial benefit in return. There are legislation, anti-corruption policy by official authorities, accounting regulations to deal with corruption. First there are legal arrangements. Top-down is a chain of legal conventions, treaties, laws, rules, regulations and recommendations. The largest institution that has formulated conventions is the United Nations. In 2005, the UN entered into the globally-agreed United Nations Convention against Corruption (UNCAC). A second instrument is the OECD Convention on combating bribery of Foreign Public Officials in International Business Transactions. And The International Accounting Standards (IAS) are applied all over the world, where listed companies, including banks and insurance companies, are obliged to prepare their consolidated accounts and annual in accordance with these standards (Puil and Weele 2014).

51 In Europe there are actually two conventions in force: the Criminal Law Convention on Corruption of the Council of Europe and the Civil Law Convention on Corruption of the Council of Europe. In the world the most stringent anti-bribery act ever is in the UK which is stricter than in the USA. (Puil and Weele 2014) mentions that contracts presented by employers with their invitation to tender often contain anti-corruption clauses. A more formal and strict way of dealing with this is the signing of anti-corruption acknowledgement statement. The latter is a model paper, drafted by the (future) employer, which has to be signed by the contractor before entering negotiations. OECD says that bid rigging occurs when bidders agree among themselves to eliminate competition in the procurement process, thereby denying the public a fair price. As a result, bidders can eliminate competition in many ways: a competitor agrees to submit a non- competitive bid that is too high to be accepted or contains terms that are unacceptable to the buyer, a competitor agrees not to bid or to withdraw a bid from consideration and/or a competitor agrees to submit bids only in certain geographic areas or only to certain public organizations (Fingleton 2012). Bid rigging can be executed in different forms. (OECD 2009) identifies following bid rigging: Cover bidding - it occurs when individuals or firms agree to submit bids that involve at least one of the following: (1) a competitor agrees to submit a bid that is higher than the bid of the designated winner, (2) a competitor submits a bid that is known to be too high to be accepted, or (3) a competitor submits a bid that contains special terms that are known to be unacceptable to the purchaser. Bid suppression - involves agreements among competitors in which one or more companies agree to refrain from bidding or to withdraw a previously submitted bid so that the designated winner’s bid will be accepted. In essence, bid suppression means that a company does not submit a bid for final consideration. Bid rotation - in bid-rotation schemes, conspiring firms continue to bid, but they agree to take turns being the winning (i.e., lowest qualifying) bidder. The way in which bid-rotation agreements are implemented can vary. For example, conspirators might choose to allocate approximately equal monetary values from a certain group of contracts to each firm or to allocate volumes that correspond to the size of each company. Market allocation - competitors carve up the market and agree not to compete for certain customers or in certain geographic areas. Competing firms may, for example, allocate

52 specific customers or types of customers to different firms, so that competitors will not bid (or will submit only a cover bid) on contracts offered by a certain class of potential customers which are allocated to a specific firm. In return, that competitor will not competitively bid to a designated group of customers allocated to other firms in the agreement.

Therefore, OECD designed tenders’ guidelines to government and public authorities to obtain best value for money, reduce probability of bid rigging and ensure that tendering process will result in a competitive outcomes (Fingleton 2012). Designing auctions and tenders can minimize the chance for a collusion. OECD offers following strategies on fighting bid rigging: Look for markets that are susceptible to bid rigging – there is a high probability of bid rigging where there are small numbers of bidders. Secondly, the chances of bid rigging are greater if the products or services being purchased are standardized and simple, and do not change over time. In this case it is easier to work out an agreement and have it last a long time. Thirdly, if entry in a certain bidding market is costly, hard or time-consuming, firms in that market are protected from the competitive pressure of potential new entrants. Learn about the market – this implies learning about the products, suppliers and conditions in the marketplace, as a result, procurement agents are better able to design effective procurement processes. It is particularly useful to gather information about potential suppliers’ prices and costs, including prices in other geographic areas or for similar products. Moreover, knowledge of the prices that have been submitted in recent tenders for the same or similar products, help procurement authorities to recognize what is acceptable and what is not. Encourage strong participation by bidders - if the design of the tender process encourages participation by many bidders, then the chances of bid rigging are reduced. In addition, bidding on a portion of a large contract will permit small and medium-sized firms to participate. Similarly, allowing foreign firms to submit a bid will make collusion more difficult. Have clear requirements and allow for unpredictability in the tender process - it is recommended that tender specifications be defined in terms of functional performance, where possible, rather than by reference to specific products. Allowing for alternative or innovative sources of supply can also make bid rigging more difficult.

53 Limit communication among bidders - bid rigging requires bidders to communicate with each other. Hence, if the procurement process is designed to make it difficult for potential bidders to identify their competitors, then bid rigging becomes more difficult. Evaluate the criteria for awarding contracts – implies that the probability of bid rigging increases if you have a small number of potential bidders. It is therefore vital to consider the impact of the design of the procurement process on the number of bidders over the long term. Specifications should clearly describe all award criteria to encourage maximum participation. Training to procurement authorities - appropriate training will help procurement staffs to design a procurement process that is less susceptible to bid rigging. Moreover, development of a data base that contains past and present bid results will assist staff to detect potential problems quickly and help to rectify them.

Hence, it is crucial to understand that bribery, conflict of interest, and illegal gratuities can result in corruption. There is an international war against bribery and corruption going on. Procurement authorities should be especially alert when working in foreign country. Therefore, anti-corruption regulations plays an immense role against bribery. In addition, recommendation on fighting bid rigging in public procurement will help as public as private players to conduct more effective procurement procedure and reduce risk of bid rigging in tenders.

2.11. Research background & Research questions Efficient public procurement practice plays a key role in modern economies as they ensure reduction of wasteful activities. It involves spending money, and it is important to buyers to always act in the best interest of their agency. Competitive tendering has been a common way of procurement. The idea behind this arises from ‘best value for money’ objectives. In another words, get the work or service carried out as efficiently as possible with the best terms. Since procurement in the oil and gas industry in Norway is associated with high costs and complexity, public and private players seek to use tendering as their procurement method.

54 Especially now, when the sector is challenged by the low oil price and there is a need for cost reduction.

The study aims to find out how tendering as a procurement method has been carried out in oil and gas industry. To do so, the study objects to get practical experience of tendering procedures, evaluation criteria and award of contract in the Norwegian Petroleum Industry. The risk related to tendering and techniques for risk mitigation are part of research’s objective. Furthermore, how literature correspondents findings and what is a gap between them shall be investigated in the research. The research questions can be defined as follows: Q1. What are main requirements according to Norwegian Continental Shelf regarding tendering? Q2. How is the tendering process conducted? Q3. How do buyers evaluate suppliers? Q4. What are main drivers for choosing a supplier? Q5. What kind of risks are associated with tendering and how do players mitigate these risks? Q6. How is awarding process and post tendering process?

In addition to the main research questions, incentives and drawbacks of tendering, an alternative way of tendering will be also addressed. Additionally, bidding process and ethical behavior will be also examined.

55 Chapter 3

Research Methodology Chapter 3 is all about the research methodology and techniques used in the thesis. The research model has been presented as well. In addition, data collection, source and method have been discussed.

3.1. Research design Research can be defined as an academic activity which comprises defining problems and research questions, formulating hypothesis or suggested solutions, collecting, organizing, evaluating data and eventually reaching conclusions. The main aim of the research is to find out the truth which is hidden and has not discovered yet.

(Maxwell 2013) says that in a qualitative study “research design should be a reflexive process operating though every stage of project”. While (Yin 1994) says that research design is “logic that links the data to be collected and the conclusions to be drawn to the initial questions of a study”. He also adds that “every type of empirical research has an implicit, if not explicit, research design”. (Maxwell 2013) adds that because a design always exists, it is important to make it explicit, to get it out in the open where its strength, limitations, and consequences can be clearly understood. The author points out that qualitative research design, to a much greater extent than quantitative research, is a “do-it-yourself” rather than an “off-the-shelf” process, one that involves “tacking back and forth between the different components of the design, assessing their implications for one another. Maxwell also mentions that the research proposal acts as an argument which should convincingly demonstrate why this research should be done, what activities it will consist of, and to which results it will lead.

Figure 9.displays how research design has been created and carried out for the thesis. It can be seen that the starting point for the thesis is literature review, followed by the research questions, and research model formulation and. Afterwards interview guide was created in collaboration with the advisor. Upcoming step contains selection of companies and conducting face to face interviewing. The objective of the interviews was to get as more findings as possible. After data was collected its analysis and interpretation were delved. In the end, conclusion and recommendations are given.

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Figure 9. Research design

3.2. Qualitative research Van Maanen (1979) says that qualitative research is “an umbrella term covering an array of interpretive techniques which seeks to describe, decode, translate, and otherwise come to terms with the meaning, not the frequency, of certain more or less naturally occurring phenomena in the social world” quoted in (Merriam and Tisdell 2015, 15). The authors say that qualitative research’s focus is on process, understanding, and meaning, where the researcher is the primary instrument of data collection and analysis; the process is inductive and the product is richly descriptive. Poter (1985) explains that qualitative research is an effort to understand situations in their uniqueness as part of a particular context and interactions there. This understanding is an end in itself, so that it is not attempting to predict what may happen in the future necessarily, but to understand the nature of that setting. In addition, key concern is understanding the phenomenon of interest from the participant’s perspectives, not the researcher’s in (Merriam and Tisdell 2015).

(Marshall and Rossman 1999) say that researchers who conduct qualitative research face three challenges: (1) developing a conceptual, concise and elegant framework for the study, (2) planning systematic and manageable design and (3) interacting these two into a coherent

57 documents that convinces the proposal readers – a funding agency or a dissertation committee – that the study should be done, can be done, and will be done. (Patton 2002) also adds that the challenge of qualitative analysis lies in making sense of massive amounts of data. However, the author highlights that analysts have an obligation to monitor and report their own analytical procedures and process as fully and truthfully as possible.

The key issue in selecting and making decisions about the appropriate unit of analysis is to decide what it is you want to be able to say something about at the end of the study (Patton 2002). In this study, the main unit of analysis can be defined as interviews with companies (with the leaders), tendering and post tendering process, supplier evaluation-award process and risk and its mitigation process.

3.3. Interviewing as a research method

„Interviewing is rather like a marriage: Everybody knows what it is, an awful lot of people do it, and yet behind each closed door there is a world of secrets”.

A. Oakley (1981, 41 in Patton 2002, 340)

Qualitative researches typically rely on four methods for gathering information: participation in the setting, direct observation, in-depth interviewing, and analyzing documents and material culture (Marshall and Rossman 1999). Indeed, in this study the main source are interviews with informants. In addition, analyzing documents is part of the study. Namely, tendering documents and procedures of companies.

One of the most important and essential sources for the qualitative research is face-to-face interviewing. Being a good “listener” is important while conducting this type of research. The latter means being able to assimilate large amounts of new information without bias. (Yin 2014) adds that a good listener hears the exact words used by the interviewee (sometimes, the terminology reflects an important perspective). Even though interviews may take several forms, most commonly interviews are open-ended nature. The author adds that interviewer has two jobs throughout interview process: (a) to follow his own line of inquiry, as reflected by the protocol, and (b) to ask actual (conversational) questions in an unbiased manner that also serves the needs of one’s line of inquiry.

58 A common question about conducting qualitative interviewing is whether to record them. Audiotapes certainly provides a more accurate rendition of an interview. Especially, when the latter is prolonged interviews. This method allows interviewer to recall the exact words and terminology used by respondents and more importantly, listen to the interview once again, make notes without rush and analyze it deeply.

Interview questions were written out in advance exactly the way they were to be asked during interviews. In this scenario, respondents were asked for the facts of a matter as well as for the respondent’s opinion about events. The type of interviews in the thesis can be defined as a focused interview. This implies that interviewees were interviewed for a short period of time- an hour. The interviews remained an open-ended and assumed a controversial manner, but I, as the interviewer, was more likely to be following a certain set of questions derived from the case study protocol. All interviews were conducted face to face which was a led to less misunderstanding and collecting as much information as possible. Moreover, face to face interview guided to trust between me and interviewees. And as a result, valuable information, namely documentation and confidential information has been gained though interviewing.

The quality of the information obtained during an interview is largely dependent on the interviewer (Patton 2002). In addition, key informants are often critical to the success. Such persons not only provide insight into a matter but also gives an access to other interviewees who may have corroboratory or contrary evidence (Yin 1994). Interviews are not a perfect source of evidence, it has its strength and weaknesses. According to Yin, this can be displayed as follows:

Source of Evidence Strength Weaknesses Interviews  Targeted – focuses  Bias due to poorly directly on case articulated questions study topics  Response bias  Insightful – provides  Inaccuracies due to explanations as well poor recall as personal views  Reflexivity- (e.g., perceptions, interviewee gives attitudes, and what interviewer meanings) wants to hear Table 5. Source of evidence: Strength and Weaknesses(Yin 2014)

59 These features were important to be taken into account while setting questions for the interview and later on conducting it. Moreover, to be reduced reflexivity and omission in the thesis, at the end of the interviews all respondents were asked whether they would like to add something regarding tendering in Norwegian Petroleum Industry. In another words, they were given an incentive to refer to an important issue regarding tendering that they were not asked.

3.4. Data collection

“Simply observing and interviewing do not ensure that the research is qualitative; the qualitative researcher must also interpret the beliefs and behaviors of participants”. Valerie J. Janesick (2000, 387, in Patton 2002, 477)

Data collection in the thesis can be divided into primary and secondary. All primary data have been obtained by the researcher while the latter has been gained from official authority’s webs-pages, press-releases, books, journals, articles, and theses. The most valuable, primary data, was collected through interviews. All interviews were conducted face to face, namely, visiting the respondents in the company they represent for. This method offers the possibility of modifying one’s line of enquiry, following up interesting response and investigating underlying motives in a way that postal and other self-administered questionnaires cannot.

Nevertheless, although the interview is no sense a ‘soft’ option as a data-gathering technique, it has the potential of providing rich and highly illuminating material (Robson 2002). Indeed, face-to-face interview is one of the accurate and compassing methods of data collection which guided to trust among me and respondents, access to confidential information, further explanation and enquiry. This resulted in delving of the research topic, getting more insights and asking additional questions. Additionally, the respondents were ready for the interview and some of them were giving power point presentation and further clarification of tendering process within their company.

The major players in the oil and gas sector in Norway have been interviewed to get a deep understanding of tendering. Namely, 11 companies were interviewed. The selection of respondents was decided with care. The latter are the one from procurement and logistics department and even CEO of a certain company. Furthermore, most respondents are dealing

60 with vendors and directly involved in tendering and decision making process. The Interviews were conducted according to the interview guide which has been carefully created in the collaboration with the advisor (presented in the appendix).

All respondents were asked the same questions in order to be able to compare the results and eventually analyze them. Most questions were open-ended and only few closed-ended ones. The questions were slightly modified when it came to the supply side since those relatively small companies are the one which do not announce tender, rather than participate in. The goal was to interview both supply and demand sides. The interview varied from an hour to 1.30 minutes which was recorded through a special app on the cell-phone called “Voice Record Pro”. Taking into account the bias characteristic of an interview, as mentioned earlier, at the end of the interview, all respondents were asked for giving a comment or mentioning the issue they refer as important but were not asked by the interviewer. This tactic was indeed a successful way to emerge and navigate me to new issues, problems and findings regarding tendering in the Norwegian Petroleum Industry and ‘interpret the beliefs and behaviors of participants’.

61 Chapter 4

Secondary data

4.1. Introduction In chapter 4, secondary data of the case study will be discussed. This encompasses The Norwegian petroleum industry at a glimpse, regulation and standards within sector. European tendering and public procurement legislation in Norway will be presented as well. Furthermore, changes in the procurement directives in oil and gas sector and one of the pre- qualification systems used within industry have been covered. At the end of the chapter all companies interviewed during the research will be presented. The latter also reveals the respondents and their roles in the company.

The aim of presenting the secondary data is to get understanding how Norwegian Petroleum Industry works, to which regulation and standards are subjected the players, introduce companies at one glance and discuss shortly what they are dealing with. The companies covered in the following chapter implies both supply and demand side in the petroleum industry. The latter accounts for 11 companies with 13 respondents. As mentioned earlier, all information addressed below refers to secondary data which has been obtained from official authority’s web-pages, the press releases, electronic articles and electronic papers. They all will be displayed in the reference lists with their own links.

4.2. The Norwegian Petroleum Industry In the late 1950s very few people believed that Norwegian Continental Shelf (NCS) might conceal rich oil and gas deposits. In October 1962, Phillips Petroleum sent an application to the Norwegian authorities requesting permission for exploration activities in the North Sea. The company wanted a license for the parts of the North Sea that were on Norwegian territory, and that would possibly be included in the Norwegian shelf. This offer was out of question to hand over the whole shelf to one company. In 1963, Einar Gerhardsen’s government proclaimed sovereignty over the Norwegian Continental Shelf (NCS). New regulation determined that the State owns any natural resources on the NCS, and that only the government is authorized to award licenses for exploration and production. The same year, companies got the possibility to carry out preparatory exploration. The licenses included rights to perform seismic surveys, but not drilling (Regjeringen 2013) . Afterwards, Norway had to make a clarifications to divide the continental shelf with Denmark and Great

62 Britain which was reached in 1965. In the same year, 22 production licenses were awarded to companies. The latter included rights for exploring, drilling, and production in the license area.

Ekofisk discovery was one of the most important events in Norway’s postwar history. Indeed, the latter represents Norway's inauguration as an oil nation which starts in 1969. Production from Ekofisk field started in 1971. The foreign companies dominated and were responsible for developing the country's first oil and gas fields. Statoil was formed in 1972 and 50% state participation in each production license was established. The rules was changed later. In 1985 state’s participation in petroleum activities was reorganized. The State's participation was split in two, one linked to the company and the other becoming part of the State's Direct Financial Interest (SDFI) in petroleum operations. SDFI is an arrangement in which the State owns interests in a number of oil and gas fields, pipelines and onshore facilities. In 2001 Stortinget (Norwegian Parliament) decided that 21.5 % of the value of the SDFI portfolio could be sold; 15 % was sold to Statoil and 6.5 % to other licensees. The sale of SDFI shares to Statoil was seen as an important element on the way to a successful listing and privatization of Statoil. In 2001 Petoro, state-owned company was established to manage the SDFI on behalf of the state. These holdings a third of Norway’s oil and gas reserves and associated facilities. In 2007, Statoil merged with Norsk Hydro’ oil and gas division (Norskpetroleum 2016).

The oil and gas resources belong to the Norwegian people. Therefore, the resources are managed for the benefit of the Norwegian society as a whole. This has been the guiding principle for the Norwegian oil and gas policies ever since they started planning the first exploration well in the 1960s. The minister of petroleum and energy, Tord Lien defines their policy target as “creation of maximum value from the resources, at the same time, secure the state a large part of the net income from the sector” (Lien 2014). Since the 1990s Norway has had a system in place ensuring that the state’s yearly earnings from the resources are separated from the revenue in the State budget. This system has two legs: a Sovereign Wealth Fund – the Government Pension Fund Global, and The fiscal rule. All government petroleum revenues go into the Fund. The fiscal rule entails that no more than four percent of the fund’s total – the estimated annual return - can over time be spent over the annual national budget (Lien 2014).

63 Petroleum activities have played a key role in the development of today’s welfare state in Norway. The industry has generated jobs and activities all over the country. Despite the current challenges faced in oil and gas industry, as low oil price, resulted in reduction of jobs within industry, activity on the Norwegian shelf will continue to be vital to the Norwegian economy and still there are major new projects such as the development of Johan Sverdrup under way. As Norwegian Petroleum Directorate emphasizes "the petroleum activities are our most important industry and will remain so for decades to come” (Regjeringen 2014).

4.3. Main regulator in Norwegian oil and gas sector The Norwegian Petroleum Directorate (NPD) is the key regulator in petroleum and energy sector in Norway. NPD was established in 1972 which is an advisor to the Ministry of Petroleum and Energy (MPE) through its professional integrity and interdisciplinary expertise. The paramount objective of the Norwegian Petroleum Directorate is to contribute to creating the greatest possible values for society from the oil and gas activities by means of prudent resource management based on safety, emergency preparedness and safeguarding of the external environment. The NPD sets frameworks, stipulates regulations and makes decisions in areas where it has been delegated authority. Furthermore, the latter has a national responsibility for data from the Norwegian Continental Shelf and in cooperation with other authorities, the NPD is to ensure comprehensive follow-up of the petroleum activities.

In 2002 the government made a decision that NPD would be divided by allocating responsibility for supervising safety to a separate regulator entitled the Petroleum Safety Authority (PSA). The latter defines their goal as : “set the terms for health, safety, the environment and emergency preparedness in the petroleum sector, follow up to ensure that industry players maintain high standards in this area, and thereby contribute to creating maximum value for society”. They can be defined as technical and operational regulator. Moreover, they are also authorized to take company-specific decisions in the form of permits and consents, orders, enforcement fines, halting operations, prohibitions, and exemptions. Their duties encompass as follows: through their own audits and in cooperation with other health, safety and environmental (HSE) regulators to ensure that the petroleum industry and related activities are supervised in a coherent manner, to supply and advice players in the

64 industry and establish appropriate collaboration with other HSA regulators nationally and internationally.

4.4. European tendering According to European Commission each year, more than 250,000 public authorities in the EU spend around 14% of GDP on purchasing services, works or supplies. As a business registered in the EU, one have the right to compete for public contracts in other EU countries (Commission 2016). European procurement procedures is defined as “the total set of rules and regulations that are aimed at selecting the best contractor for the best product against the best conditions, recognizing European laws and regulations. The principles of these procurement directives imply the same major principles discussed earlier as: non- discrimination, equality, transparency and proportionality. In addition, here transparency also implies that contractors have right after tender submission to be informed as soon as possible whether or not have won the contract. Furthermore, if one have not been selected, then he is entitled to a detailed explanation of why his tender was rejected. The public authority must observe strict confidentiality regarding the exchange and storage of contractor’s data (Commission 2016).

The law of public tendering is based upon the body of international and European law, national laws and directives and jurisprudence. However, apart from these laws and directions, EU member states also have to comply with the regulations resulted from the Agreement on Government Procurement (GPA), General Agreement on Tariffs and Trade (GATT) and World trade Organization (WTO) (Puil and Weele 2014). European Directives on Public Procurement include the following procedures: an open procedure, restricted, negotiated, competitive dialogue and Electronic auctions (Commission 2016).  An open procedure – where any business may submit a tender. The minimum time limit for submission of tenders is 52 days from the publication date of the contract notice. If a prior information notice was published, this time limit can be reduced to 36 days.  Restricted procedure – where only pre-qualified suppliers can submit a tender. The time limit to request participation is 37 days from the publication of the contract notice. The public authority then selects at least 5 candidates possessing the

65 capabilities required, who then have 40 days to submit a tender from the date when the invitation was sent.  Negotiated procedure – public authority invites at least 3 businesses with whom it will negotiate the terms of the contract. Most contracting authorities can use this procedure only in a limited number of cases, for example for supplies intended exclusively for research or testing purposes. The contracting authorities in sectors such as water, energy, transport or postal services may use it as a standard procedure.  Competitive dialogue – this procedure is often used for complex, such as infrastructural projects, where the public authority cannot define the technical specifications at the outset. After the publication of the contract notice, interested businesses have 37 days to request participation. The public authority must invite at least 3 candidates to a dialogue in which the final technical, legal and economic aspects are defined. After the dialogue the candidates submit their final tenders.  E-auctions – public authority can also award contracts by electronic auctions. Before starting the auction, the latter must make a full initial evaluation of the tenders and allow only the admissible ones to take part. The invitation to participate in the auction must state the date and time of the auction and the number of bidding rounds. It should also set out the mathematical formula that will determine the automatic rankings. In each bidding round one must be able to see his ranking compared to his competitors, without knowing their identity. It should be mentioned that E-auctions cannot be used for certain types of contract. Such as the design of works, for example architectural plans for a building.

To create a level playing field for all businesses across Europe, the EU law sets minimum harmonized rules. These rules, transposed into national legislation, apply to the tenders whose monetary value exceeds a certain amount (The Table 5) .These ‘above threshold' tenders are, presumably, of cross-border interest, in other words - the tender value makes it worth-while for a business to submit a tender abroad. For tenders of lower value, national rules apply (which nevertheless have to respect general principles of EU law). The ‘below threshold' procedures may be simplified compared to the EU-wide tenders. On 15 December 2015, the European Commission adopted new Regulations, (EU) in respect of the relevant thresholds for the application of the procedures for the award of public contracts.

66

Table 6. Threshold values, own display, based on (Commission 2016) The reason for the lower threshold values for central government is the fact that contracts also need to comply with the regulation as stipulated by the Agreement Government procurement. When estimating the value of a contract, all cost need to be recognized that will be incurred during the execution of the building assignment, the delivery contract or the service contract including all supportive activities (options).

4.5. EU public procurement Public procurement has been in focus since early 1970s. Public procurement rules adopted by EU aims to improve competitiveness through developing the inner market into one single market. Directives on public procurement were adopted in 1992/93. EU directives on public procurement aim at securing procurement practices that will secure best value for money. To create a level playing field for all businesses across Europe, EU law sets out minimum harmonized public procurement rules. These rules organize the way public authorities and certain public utility operators purchase goods, works and services. They are transposed into national legislation and apply to tenders whose monetary value exceeds a certain amount. In another words, EU directives on public procurement cover tenders that are expected to be worth more than a given threshold values. EU established new threshold triggering illustrated above.

The core principles as of these directives, mentioned earlier, are transparency, equal treatment, open competition, and sound procedural management. They are designed to achieve a procurement market that is competitive, open, and well regulated. Otherwise, for

67 tenders of lower value, national rules apply. Nevertheless, these national rules also have to respect the general principles of EU law. Systematic approach of EU public procurements can be illustrated as follows:

Basic requirements •Equal treatemnet •Non-discrimination •Transparency Procedual requirements

•Using technical specifications and standards •Using specific procurement procedures •Publication of notices prior to tendering and on contract award •Qualification, selection and contract award

Figure 10. Systematic approach of EU procurement requirements, own display The basic requirements apply regardless of the value of the purchase and the type of service as long as it is an activity covered by the legislation which is performed by an entity covered by the legislation. The procedural requirements only apply to purchases exceeding certain threshold values. With particular regard to service contracts above the threshold values it is differentiated between prioritized services and non-prioritized services. Prioritized services shall comply with all procedural requirements, while non-prioritized services are subject to more simplified procedures (use of technical specifications and standards).

In the end, Doffin, the Norwegian web-based database, should be mentioned. The latter is used for notices of public procurement and procurement in the utility sector (water, energy, transportation, and postal services) that are subject to the European Union regulations. The purpose of this base is to ensure competition and openness about business opportunities, control of procurement notice, publishing and distributing in a searchable format and in the end access to creating relevant statistics in the public sector (Doffin 2016).

4.6. EU Public Procurement at EEA level in Norway The EU directives on public procurement are implemented in Norway in accordance with the terms of the European Economic Area (EEA). The latter brings together the EU Member

68 States and the three EEA EFTA (European Free Trade Association) States - Iceland, Liechtenstein and Norway - in a single market, referred to as the "Internal Market".

EEA rules on public procurement distinguishes between two sectors: the “classical” sector and the “utilities sector”. The former refers to execution of works, supply of products or provision of services. In another words, it refers to all sectors except those that are explicitly excluded. This sector covers public authorities and bodies governed by public law. While the “utilities sector” covers water, energy, transportation, and postal services. The latter applies for public authorities, bodies governed by public law, public undertakings, and as well as other entities which operate on the basis of special or exclusive rights granted by a public authority. The classic sector is regulated by Directive 2004/18/EC while the utilities sector is regulated by Directive 2004/17/EC, which provide similar rules to those applicable to the ‘classical’ sector. However there are some important differences, such as the possibility of granting an exclusion from the application of the latter Directive if, in the state concerned, there is unrestricted access and full competition in the market. Public procurement legislation in Norway can be described in a cluster as follows:

The Public Procurement Legislation in Norway

General "Classical "Utilities sector" sector"

Figure 11. The public procurement legislation in Norway, own display

 General - The Public Procurement Act of 16 July 1999 (LOV-1999-07-16-69)

69  “Classical sector” - The Public Procurement Regulations of 7 April 2006 (FOR 2006-04-07 nr.402). These regulations, in addition to implementation of the EU directives, also include national requirements.  “Utilities sector” - Procurement Regulations for the Utility Sectors of 7 April 2006 (FOR 2006-04-07 nr.403). These regulations merely implement the EU directives.

In the “utilities sector”- the procurement entity may freely choose between open procedure, restricted procedure and the negotiated procedure. Due to this flexibility it has not been found necessary to provide for competitive dialogue in these sectors (within the framework of negotiated procedure the method prescribed for competitive dialogue might be applied). In the “classical sector” (above the EU threshold values) - as a main rule implies either the open procedure or the restricted procedure should be applied. In particular instances, expressly provided for in the regulations, it is permitted to apply: competitive dialogue, negotiated procedure with prior notice, and negotiated procedure without prior notice. And the third procedure can be found between EU threshold values and the national threshold values.

4.7. Changes in the directive rules on public procurement Public procurement in Norway is subjected to EU rules on public procurement. Even though Norway is not member of EU, is required pursuant to the European Economic Area (EEA) Agreement to comply with certain rules of the European Union. As mentioned earlier, if the cost exceeds threshold values, then competitive tendering will be chosen.

The EFTA Surveillance Authority, in 2012, has decided to exempt the exploration and the extraction of crude oil and natural gas on the Norwegian Continental Shelf from the EEA rules on public procurement in the utilities sector laid down in Directive 2004/17/EC. This means that Norwegian authorities, public enterprises, or enterprises with exclusive or special rights within the oil and gas sector were excused from the detailed tendering rules of Directive 2004/17/EC. In another words, Norwegian oil and gas sector exempt from “utilities directives” on procurement.

The effect of the decision is that public authorities, public undertakings or entities operating on the basis of special or exclusive rights in these sectors are not subject to the detailed procedural rules set out in Directive 2004/17 and therefore entities operating on the basis of

70 special or exclusive rights (such as a NCS Production License) in Norway will no longer be subject to the Utilities Directive rules (Williams 2013).

Activities covered by the Directive may be exempted from its scope upon application by the State or the industry, provided that access to the market is unrestricted and that the activity concerned is directly exposed to competition. Based on a thorough assessment, the Authority has concluded that both these conditions are fulfilled as regards the exploration and the extraction of crude oil and natural gas on the Norwegian Continental Shelf. The Authority has, therefore, taken the decision that these activities are exempted from the scope of application of the Directive. The reason for this decision arises from the fact that sector of oil and gas industry has already been sufficiently exposed as a competitive market. In another words, access to the market is unrestricted and an activity is already directly exposed to competition (Einarsson 2013).

4.8. Achilles Achilles can be defined as a connecting bridge between suppliers and buyers. In another words, Achilles is a global network of collaborative industry communities, allowing trading partners to share high quality, structured, real-time data. Using cloud-based technology, they act as an independent partner providing validated data and insightful analytics to enable buyers to manage risk, and suppliers to increase market reach in their sector (Achilles 2016).

Within Achilles buyers have access to more than 1000s pre-qualified suppliers which enables the latter to save costs and lead-time. Furthermore, reduction of supply chain risk and non-compliance is another advantage of it. For suppliers, Achilles enables to reduce time and effort on tenders and demonstrate their credentials. The industry they work in encompass following sectors: automotive, construction, facilities management, transport, oil and gas, construction, mining and cement, public sector, pharmaceutical, utilities, power and tech, service industries, public sector, the ICT (Information, Communication and Technology) and FMCG (fast-moving consumer goods) (Achilles 2016).

Using Achilles qualification system is a common way of finding pre-qualified suppliers in in the Norwegian oil and gas sector. This is an initial phase when Norwegian players look for suppliers. This ensures them a certain supplier is in compliance with technical

71 requirements and ISO standards. Furthermore it provides information supplier’s financial statement. However, Achilles is not the only way of qualification vendors have to meet, each company has additional qualification system and approach. Achilles is just the basic pre- qualification stage, suppliers should meet. The interview showed that, all companies on NCS are using Achilles to find suppliers and likewise, all vendors, were registered there to be reachable to buyers.

4.9. NORSOK standards The NORSOK are standards in the petroleum sector on the Norwegian Continental Shelf. The latter are developed by the Norwegian petroleum industry to ensure adequate safety, value adding and cost effectiveness for existing and future petroleum industry developments. Furthermore, NORSOK standards are as far as possible intended to replace oil company specifications and serve as references in the authority’s regulations. This standard stands as for "the Norwegian shelf’s competitive position" and was introduced in 1994 to cut costs and improve competitiveness on the Norwegian Continental Shelf (Standard 2015b).

Recognized standards, both NORSOK and ISO, are today the important basis for the regulations in force on the Norwegian continental shelf, and Norway has so-called function- based regulations, where standards are an important factor in the interpretation of the various regulatory requirements. The regulations refer to standards that provide more detailed descriptions of how things should be done. About half of these standards are used by the Petroleum Safety Authority Norway as part of regulatory management in the North Sea (Standard 2015b). Hence, as mentioned, NORSOK standards are the one suppliers must meet in Norwegian Petroleum Industry. Those standards are complex with a lot of details which even tells suppliers how things should be done. Roar Lervik, a purchaser manager at NOV (National Oilwell Varco) in Molde, defined NORSOK standards as “one of the most detailed rules” in the world. Where the standards describe in detail every part of a certain product and process and even tells how things should be done in oil and gas industry in order to meet requirements and ensure adequate safety and technical compliance on NCS.

72 4.2. The interviewed companies at a glance

4.2.1. Shell Shell is an international energy and petrochemical company which was formed in 1907. As the company defines their role “to ensure extract and deliver these energy resources profitably and in environmentally and socially responsible ways”. Their operations are divided into four businesses: upstream, where they focus on exploration for new liquids and natural gas reserves and on developing major new projects. Integrated gas, the focus area is LNG (Liquefying Natural Gas) and converting gas to liquids (GTL). Downstream, where they are engaged in turning crude oil into a range of refined products. In addition, production and selling petrochemicals for industrial use worldwide. And Projects & Technology business are which is responsible for delivering new development projects and the research and development (Shell 2016b). Shell in Norway is active since 1912 working within exploration and production of oil and gas. The head office is located in Stavanger (Shell 2016a). Shell in Kristiansund has been visited. Erik Gjuel, logistics chief at Norske Shell was the respondent. He has long experience within industry and has been involved in tendering process, evaluation and award criteria. He was sharing his experience and knowledge related tendering and was open to give business examples and conveying specific tendering cases. He was the first respondent of the research which has been conducted before the proposal. After couple of months of the interview Erik Gjuel was planning to retire.

4.2.2. AXTech AXTech is Norwegian engineering and Service Company, providing a full kit. Meaning that they engineer, deliver and maintain it. It is a full service provider of equipment. Namely, they are supplier of heavy-duty lifting and material handling equipment in a capacity range of 25 to 1000 tones and more. AXTech develops, designs, delivers, tests, commissions and carries out service on heavy lifting and material handling equipment for use in harsh and corrosive marine environments. Company is owned privately. 1/3 is owned by foreign big institution. While 2/3 is owned privately in Molde. The company was formed in 2004. In 2008, they joined forces with winch manufacturer SAS Gouda (NL), which is now a part owner of AXTech, making company a member of the BRASTEC group (AXTech 2016). AXTech has 3 offices, in Molde, Gdansk and Kristiansund. Head office is in Molde and

73 every decision is made there. The company claims to be supplier to the world’s first subsea gas compression facility of the Norwegian Sea. Richard Myhre was interviewed who is CEO of AXTech. He has technical background and has long experience within providing and delivering engineering and service to oil and gas industry. Every tender, projects, RFQ (Request for Quotation) from buyers, project development, or additional study the company has to carry out he is involved in.

4.2.3. AXESS Axess is the Norwegian company which dates back to 1998. The company has become big international player within inspection, certification, engineering services and solutions both in offshore and onshore. But mostly their main area covers offshore industry. They also manufacture some products. But this is mainly though their subsidiary company Apla. Axess holding is owner of Axess AS. The company’ headquarter is located in Molde and branch offices throughout Norway. In addition, they have branch offices in Singapore, Rio de Janeiro, Houston and Canada. Their area encompass crane and piping systems, lifting technology, and lifting operations, analysis and verifications (Axess 2016). Knut Stefanussen, is head of sale and marketing and business development at Axess. In addition, he is in charge of whole tendering process and sourcing an alternative buyer.

4.2.4. NOV National Oilwell Varco is a global company, delivering equipment for oil and gas industry and equipment for drilling and production. They do not operate, they just deliver them. There field includes rig systems, wellbore technologies and completion and production solutions are. The main office is in Houston, Texas. In the US the company is even producing for onshore drilling. But in Norway their area covers only offshore drilling, all kinds of equipment for finding and pumping oil. NOV in Molde is specialized in one type of equipment, namely, offshore cranes. Roar Lervik is purchaser manager at NOV in Molde. Negotiation, bidding process and tendering are his business area. He was going to resign in upcoming month after the interview.

4.2.5. Statoil Statoil is an international energy company with operations in 37 countries. As mentioned earlier, the company dates back to their history since 1972, building on more than 40 years

74 of experience from oil and gas production on the NCS. They are committed to accommodating the world's energy needs in a responsible manner, applying technology and creating innovative business solutions. Statoil's largest activities are located in Norway, headquartered in Stavanger with corporate functions in both Stavanger and Oslo, with approximately 22,000 employees worldwide. The company set absolute requirements for HSEQ. According to Jan Borkelmans “safety comes first” is one of the major objectives of the company. Statoil is the largest operator on the Norwegian continental shelf, and a license holder in numerous oil and gas fields. The latter is active within such areas as gas treatment, crude oil reception, refinement and methanol production. The Norwegian state’s holding in Statoil is managed by the ministry of petroleum and energy which accounts 67%, while 8.9% shares is held by Norwegian institutional investors and private owners. The rest shareholders are distributed in UK, in rest of Europe, in rest of the world and in the US (Statoil 2013).

The interview with Statoil was conducted in headquarter, Stavanger with Jan Borkelmans. Jan is leading advisor SCM Contract Establishment. He has a proficient knowledge and experience of all process though SC, understanding and using contracts. In addition, tender management which includes supplier pre-qualification, bidding evaluation and adjustment and finally establishment of contracting. Furthermore, pre and post quality control and supplier performance. How the company deals with risk related to tendering, what kind of techniques are being used against risk mitigation are the area Jan are specialized in. The interview with Statoil confirmed once again the professional way of doing business with highly educated and skilled employees.

4.2.6. Dolphin Drilling Dolphin Drilling is a company involved in offshore drilling. The company is owned by Fred. Olsen Energy ASA, an international drilling contractor operating in the mid- and ultra-deep water segment. The company’s offshore activities are controlled from the offices in Aberdeen, Scotland and Stavanger, Norway. In addition, they have an office in Singapore which provides management and administrative support including the employment of international offshore personnel.

Dolphin Drilling is one of the longest established independent drilling contracting companies in the offshore arena tracing its roots back to the earliest offshore exploration

75 activity in the North Sea in the mid nineteen sixties. The Fred Olsen family’s interest pre- dates this with a history in shipping activity stretching over 150 years. The interview with the company was conducted in Stavanger with Cato Cundersen. Cato Gundersen is involved in SC. Vice President for supply chain management at Dolphin Drilling. He is mainly involved in procurement and vendor relations. Tendering procedure and planning, tender committee, vendor selection and bid evaluation and contract award and evaluation is his direct tasks.

4.2.7. PREZIOSO Linjebygg PREZIOSO Linjebygg is an international provider of a range of multidisciplinary technical and engineering services, principally for the oil and gas and power generation sectors, assisting its customers in extending the life and optimizing the cost of their most critical assets. The company is mainly involved in offshore installation and technical and engineering services. The company was formed in 1957 in France. In 2010s majority stake in the company acquired by Cinven - major acquisition of Linjebygg Offshore Norway.

The company also provide special services – climbing with ropes to access difficult places where one cannot go with traditional equipment. Then they use climbers. This service is also provided onshore. The interview with the company was carried out in Molde, with Bjørn Bergsvik’s office. Bjørn is tender manager at Prezioso Linjebygg in Molde. He is involved in every tendering process and preparation of bids. In addition, his background allows him to be in charge of technical assessment of a bid.

4.2.8. Kværner Kværner is an international company located with headquarter in Oslo which has offices and fabrication facilities in several of the world’s main oil and gas regions. The company is highly concerned with health, safety, security and environment (HSSE) while doing their business. Kvaerner delivers complete oil and gas offshore platforms and onshore process plants to operators and other customers. They specialize in executing engineering, procurement and construction (EPC) projects. Their objectives are successfully planning and executing EPS projects.

76 One of the current project of Kværner is Nyhamna onshore project. The company was awarded a contract in 2012 by Norske Shell for Engineering, Procurement, Construction and Management (EPCM) for modifications and projects at the Ormen Lange/Nyhamna onshore facilities on the west coast of Norway. The contract is a framework agreement with duration of six years, and options for additional two plus two years. The estimated contract value is NOK 6 billion, excluding options. The Nyhamna gas plant processes natural gas from the Ormen Lange gas field located in the Møre Basin in the southern part of the Norwegian Sea. The contract scope includes all modifications and projects on the Ormen Lange/Nyhamna facility and is established to meet the expected, significant increased project activity over the next five to ten years (Kværner 2012).

The interview with Kværner was conducted in Nyhamna where their onshore activities take place. The respondent was Lisbeth Varhaugvik, site procurement manager in Kværner, Nyhamna expanded project. She has been working on this project since 2012. She is also responsible for contract and support services, including: building a camp, accommodation, warehouse facility, offices, and transportation in Nyhamna. In addition, the company is preparing the side to receive more gas. Statoil has lay down “Polarled” which will bring more gas from the Aasta Hansteen field outside Bodø. The project includes expansion of the Shell-operated gas plant at Nyhamna. Preparations will be made for the tie-in of existing and future discoveries in the area.

4.2.9. Aker Solutions Aker Solutions traces its roots back to a small mechanical workshop on Oslo’s Aker River. Now the company is a global provider of engineering, design, production systems and services to the oil and gas industry. The company is in about 20 countries worldwide, providing subsea production equipment and offshore field design, ranging from concept studies and front-end engineering to subsea production systems. They carry out maintenance and modifications work and provide services during operations as well as deliver solutions to extend the lifetime of oil and gas fields (Solutions 2016).

The interview was carried out at Aker Solutions in Kristiansund. This includes two respondents: Roy Lien and Kathrine Sorvik. Roy is procurement manager while Kathrine - a senior consultant procurement. Their tasks at the company includes as follows: purchase

77 of equipment, bulk and services, issuing inquiries, bid evaluation, negotiation and order placement, follow up of equipment and documentation, settlement of accounts and close out and interface with engineering disciplines, offshore, fabrication and warehousing.

4.2.10. Oss Nor Oss Nor is the Norwegian company, established in 1983, supplying and serving offshore activities on the Mid-Norway Continental Shelf, mainly they are service supplier to offshore installations. The company is privately owned by local investors. Currently, Oss Nor is the “Base Work Shop” for the Norwegian and Barents Sea. They are centrally located in Kristiansund harbor within short distance of Vestbase. In addition, Oss-nor Hammerfest, a subsidiary of Oss-nor, was established in 2004 and is located in Rypefjord next door to the Polarbase. The company with its daughter company, Benor AS is mainly involved in offshore service and supply. The interview was taken from Sylvia Mundal, senior administration coordinator and from Tor Henrik, subsea department manager in Kristiansund.

4.2.11. Navitas Navitas can be defined as an independent actor in the Norwegian Petroleum Sector. Navitas concept is currently owned by EPIM (Exploration & Production Information Management Association) based in Stavanger. The Nordic IT and consulting company Sigma acquired Navitas concept when they bought the bankrupt estate to the Foundation Navitas autumn 2015. Sigma resold as at year 2015-16 this section the activities of EPIM which is a non- profit membership organization for licensees on the Norwegian continental shelf. EPIM has several information portals in its portfolio and manages, Achilles database is one of them (Navitas 2016).

Navitas has the petroleum sector as their field of activity and operating in the interface between the oil companies and main contractors on the one hand, and suppliers on the other. The organization's purpose is to promote greater transparency in the flow of information especially related to procurement processes, i.e. whether plans, requests and contracts. Navitas as independent actor contributes to open competition, wider variety and greater participation. The key tools used by Navitas is navitas.no, findsuppliers.no and fincontracts.no. The latter two tools aims the combination with activities under the business

78 area of supplier development, contributing to greater transparency, improved structure, standardization and collaboration between industry players. Though findsuppliers.no buyers can search among all suppliers, their expertise and contract experience. On another side, findcontracts.no vendors can search published contracts, find market opportunities and track tenders.

In December 2015 Sigma and EPIM agree on a takeover deal. Under the agreement Navitas concept will be operated on from offices in Molde. The outsourcing agreement goes so far until the summer of 2016. The intention is that a one during this period shall negotiate a longer-term operating agreement. The interview was conducted in Molde, with John-Helge Frøystad, Senior Consultant of program and project management at Sigma. He holds an experience within findcontracts.no and findsuppliers.no.

79 Chapter 5

Primary data

5.1. Introduction

After interviewing 11 companies on NCS and collecting data from the major players, chapter 5 reveals how the tendering process take place in the Norwegian Petroleum Industry. The latter contains prior-to tendering stage, entering to the tendering and post-tendering stage. Most importantly, it shows how buyers pre-qualify and qualify suppliers and as a result how final evaluation occurs which results to entering into contracting. Furthermore, post- tendering process is examined. The general picture of tendering is explained and illustrated, afterwards certain companies’ procedure is displayed. One of the most crucial parts in tendering – risk is discussed. How companies handle tendering related risk and what kind of tools are being used for the risk assessment by companies is discussed.

An alternative methods of competitive tendering is also suggested and explained. The primary data also gives the insight of Norwegian way of doing business and vendor-buyer relations. Moreover, as the interview guide intended, the case study will also reflect beliefs, thoughts and comments from buyers and suppliers. The latter aims to reduce bias of interviewing as a research methodology.

5.2. Procurement

As literature says supply chain management is a cross functional teamwork. So is in the Norwegian Petroleum Industry and procurement is one of parts of that teamwork on NCS. The important and initial phase before conducting procurement is division functions and management in order to meet end-user’s need and requirements. Procurement function in oil and gas industry consists of coordination, planning and execution of a company’s procurement. In the procurement process, mainly procurement and technical department are involved. In general, Norwegian companies strictly follow their rules and guidance while executing procurement process.

Since the oil and gas industry is characterized with high risk and complexity, procurement responsible in collaboration with technical responsible prepares a procurement strategy in

80 detail. This is crucial because before buyer sends enquiry to certain suppliers, he/she has to have well-defined need and assessment of the project. How this process take place through tendering in detail is discussed and illustrated in the upcoming sections.

5.3. Tendering in the Norwegian Petroleum Industry After interviewing 11 companies my findings allow me to conclude and visualize how tendering process occurs in the Norwegian Petroleum Industry. The results show me that companies do not perceive these process as tendering rather than an ongoing and daily business. As Roar Lervik said “We do not perceive it as a tendering, this is an ongoing business and we are doing this all the time”. The vital part prior to entering a tendering process is that the procurement responsible prepares a strategy, where he/she describes in detail how the process will be handled, what the scope is, what the estimated value is, size, etc. The more complex a project is, the more time it takes to prepare a procurement strategy. The latter is defined by the size and scope of a project. The procurement responsible before prepares a strategy, executes the initial phase which means to define the business need. As mentioned above, it is important that enquiry is well-defined and conveys in detail what buyer wants and is looking for. The Procurement strategy serves an important role also in terms of risk assessment since the latter is part of the procurement strategy. Those phases occur prior to tendering.

After defining the business need and preparing procurement strategy, buyers find pre- qualified suppliers through Achilles. Achilles as mentioned earlier, a vendor database gives buyers an access to find qualified suppliers. Since oil and gas industry is quite technical, there are a lot of requirements and therefore only pre-qualified suppliers are the ones who could be considered as bidders. However, there might be cases when a supplier is not registered in the Achilles qualification system and buyer has to pre-qualify by themselves which requires an extra work from their side. However, most suppliers involved in oil and gas industry worldwide are registered in Achilles. Indeed, the interviewed companies, supplying and serving petroleum industry on NCS are registered in the system. Sales department of a supplier side is in charge to be registered and continually updated in the database.

Achilles is not the only requirement suppliers have to meet to be considered for ITT (Invitation to tender). Additionally, each company has its own qualification method for

81 qualifying suppliers. Hence, Achilles is the basic requirement suppliers have to satisfy. After this, additional qualification will occur which varies from company to company. This will be explained and showed in details in the upcoming part. After a company completes its own qualification system, evaluation process will be delved.

Define the Prepare Find pre-qualified Evaluation: business procurement suppliers and Invitation (1) Technical Contract Manage need strategy qualify to tender (2)Commercial award agreement

Follow up strategy Startup meeting Administration Follow up Close out

Figure 12. Tendering process in the Norwegian Petroleum Industry

Evaluation process is one of the most crucial phases of a tendering process. The evaluation part consists of two main sets: technical and commercial evaluation. The technical requirements and needs are prepared by engineers or technical responsible who has knowledge and expertise and later on evaluating a supplier’ technical ability. Tenderers must have the technical capability to actually produce the products or perform the services required in a manner that is of adequate quality. The second part is commercial evaluation which contains elements such a price, lead time, supplier’s expertise and experience, financial statement, environmental issue, sub-contractors, project management capability and capacity, HSE history, etc. Figure 13 illustrates the evaluation method with the sample criteria in the Norwegian oil and gas industry.

82 Technical capability and capacity HSEQ Technical Wokload and equipment evaluation Human quaifications Welding and fabrication

Evaluation

Price Commercial Lead time evaluation Sub-contractors Financial statement

Figure 13. Evaluation criteria One of the vital parts of evaluation is HSEQ (Health, Safety, Environment, and Quality). HSEQ is important that is taken into account by byer as well as supplier. This aims to avoid harm and occupational injuries, avoid spill to the environment, financial loses or material damages. HSEQ requirements is mainly in accordance with industrial standards. For most contracts, this implies being in accordance with the ISO 9001:2008 standard and be registered in Achilles or FPAL (First Point Assessment Approval) and/or in compliance with NORSOK S-006 standards. HSEQ requirements are crucial and might have an overweighting factor while choosing a supplier. However, the latter depends on the size and scope of a project. The more risky the project is, there is more likelihood that HSEQ requirements are high.

After commercial and technical evaluation a joint evaluation is made and the most successful supplier is awarded a contract. Evaluation techniques differs by companies which will be discussed and shown. The results of evaluation is expressed in numbers and summarizes of each supplier’s score. Evaluation process is mostly executed by tender committee or project responsible. After award a contract, supplier starts to deliver and supply services. The latter will be monitored by buyer, where suppliers have to deliver monthly, weekly or quarterly reports. This depends on buyer. Additionally, follow up and administration process is executed by a tender responsible from buyer side.

83 5.4. The Process of tendering The section discussed above provides just an overall picture of tendering in the Norwegian petroleum industry. However, to understand further and become this comprehensive, the process of tendering in oil and gas industry, need to be explained in details. Namely, how each stage is handled and executed. One important requirement that should be mentioned is that in order to have a competitive tendering, minimum three suppliers should be participants. Hereby, the tendering process in delved.

5.4.1. Define the business need As mentioned earlier, the first stage of the tendering process is defining the business need. When a buyer has decided what service and supply is looking for, according to project’s size and complexity, the responsible team shall be set. The responsible team, also called enquiry team that is vital to the content and quality of the enquiry which shall define exactly and accurately what the company’s need is. Later on, when buyer sends enquiry to suppliers, it should be well-defined and reflect what a business need is. The signal for business need can come from offshore as well onshore. This depends on a certain scenario and ongoing project.

5.4.2. Procurement strategy A procurement strategy or as Aker Solutions calls ‘package strategy’ is a vital and crucial part prior to tendering that is based on buyer’s need. The aim of the strategy is to achieve the most cost effective demand coverage. For this purpose, the most appropriate multidisciplinary team will be formed. According to Statoil, the right team is vital to the content and quality of the enquiry, and shall be put together based on an assessment of the procurement, i.e. size and complexity. The multidisciplinary team can consist participants from: procurement, technical disciplines, project management, quality and risk management, IT, etc. The created strategy shall present size and complexity of a project. Furthermore, it describes in detail how the process will be handled, what the scope is, what the estimated value is, etc.

Hence, procurement strategy serves as a starting brick that aims to achieve the most cost effective demand coverage and present size and scope of a project. Under this strategy, most importantly, risk assessment is carried out. Particularly, a risk assessment shall be performed as part of the strategy work. For instance, Statoil, describes identified risk and success factors and necessary mitigation actions that will be defined and documented as part of the specific

84 strategy. Risk assessment will be discussed in a separate section of a risk mitigation. According to the procurement strategy, production of enquiry will occur. Based on Statoil’s rules for instance, the inquiry shall reflect the established strategy (dependency between phases), correspond with the market in question and present the scope in order to attract tenderers.

In the enquiry, commercial and technical contribution is implied. The former would cover size and scope of a project, HSEQ, technical specifications, risk assessment and technical award criteria. It should be mentioned, as Statoil highlights, technical specifications must not be formulated in a way that favours particular suppliers. The commercial input to enquiry would include commercial award criteria, ITT, CoC (conditions of contract), compensation model, etc. To Statoil, purpose of the enquiry is to achieve the most cost efficient solution in accordance with the focus on: optimal sourcing method and optimal market approach, risk focus, commercial mind-set and efficient accomplishment. The figure below displays enquiry and specific strategy (part of a procurement strategy) of Statoil.

Figure 14. Specific strategy and enquiry of Statoil As mentioned above procurement strategy requires a multidisciplinary team to be involved. The latter with Aker Solutions called ‘package strategy’ that consists of procurement package team: Package Responsible (PR), Package Responsible Engineer (PRE) and Package Responsible Buyer (PRB) as displayed below.

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Figure 15. Organization of Procurement of Aker Solutions

When multidisciplinary team finishes organization of procurement stratgey where they clearly define how suppliers will be evaluated in terms of commercial and technical terms with their weighted scores, these can not be changed. In addition, as mentioned earlier, the latter will not favour particular supplier.

5.4.3. Pre-qualification and qualification In tendering within oil and gas industry only pre-qualified suppliers can be selected as tentative bidder. The reason for this is that this industry is quite technical and buyers need to ensure themselves that a particular supplier has capacity and capability to supply and deliver specific services. As mentioned earlier, the starting point for finding pre-qualified suppliers stems from Achilles database where mostly all supplier within this industry are registered. As a result buyer can have a look on a supplier’s background and ponder whether to pick a particular supplier. However, Achilles is not the only option. On NCS, findsuppliers.no and findcontrcats.no can be another option. Additionally of using Achilles, vendors are also using their own database of supplier, carrying out market research/screening, internal inquiry or simple google search.

86 To provide an example, the figure below illustrates the process of Aker Solutions from Achilles until the phase of getting qualified bidder lists. Once again having a competitive tendering implies having minimum three suppliers in the eventual bidder lists.

Figure 16. Getting to the bidder list

Pre-qualified suppliers within Achilles database guides buyer to have an access and later on assess suppliers according to HSEQ, QA (Quality Assurance) and financial position. For instance, HSEQ implies being in accordance with the ISO 9001:2008 standard and be registered in Achilles or FPAL. Suppliers can demonstrate this by attaching certificates, or alternatively to answer a set of questions as per NORSOK S-006.

As pre-qualification implies, suppliers mostly should be in accordance with ISO 9001:2000 standards. The latter serves as QA system where an organization needs to demonstrate its ability to consistently provide product that meets customer and applicable regulatory requirements. And aims to enhance customer satisfaction through the effective application of the system, including processes for continual improvement of the system and the assurance of conformity to customer with applicable regulatory requirements.

In addition to pre-qualification, each company makes additional qualification. The latter can include following:  Experience – this implies that vendors must be able to demonstrate that they have performed similar work in the past. To prove this they have to disclose a list of previous customers and describe the nature of the work performed.

87  Technical - contractors must have the technical capability to actually produce the products or perform the services required in a manner that is of adequate quality and their personnel have appropriate competence.  Capacity - suppliers must have an organization able to deliver the quantities required by the provisions of the contract.  Financial strength – suppliers must have healthy financial statements and prove this by providing financial statement for defined years. This varies from buyer to buyer, however supplier are asked to provide financial strength for last 3-4 years.  Environmental – tenderers are asked to demonstrate that they have a system for managing waste and minimizing environmental effects. For most contracts, this implies being in accordance with the ISO 14001:2004 standard.  Ethical – tenderers are required to have a code of conduct describing how their employees and subcontractors should behave in ethically challenging circumstances. This is very important and strict on NCS where ethics, anti-corruption and corporate social responsibility must apply in all phases of the procurement process. This issue will be addressed further when discussing purchasing ethical behaviour.  Subcontractors - contractors shall disclose a list of all subcontractors they utilize, and describe their relationship to the tenderer. Tenderer shall also demonstrate a system for managing and auditing their subcontractors. Mostly, maximum number of subcontractors are defined from three to four.  Information security – Vendors are mostly asked an established and in force an Information Security Management System in accordance with ISO 27001/2/3. The vendor should act in accordance with such system and company shall have the right to audit the vendor’s compliance with it at any time during the term of the contract. Vendor shall, if required, prepare an information security risk mitigation plan for the performance of the work. If suppliers are asked for the risk mitigation plan, then the latter shall be prepared in accordance with requirements given in the purchase order.

5.4.4. ITT Vendors who have passed pre-qualification and qualification criteria, a tender responsible or a tender coordinator issues a complete invitation to tender to those vendors. Vendors mostly have short time to respond to this invitation and several months to prepare and submit

88 bids. And if tenderer has some questions regarding the tender process or contracting, the tender responsible or coordinator can additionally investigate internally and give a response as soon as possible. Bidders are mostly asked to submit their bids per e-mail as well as paper version which might be required to be sent as sealed package to the tender coordinator.

5.4.5. Evaluation After bids are received, the process of evaluation of each supplier according to buyer’s already well-defined enquiry and criteria will be delved. The tender committee gathers together and starts evaluation and comparison of bids where bidders will be given weighted score. It should be mentioned that weighting criteria will depend on the complexity of a project. For instance, when I had a look on weighting criteria of a specific project at Kværner, the company had decided scoring on commercial 40%, technical -40% and on HSEQ - 20%. This is just a sample and shows that the certain project did not contain too much risk and therefore HSEQ had relatively lower weighting score.

As mentioned earlier, the two important pillars are commercial and technical evaluation which consists of specific required criteria. After commercial and technical evaluation the joint evaluation will be occurred. To understand deeper how those two commercial and technical weighting are being carried out in practice, the examples of the specific project weighting of Aker Solutions are displayed below. No. Technical Evaluation Criteria Weight in % 1. Design Complexity and Maturity 50 2. Weight and Layout 25 3. Technical References 25

Table 7. Technical evaluation criteria The table above illustrates that each bidder were evaluated against a set of weighted evaluation criteria. The technical evaluation criteria had been established in accordance with technical Criticality Assessment that is part of the risk assessment at Aker Solutions. The latter will be explained in details in the risk assessment part. The weighting of criteria reflects their relative importance in terms of mitigating the overall technical risks.

89 The commercial evaluation, it had been established in accordance with project objectives, the project procurement strategy and a commercial risk assessment of the supplier market for this particular scope of supply. The weighting of criteria reflects relative importance in terms of meeting project objectives, and in mitigating commercial risks associated with the scope of work. The table below summarizes the main categories of commercial evaluation criteria and their recommended weighting of a specific project of Aker Solutions.

No. Commercial Evaluation Criteria Weight in % 1. Price 45 2. Lead Time 25 3. Project Management Capacity and Capability 15 4. HSE Track Record 10 5. System for Sub-Supplier/Material Management 5

Table 8. Commercial evaluation criteria To become evaluation method and calculation of scoring system comprehensive, commercial and technical evaluation of the particular bidders in a specific project of Aker Solutions is illustrated below.

Figure 17. Technical evaluation and weighted score of Aker Solutions

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In addition to technical evaluation, commercial evaluation is displayed below. As mentioned earlier, after commercial and technical scoring, the joint bid evaluation is executing which summarizes these two evaluation and suggest the winning bidder. The latter is also visualized below.

Weighted Commercial Evaluation Confidential Weighted Commercial Evaluation Score Weight Bidder A Bidder B Bidder C ref Package Staretegy dated dd.mm.yyyy . in % Weighted Weighted Weighted Score ** score * Score score Score score 1 Evaluated Cost 45 4.81 2.16 4.00 1.80 5.00 2.25 2 Lead Time 25 4.00 1.00 3.00 0.75 5.00 1.25 3 Project Management Capabilities 15 3.00 0.45 3.00 0.45 5.00 0.75 4 HSE Track Record 10 4.00 0.40 4.00 0.40 4.00 0.40 5 Supplier Management System 5 4.00 0.40 5.00 0.50 3.00 0.30 Weighted score 4.41 3.90 4.95 Commercial Ranking 0.89 0.79 1.00 Table 9. Commercial evaluation of Aker Solutions

Table 10. Joint bid evaluation

The table above sums up the final evaluation bids according to weighting criteria approved in Package Strategy in Aker Solutions. The latter shows only a particular project and its scenario. The joint bid recommendation/evaluation is based on final weighting of the commercial and technical evaluation score, notably 60 % weight on the technical evaluation score and 40 % on the commercial one.

As already highlighted those two criteria are two crucial pillars. However besides them buyer would take into consideration additional evaluation elements as follows:  Workload and stuffing – suppliers should sometimes list what other obligations has already to other suppliers. In addition, tenderer might be asked to demonstrate how its personnel and subcontractors still will be able to meet company’s demands even during high workload from other clients.

91  Experience – supplier can be asked to include information about pervious relevant work. Additionally, they might be asked to highlight how they provide superior service and quality compared to other vendors. Vendors are also encouraged to provide references.  Pricing – it is vital that vendors provide detail information of how the final price has been calculated that will be judged favorably. The latter refers to transparency. However, if tenderer believes there might be hidden costs not covered by the contract, this should be highlighted.  Supply chain - suppliers should demonstrate how it will be able to provide a secure and timely delivery of the supply. This includes facilities, delivery times, subcontractors and transportation costs.

 Management system – this can contain HSEQ policy and goals, KPI indicators and risk management. During evaluation buyer might ask vendors additional information or documentation and tenderer should be able to response this promptly. One common feature among companies on NCS is bid clarification meeting with suppliers. The latter is especially common when a project is complex and buyers want to ensure themselves that suppliers have understood exactly what they are asking for, make technical clarification further. Most importantly, bidders should explain and clarify their bids in details. Bid clarification meetings can only occur with suppliers who have met evaluation criteria and buyers are interested in. The bid clarification meeting aims detailed clarifications and negotiations before evaluation process starts.

5.4.6. Contract awarding After bid clarification meetings and suppliers’ evaluation, the tender committee choses the most successful vendor, vendor with the highest score, according to their established strategy. The tender committee shall determine whether general terms and conditions are sufficient in covering the legal aspects of the contract. The committee can also determine whether any other documents are relevant to attach, such as procedures, equipment lists, drawings, pictures, etc. The tender committee also determines the compensation model covering the actual costs most beneficial to the company and that contains healthy incentives for the contractor to perform the work in an optimal way. Mostly, the tender coordinator is responsible for informing the successful supplier and intent to entering into contract by

92 issuing an award letter. After reviewing and signing the contract both parties should be bound by the provisions of the contract.

Companies on NCS also inform unsuccessful tenderers by issuing a notification to unsuccessful tenderers or letter for rejection as Kværner calls. However, they do not have to provide further explanation and debrief for not selecting a particular suppliers. But if suppliers ask for feedback and request for further debrief, they can get buyer’s feedback and recommendation. This is interesting issue and through interviewing, both sides, buyers and vendors, confirmed and provided examples that suppliers on NCS are eager to learn and know its weaknesses. Based on findings, most cases suppliers ask for debrief and feedback. The reason for this is that suppliers are willing to develop further. Namely, to get known in which aspect they failed at, what they have to work on for becoming a specific buyer’s supplier.

5.4.7. Manage agreement After contract has been signed and players have agreed on conditions this does not mean that tendering process is finished. Furthermore, this stage is highly monitored and followed up by buyer. Tendering is not done until process is not closed out. The last phase, manage agreement, implies contract implementation and evaluation process. For this reason, a contract coordinator will be set. The latter shall plan and lead the evaluation of the vendor contract performance, through KPIs and periodic meetings, and report findings to the procurement manager. Hence, contract administrator or contract responsible is in charge of post tendering and monitoring process.

In Aker Solutions and Kværner for instance, in post tendering process PRB (Package Responsible Buyer) and PRI (Package Responsible Discipline Contract) are monitoring and following up supplier’s performance. Kværner and Aker Solutions are having and following the same tendering procedures and evaluation methods. In Statoil for instance, the company’s representative is intensely involved in monitoring process. According to the company, post award process secures as follows: establishing follow up strategy, securing that Statoil’s right under agreements are fulfilled, securing goals regarding HSE, ethics, quality, cost and schedule are met. Additionally, the process should

93 secure that excellent contractor relations are obtained and proper reporting and management information are given to the company.

Internal kick-off meetings and periodic reports are common at this stage of tendering. This phase is characterized with intense communication from supplier and to supplier. The main objectives of following up and contract implementation can be summarized as follows: internal and external kick-off meetings, quality surveillance (design, supplier documents and drawings), HSE review, and equipment performance testing and final inspection. The figure below displays two essential stages of managing agreements, as a final step in tendering process.

Figure 18. Performance evaluation and close out

94 5.5. Tendering process of Dolphin Drilling In addition to the general process of tendering on NCS in the oil and gas industry, more specific procedures and examples of particular companies will be displayed. The first procedure as visualized below, reflects tendering process at Dolphin Drilling. According to their procedure it should not restrict competition among suppliers and should ensure that end-users receive goods and service of satisfactory quality.

The objective of Dolphin Drilling’s tendering procedure is as follows: securing supply of critical goods, control and reduction of procurement costs, fair competition, limiting the number of vendors, good specifications, standardizing, business ethics, and optimization of legal terms and conditions of purchase. The figure below visualizes the whole tendering process of Dolphin Drilling. It can be seen that the starting point is demand or as mentioned earlier business need that is followed by the assessment of that demand. This also includes risk assessment. As mentioned above, tender committee is the one who decides and selects bidder with highest score. After pre-qualifications the company gets the list of suppliers where some of them would be invited to tender. If there is a need the company would conduct negotiation with specific suppliers. This stage is followed by contract award and its implementation and eventually ends up with contract evaluation closed out.

Figure 19. Tendering process of Dolphin Drilling

95 5.6. Tendering process of Statoil When it comes to Statoil, the sourcing methods in procurement objects safe and efficient operations and long-term competitive advantages. For this reason, the company follows the principles according to which competitive bidding is their main sourcing method, if not an alternative sourcing methods are applicable. And most importantly, transparency and fear treatment are applied. The figure below illustrates the tendering process in Statoil. As it can be seen, these process also reflects the dependency between phases. The latter implies that all work coming in the phases must reflect the previous phases in order to secure consistency to decisions and directions given in earlier phases.

As figure below visualizes the start point of tendering process at Statoil, business strategy or category strategy. At this stage the company defines what the size and scope of a project are, what estimated value are, how the project would be handled and executed, what evaluation criteria, etc. Afterwards, the risk identification and risk mitigation acts are carried out. This job belongs to specific strategies. The next stage is followed by enquiry documents that reflects commercial and technical contribution to enquiry. In enquiry process cross functional team is involved. Next step, which is not displayed below, is finding pre-qualified suppliers and qualifying them. When company finishes these process then selects certain suppliers they are interested in and sends enquiry.

Award Manage agreement Evaluation

Enquiry documents Specific Strategies

Business strategies/Category Strategies

Figure 20. Tendering process and dependency between phases of Statoil

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When company gets bids from several vendors then the evaluation process will be delved. The company has two types of evaluation criteria: quantitative and qualitative criteria. The former are the criteria that can be easily measured, easy to maintain objectively such as technical minimum requirements as capacity, response time, lead time etc. In addition, costs that can be easily measured. Whereas the qualitative criteria contains professional judgement, special focus on maintaining objectivity the evaluation work and sub-dividing scope of work within competence, experience and service.

However, this is not all what evaluation process includes in Statoil. The evaluation models consists of two main types: cost based (linear) and normalised which leads to final evaluation.

Figure 21. Two types of evaluation of Statoil

The cost-based model has a strong cost focus by showing how much Statoil is willing to pay for differences in technical tender and final result of the total evaluation that gives an evaluated commercial value. According to the cost based model the successful tender will be the tender with the lowest evaluated value.

Whereas the normalized model combines and weights technical and commercial evaluation. This implies commercial evaluation and score based technical evaluation. According to this model, the successful tender will be the tender with the highest total weighted score. To sum up, cost-based model implies successful tender with the lowest evaluated value, when normalised refers to the successful tender with the highest total score (combining commercial and technical evaluation). The figure below visualizes total evaluation models that can be normalized or cost based and consists of technical and commercial results.

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Figure 22. Guideline of evaluation method of Statoil

After evaluation process is completed, awarding letter or notification will be sent to the successful bidder. Evaluation process varies and can even take three-two months if project is complex and contains high risk. When actual delivering service and executing of work by supplier begins, starts manage agreement phase that implies company’s representative is monitoring and followed up supplier’s performance. At this stage, suppliers have to give reports as required by buyers. Monitoring and following up are important since buyer needs to ensure that performance and supplying service are carrying out according to the strategy defined at the beginning of the tendering process.

5.7. Tendering process of Aker Solutions As in every company, the tendering process in Aker Solutions roots from the business need. Afterwards, the company creates package strategy/sub-contract strategy where the project is defined clearly. The Strategy has been developed in accordance with the policies and objectives implemented under the project. In the package, the project execution model priority for a specific procurement will be created where first, second and third priorities for the project will be defined. For this purpose, as mentioned earlier, Package Responsible Buyer (PRB), Package Responsible Engineer (PRE) and Package Responsible Disciple Contract (PRD) will be set. Then, technical and commercial package is created where criticality assessment will be delved. A criticality assessment of the technical scope of work will be performed. Under commercial and technical package commercial risk and opportunity assessment will be carried out where commercial risk and opportunities factors have been identified. Followed phase is getting to qualified list of suppliers. For this goal, the company uses Achilles where pre-qualified suppliers can be found and SQiS (Supplier Qualification information System) for MMO (Maintenance, Modification and Operation) of

98 Aker Solutions. Pre-qualified suppliers will be assessed in order to get to QSL (Qualified Suppliers List). Criticality assessment serves for this purpose. The latter can be described as risk assessment that will be explained in risk management in detail. However, to understand how the company carries out criticality assessment is briefly given below.

Before Inquiry, it is the responsibility of the buyer to ensure that the supplier is prequalified for MMO in the SQiS. Due to differences in prequalification requirements it is not sufficient that the supplier is present in the SQiS, the supplier must be prequalified for the specific project. Before order placement, it is the responsibility of the buyer to ensure that the criticality rating, related to the purchase order, complies with the Qualification Level for the supplier in SQiS as stated below. According to this level A is high criticality, B and C medium and D low criticality.

Criticality A Qualification Level A. Criticality B Qualification Level B or higher. Criticality C Qualification Level C or higher. Criticality D Qualification Level D or higher. Table 11. Qualification level for supplier This means that the Qualified Supplier List (QSL) will only show A, B and C rated Suppliers. Suppliers with Qualification level D will be registered in the SQiS, but not approved to the QSL. Figure 23 visualizes these process further and provides a sample scenario.

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Figure 23. Procurement strategy of Aker Solution As explained above, Aker Solutions use Achilles and its own separate pre-qualifications SQiS. When they get bidder lists then bid clarification and evaluation process begins. In accordance with the technical criticality assessment it is recommended that bidders are called for bid clarification meeting for detailed clarifications. In addition, negotiations can occur during the detailed evaluation. AK also carries out preliminary evaluation and eventually gets short list of suppliers followed by the final evaluation. When final evaluation is completed, the award letter will be sent to the winner. When they get confirmation from the supplier then contract will be issued.

Post-tendering process

Contract / Package Tech. Req. for Inquiry & Bid clarifications Tech. Req. for PO / Contract Follow Close- Strategy Inquiry Clarifications & Evaluation PO / Contract Issue up Out Figure 24. Tendering process of Aker Solutions Later on post tendering process occurs. This phase is highly characterized by communication from supplier. In addition, buyer communicates intensely to supplier as well. Execution of follow up and supplier co-ordination includes kick-off meetings with supplier as well as with employees, quality surveillance, HSE review, etc. In the end, before close-out of tendering

100 process, supplier evaluation will be carried out by the company. When evaluation of particular supplier is completed, those suppliers will be registered in Aker Solutions supplier database. This implies becoming approved suppliers of Aker Solutions that refers to being qualified and acceptable vendors.

5.8. Risk and mitigation actions in tendering According to the literature and the interviewed leaders, risk and risk assessment can be emphasized as one of the crucial parts of tendering, namely, when regulator prepares procurement strategy, identified risk and mitigation actions are part of it. Or it can be under specific strategy as Statoil is executing. Richard Myhre, CEO of AXTech, highlights that tendering is associated with range of risks, adding: “It is certain, peculiar way of thinking of project, how you can control project before it is designed. There are many uncertainties on materials and hours spent, contractual terms, and delays, etc. All our projects involve risks and challenge is how you manage that risk which is one of the success factors”.

All interviewed leaders said that risk and risk factors shall be identified for each project, where risk mitigation actions will be tailored. The respondents mention possible risks related to tendering as follows: technical, financial, environmental, subcontracting, HSEQ, commercial and contractual risks. According to the respondents, in tendering, it is common that clients use lump sum as their payment method. The latter refers to uncertainty and supplier shall estimate their costs in order to ensure that they will not end up with financial loss and project would be profitable to them. As Knut Stefanussen highlights: “We have to be sure about our costs, to avoid financial risk and deliver in a safe manner”. One of the examples of safety risk assessment can be illustrated by the flowchart, provided by Statoil. This is one of their internal tools that guide them through this assessment, when it comes to analyzing the risks for safety. The flowchart indicates that when there is a high risk safety mood, qualification of supplier’s HSE policy is required. By contrast, no action and HSE management system will be required if safety risk mode is low. This figure also explains that if supplier has poor HSE poor track, then risk mitigation plan will be developed.

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Determine need for safety qualification

High/ Medium safety risk Low safety risk Assess the overall risk picture (Input from the safety risk assessment)

Interface 3 Interface 3 Assess supplier Assess supplier interface interface

Interface 1 and/or 2 Interface 1 and/or 2

Does potential supplier(s) have known poor track record with regards to No No safety performance?

Safety risk mode HIGH Safety risk mode LOW QualificationYes of supplier’s HSE Qualification of supplier’s HSE management system required management system not required Develop mitigation plan

Figure 25. Analyze of safety risk (Statoil)

102 The flowchart indicates that when there is a high risk safety mood qualification of supplier’s HSE policy is required. By contrast, no action and HSE management system will be required if safety risk mode is low. This figure also explains that if supplier has poor HSE poor track then risk mitigation plan will be developed.

According to Statoil, risks and risk factors, positive and negative, relevant to their specific procurement, and factors related to safety, security, sustainability, ethics and anti-corruption will be performed. In addition, a risk assessment on the suppliers’ financial background will be checked. As Jan Borkelman says, in the specific strategy, risk and success factors will be identified. In risk and mitigating actions will be considered: safety risk factors and safety risk mode, quality issues, interfaces / stakeholders, IT specific issues, commercial and operational actions, reputational issues and ethics, anti-corruption and social responsibility risk factors. Whereas in success factors and activating actions will be described the critical success factors in order to achieve the strategy objectives. Based on risk and success factors, the company defines prequalification of bidders and evaluation methods. The company believes that it is important not to mix the selection criteria as part of prequalification process with the evaluation criteria to be used in the evaluation process. They highlight that selection criteria are used to select tenderers to the bidder lists, while evaluation criteria are used to evaluate submitted tenders.

As mentioned in the literature review, in oil and gas industry and construction industry mostly used technique was risk matrix that performs a risk analysis based on negative risks. This has been confirmed according to the informants. Furthermore, as illustrated a risk matrix in the literature review that categories risk into five colors and five fractions, trough interviewing revealed that Statoil is using it as one of their internal tools that guides them to the risk assessment. They categorize risks on the matrix into five impact: minor, moderate, serious, severe and major. Major, severe and serious risk factors are red colored when it comes to threat. As for major, severe and serious opportunity factors are set in blue colors.

As for Aker Solution, they have a different approach of risk analysis. Namely, they analyze the criticality for the procurement package and subsequently for determination of a strategy for supplier selection, follow-up, management and quality surveillance of the product. Both probability of failure and consequence of failure are to be evaluated.

103 Probability of failure depends on: 1. Design complexity 2. Design maturity 3. Manufacturing complexity (including inspection access) 4. Possibilities for Maintenance 5. Supplier’s familiarity with product 6. Schedule lead time for product and documentation 7. Previous experience with supplier performance 8. Logistics complexity

While Consequence of Failure may impact:  Health and safety  Ecological and environmental issues  Construction and startup schedules  Cost of operation (including replacement/repair, downtime, loss of revenue etc.)

Each statement is given a criticality score value ranging from 0 to 4. A score of 4 is most critical and 0 not critical. The Final criticality level is determined according to the below score range:

37 - 48 = Criticality Level A = high criticality 25 - 36 = Criticality Level B = medium criticality 13 - 24 = Criticality Level C = medium criticality 12 - 0 = Criticality Level D = low criticality

The table below displays one of the factors of probability of failure. For instance, supplier’s familiarity with product examines what supplier’s experience is with product, what supplier’s standard product is, etc. Each of these criteria will be given criticality score as showed below.

PROBABILITY OF FAILURE

No. Description Criticality score: (0 - 4) 1. DESIGN COMPLEXITY 1.1 Complex design with significant external interfaces 4 1.2 Complex design with few external interfaces 3 1.3 Design with no external interfaces 2 1.4 Standard design 1 1.5 Simple design 0

104 2 DESIGN MATURITY 2.1 Unproved new design from first principles/involving new design techniques 4 2.2 New design based upon established design techniques 3 2.3 Significant modification to proven existing design 2 2.4 Minimal modification to reliable design 1 2.5 Proven reliable design 0 3 MANUFACTURING COMPLEXITY 3.1 Unproved production techniques not easily verified 4 3.2 Complex production techniques not easily verified 3 3.3 Difficult production techniques relatively easily verified 2 3.4 Standard production techniques easily verified 1 3.5 Simple production techniques 0 Table 12. Probability of failure at Aker Solutions While consequence of failure depends on health and safety, economics of operation, environmental issue, etc. In the end, final criticality level and total criticality score will be given.

CONSEQUENCE OF FAILURE

No. Description Criticality score: (0 - 4) 9 CONSTRUCTION AND START-UP SCHEDULES 9.1 Construction and start-up will be delayed and result in increased costs and penalties 4 9.2 Construction will be delayed and result in large increase in carry over work 3 9.3 Extensive construction rescheduling will be required with loss of productive man hours 2 9.4 Construction rescheduling will be required 1 9.5 Negligible impact on construction or start-up schedules 0 10 HEALTH & SAFETY 10.1 Multiple fatalities will occur 4 10.2 Single fatality or serious injury 3 10.3 Injuries may occur 2 10.4 Limited harm to operating personnel 1 10.5 No harm to operating personnel 0 11 ECONOMICS OF OPERATION 11.1 Results in total loss of system with extreme cost 4 11.2 Seriously downgrades system with serious cost 3 11.3 Significantly downgrades system with significant cost 2 11.4 Downgrade system to a limited extent or period with limited cost 1 11.5 Negligible inconvenience and/or cost 0 12 ECOLOGICAL AND ENVIRONMENTAL ISSUES 12.1 Irreparable ecological or environmental damage 4 12.2 Serious and long term ecological or environmental damage 3 12.3 Significant ecological or environmental damage over a short time 2 12.4 Limited short term ecological or environmental damage 1 12.5 No risk or minimal damage 0 FINAL CRITICALITY LEVEL: TOTAL CRITICALITY SCORE:

Table 13. Consequence of failure at Aker Solutions

In addition, based on technical criticality assessment, the recommended evaluation criteria for particular project will be summarized. When these assessments will be carried out by the

105 package responsible, then level of management and supervision towards supplier will be checked. This implies, having guidelines consisting of long lists. To become comprehensive what kind of activities they include, the table below displays an example for this.

CRITICALITY LEVEL ACTIVITIES A B C D high mediu mediu low m m 1.0 QUALITY SYSTEM REQUIREMENT 1.1 Specification of system standard R R R 1.2 QA Manual review ( R ) 1.3 Quality Plan review R R R 1.4 QA compliance audit ( R ) ( R ) 1.5 Contract review R R ( R ) 2.0 ENGINEERING 2.1 Design reviews R R 2.2 Verifications R R 2.3 Safety assessment studies ( R ) ( R )

3.0 PROCUREMENT/CONSTRUCTION 3.1 Kick off meeting R R ( R ) 3.2 Clarification meetings R R ( R ) 3.3 Special process approvals R R ( R ) 3.4 Traceability ( R ) ( R ) ( R ) ( R ) 4.0 INSPECTION & VERIFICATION 4.1 High profile/residence R ( R ) 4.2 Agreed inspection and test plan stages R R ( R ) ( R ) 4.3 Code compliance stages R ( R ) 4.4 Final tests (Functional/Performance) R R 4.5 Inspection Release at suppliers R R ( R ) 4.6 Inspection Release on receipt ( R ) ( R ) 5.0 DOCUMENTATION 5.1 SDRL Review R R ( R ) 5.2 Review of Test Procedures R ( R ) ( R ) 5.3 Approval of Test Records and Certification R ( R ) ( R ) 5.4 On-Site Approval of Test Records and Certificates R ( R ) ( R ) R = Required (R) = Requirement to be established/agreed.

Table 14. Guidelines for level of management and supervision towards supplier Aker Solutions

The table shows that each activities will be assessed and criticality level will be given. In addition, it also indicates what activities are required and what requirements needs to be established. All in all, this criticality assessment was showed to convey what criticality assessment is used for by the package responsible that leads to assess the possible risk and start risk mitigation actions. As mentioned earlier, based on the respondents, risk should be core activity in tendering process, where all tentative failure, possible risk and success factors need to be determined in the early phase, namely, in the procurement strategy. Furthermore, according to the informants this allows to create enquiry that fully reflect established strategy and corresponds to the scope of the project.

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Chapter 6

Analysis and Discussion In Chapter 6, analysis and discussion of the thesis are given. It reveals the main findings of the thesis and discuss them. The correspondence of the literature and findings have been examined. Furthermore, the gap between them have been found and discussed. It also argues and gives examples why literature might need to be updated. Additionally, it also reflects beliefs and comments of the informants.

6.1. Tendering process and procedure Even though the qualitative interview covered 11 companies, one still can get insight and understanding of tendering procedure on NCS. The interviewed companies do have their own peculiar way of doing business and so is in the tendering process. However, they have many features in common. Firstly, the companies conduct tendering and post tendering process with high ethical codes. This means that, each employee directly or indirectly involved in the process is required to conduct all stages with high ethical standards. This is especially vital on buyer side because they are the one who shall evaluate and select vendors. Additionally, their suppliers with subcontractors are expect to show ethical behavior. Secondly, the process of tendering is a cross functional teamwork where the right team is crucial to the content and quality from purchasing strategy until evaluation and close out. The same goes with quote strategy and bidding process on supplier side.

The players share common main objectives of tendering as cost efficiency, competition among suppliers, delivering innovative solutions based on transparency, equal treatment and non-discrimination. However, the objective can be split into buyer and supplier perspectives. Buyers aim within tendering to widen their approved and qualified supplier lists, achieve cost efficiency and seek for best and innovative solution. One thing that can be noticed compared to previous years is that buyers are keen to reduce costs more than ever. This fact is driven by low oil price. This means that for buyers’ focus from lead time has been switched to cost reduction. While some years ago high price was acceptable and affordable for the companies. This factor, indeed reflects and influences in evaluation and selection of suppliers in tendering process, where price could have high weighting factor. Besides price, two vital driven factors for choosing suppliers, have been found as quality and HSE. As for

107 suppliers’ perspective, tendering gives them a chance to become tenderer for big companies, suggest their own solution and increase revenue. It should be mentioned that delivering innovative solution allows them to become pioneer within specific service and supply and as a result gain high reputation on a market. And thirdly, even though companies have different qualification and evaluation method, they do have similar tendering stages, stemming from business need - until following up and closing out. As illustrated in the literature, the public procurement process by the Scottish Government, was found similar with tendering on NCS, with the difference that the former did not include pre-qualification and qualification stages.

Three types of tendering procedures have been found on NCS. As reviewed in the literature part, this contain: restricted, competitive dialogue and negotiated procedure. In the restricted procedure only pre-qualified and invited candidates may submit the bid, whereas the competitive dialogue is conducted with the candidates admitted to the procedure (Lewis 2015). The latter usually aims to develop more suitable alternatives or solutions capable of meeting stipulated requirements. The participants are asked to submit their final tender on the basis of that solution. It might be defined that contract is awarded to the participant judged to have submitted the tender that is the most economically advantageous. The third type is negotiated procedure, where buyer consults with suppliers of its choice and negotiate the term of the contract with one or more of these. This procedure is often related to nature, complexity, risks or urgency of the tendering that the contract cannot be awarded without prior negotiations (Lewis 2015).

As discussed earlier, since oil and gas industry are quite technical and contain high risk, suppliers must be pre-qualified and meet companies’ need. Being pre-qualified is not enough and additionally companies have to qualify vendors for each project. This is because each project is unique and contains specific risk. Additionally, buyers need to know who their suppliers are and what is going on down in their chain. Trough interviewing, it revealed that the bigger company is, the stricter and higher requirement has. In the chain, they are end- users where they have suppliers with their sub-contractors. All their requirements would be reflected trough entire chain. Statoil, for instance, has one of the highest requirements. An example for this can be cabin of cranes, Statoil requires additional features of cranes as refrigerator, rest room in a cabin, etc. Those can be defined as typical Statoil’s requirements.

108 However, relatively smaller companies, like Dolphin Drilling for instance, would not have so high requirements and would be easier for new entrants to become their suppliers.

When it comes to evaluation process, this analysis is in accordance with (Emmett and Crocker 2008) as discussed in excellence in procurement book, where is has been stated that evaluation of vendors should be conducted as a joint technical and commercial assessment. Furthermore, the authors highlighted those two criteria as weighting factors for choosing suppliers. Indeed, on NCS in evaluation process, technical and commercial evaluation factors are driven factors for choosing suppliers in tendering. Additionally, as (Puil and Weele 2014) indicated, besides these assessment, another aspects are assessed on supplier’s ability, attitude, financial background, sub-contractors, etc. as discussed in the literature. The reason why buyers have to assess additional factors lie from the fact that the latter shall identify and assess any possible risk and know his/her entire supply chain thoroughly. All these weight factors together allow buyers to see supplier’s capability, and eventually select them according to established procurement strategy. As highlighted earlier, it is important not to mix selection and evaluation criteria. The former are used to select tenderers to the bidder lists. While the latter are used to evaluate submitted tenders.

6.2. Exemption from public procurement directives The reason why in the thesis public procurement has been explored is that the Norwegian Oil and Gas industry used to be under public directives and procedures. However, this has been changed. Indeed, the surprising finding of the thesis is EFTA Surveillance Authority’s decision that the exploration and extraction of oil and natural gas on the Norwegian Continental Shelf are exempted from the EU rules on the public procurement process in the utilities sector in Directive 2004/17. This implies that Norwegian oil and gas sector are exempted form Utilities Directives rules on procurement. As mentioned in secondary data, the decision was made because of free access to the market and enough competition on the market.

This can be called as ‘the biggest’ finding of the thesis. When everyone thinks that NCS belongs to “utilities sector” directives, is not the case anymore. Even Statoil, with high public shares do not have to use public procurements rules. However, they still can use it and it is expect that if costs exceed so called threshold values, they will use public directives.

109 Another big surprise was that players on NCS was not aware of these changes. The reason for this can be that still tendering process and procedure are quite similar with detail public procedures, using systematic approach and procedural requirements. As discussed earlier, the former implies fair treatment, non-discrimination and transparency, while the latter – using technical specifications and standards, qualification, supplier selection and contract award. Despite this changes, tendering process is as transparent as two years ago without any discriminatory behavior. In addition, minimum three different bidders required in each tendering process. One trend that can be observed is that it is easier to enter into contracts with vendors that companies share good experiences with and have high trust. However, new entrant does not have barrier to enter the market and become bidder later on.

6.3. Focusing on risk in tendering

The interview with parties revealed that risk is reciprocal in tendering process. This implies that identified risk factors and its mitigation actions are carried out by both parties, by buyer and vendor. The former deals with that in procurement strategy, while the latter in bidding strategy.

As (Puil and Weele 2014) point out, risks account for the firm, client and sub-contractors. They also add that there are also risks that should be carried jointly. The vivid example for this can be HSE and ethical standards. In the literature review, it was also mentioned that in the stage of tender there are two main principal risks: one arising from strategies, and the other risk – from term and conditions of a contract. Indeed, the interviewed companies from demand side, identify risk and assess risk in their procurement strategy or under specific strategy, additionally in contractual terms and conditions. Once again Buyer’s first attempt is to identify and assess risks.

(Agerberg and Ågren 2012) mentioned risk matrix technique that analyze risks based on negative risks, is often used qualitative methods in organizations. So is on NCS, on demand and supply side. However, it has been found that on demand side, a risk analysis is not only based on negative risk, but also on successful factors. Namely, identified risk and success factors are described and necessary mitigation actions are determined and documented as part of the procurement strategy or under a specific strategy.

110 Internal tools to assess risks varies from company to company. However, as Baker et al (1998) found out 80% of the studied firms in the oil and gas industry use combination of qualitative and quantitative methods, in (Agerberg and Ågren 2012). Furthermore, the most used qualitative methods were the risk matrix and the decision tree analysis. Indeed, risk matrix techniques are being used by both parties on NCS. As for decision tree analysis, is has been found and shown while analyzing risk related to safety, provided by Statoil. Furthermore, as given in the literature, Project Management Institute (2004) suggested another risk matrix that categorizes risk into colors and stretches events with severe impacts to event which are negligible. This technique is also used by Statoil. The latter categorizes risks into minor, moderate, serious, severe and major impact, where major, serious and severe threats are in red color, and major and severe opportunity factors in blue colors.

The findings above indicate again that buyer is the one who identifies and assess risk intensely, whereas suppliers assess risk less than buyers. This insight is also strengthened in literature. As (Harris and McCaffer 1995) pointed out risk on the supplier side, mostly will depend on the price offered in the bid. The estimated cost is adjusted by the addition of mark up to provide for risk, overhead and profit (Adedokun, Ibironke, and Babatunde 2013). The respondent from Axess, the company delivering engineering services and solution in offshore, emphasized “we as supplier, have to understand whether we are able to deliver what customer is asking for. And therefore, we have to be sure about our costs, to avoid financial risk and deliver in a safe manner”. Whereas risk on the buyer side will depend on the use of tendering to select the right supplier, where it is the first attempt to understand risk. Risks related to safety, security, sustainability, ethics and anti-corruption shall be also assessed. In addition, supplier’s financial background and all suppliers with their sub- contractors in the supply chain have to be checked. Hence, as literature provides insight, buyers, who ‘dictate’ whole tendering process have to identify all tendering related risks, while suppliers’ main risk will depend on the offered price. However, as mentioned, there are risks carried jointly by both parties.

6.4. Bidding process

So far tendering process from buyer side has been discussed. However, bidding process has not covered yet. Vendors shall also execute procedures and preparation combined with risk assessment to decide whether bid or not. This is caused by the fact that supplier needs to

111 decide whether a certain project is profitable or not and as a result not to take financial risk. Therefore, there are many issues vendors should take into account. To get a comprehensive picture of another side of tendering process, this part seeks to explain process executed from supplier side.

When regulator finishes pre-qualification and qualification process, enquiry to particular qualified vendors will be sent. The enquiry is received in sales and marketing department. The enquiry consists of plenty of documents with separated technical documents. Suppliers have very short time to decide whether quote or not. This usually varies from three to seven days. During this time they have to make preliminary estimate of the project, take into consideration size and scope, possible risk and most importantly profitability of the project. If vendor decides to quote then the bidding preparation process will be delved.

It should be noted, as long as vendors decide to quote, they are given enough time for bid preparation. This varies from project to project, however 2-3 months are common. In case of high risk and complexity of the project, more time will be given. The process of bid preparation starts with start-up meeting where tender team will be set. In many cases, tender manager or tender responsible is selected. As figure 26.illustrates tender team includes technical, commercial and contracting staff.

Figure 26. Bidding process

112 In start-up meeting the enquiry documents and technical specification are reviewed and discussed in detail. Furthermore, in the meeting, client’s profile and client’s need are examined further. In the meeting vendor also sets tender manager where tender team starts preparing quote strategy. As mentioned earlier, in buyer’s tendering process, the first and important phase starts with procurement strategy. Hence, it can be concluded that strategy occurs on both sides. Both parties prepare and perceive strategy as milestone of a tendering process. In the quote strategy as in procurement strategy, cross functional team is involved. The cross functional team of vendor executes financial, technical, commercial, contractual and risk assessment tasks. They also define in the strategy their strengths and weaknesses, probability of their competitors, project related costs and profit. In addition, competitor’s price is also assumed. It can be also possible that vendor decides to make a joint-venture with another vendor and submit bid together. The latter might happen when vendors do not have full capabilities to satisfy client’s need and in case of joint venture they will be able to fully meet client’s need.

The vendor might also have quality assurance meeting where they go through the prepared strategy, review it carefully and do some checklists to ensure themselves that they have answered to all questions and meet client’s need. Following stage is bid clarification meeting with the client where client invites the vendor and clarifies further what they are asking for. Additionally, if the vendor is insure regarding some details entailed in the enquiry they seek to get more explanations and clarifications from the client. Afterwards, with cross functional team bid preparation process will start. Vendors shall be aware of deadline and deliver the bid within time frame as defined by the client. The submission can be asked in both forms as per e-mail as sealed package. When client finishes bid evaluation process to the successful bidder award letter will be issued. As for unsuccessful tenderers a notification will be sent. If the latter requests further information, they may be granted for further debriefing. As analysis showed, The Norwegian vendors try to get feedbacks and debrief in order to be aware what they have to work on and improve. Eventually, this allows them to focus on their weaknesses, work intensely for improvements and in the end become qualified suppliers of particular regulator.

6.5. Incentives and drawbacks of tendering The analysis revealed the incentives to tendering stem from ‘best value for money’ as discussed in the literature review. As (Mwesiumo 2001) refer competitive tendering gives

113 transparency and equal opportunities among suppliers. In addition, many informants highlight cost saving referred to (Hensher and Wallis 2005a) where the authors found considerable cost saving in short and medium term. The informants’ answers showed many similar objectives for announcing tender. One of the benefits are cost efficiency, ‘best value for money’ and the best solution. The informant from Prezioso Linjebygg, the specialized company in offshore installation added that sometimes clients do not know how to carry out a certain project that requires specific know-how in technical area for instance, and in that case clients do not even look at prices as much as at getting the best solution. There are many cases that vendors carry out studying and testing before delivering a specific service. For instance, Prezioso Linjebygg is working on a new solution for Statoil. In the North Sea there is a crane replacement work. FPSO (Floating, production, storage and offloading unit – floating vessel), where Statoil is planning to have heavy lift. However, the company seeks and works on suggesting Statoil an alternative for that. Instead of heavy lift, that is expensive, substituting some lighter one. Therefore, they made a study and suggested a technical solution for this project to Statoil. The latter is pondering and evaluating company’s solution.

According to Lisbeth Varhaugvik, representing Kværner, executing company of EPC projects, highlights that bidding always gives the best price and competition among suppliers. Additionally, it allows them to reach out suppliers that are not in their supplier list. The employees from Aker Solutions refer to cost efficiency, delivery and quality as their incentives to tender. Getting the right service and materials on the right time combined with price and quality are another objectives to tender. Additionally, according to the respondents, best service for right price is a motto for announcing a tender. Cost and quality combined with high level of safety, transparency and open competition are reasons to tender, according to Statoil.

Many players on supply side mention that becoming a “member” of approved supplier lists of big companies, is another objective for them to participate in tendering. John-Helge Frøystad, representing Navitas, also refers tendering to competition, transparency and innovation.

When it comes to drawbacks, they were not found as many as benefits, however, many informants mentioned that tendering is time consuming process that can be costly and

114 requiring high efforts of human resourcing. The same has been discussed in the literature where (Emmett and Crocker 2008) point out tendering as a slow, time-consuming, expensive administrative procedure. However, in the literature has not be mentioned that standards and regulations with additional technical documents can be costly and arises more time in preparation of tendering process. It has been found that, tendering procedure on NCS requires many documentation, especially technical ones. Furthermore, oil and gas industry in Norway requires many standards and regulations that might lead to extra costs. And eventually post tendering process might arise some extra costs and administrative procedures.

6.6. Negotiation as an alternative of tendering

The outcome of the interviews showed that there is not as tendering versus negotiation, rather than negotiation as common, applicable and necessary process on NCS. Tendering as mentioned earlier in this part, can occurred as a negotiated procedure. This is especially important and necessary within this industry that consists of complexity and risk and many circumstances cannot be decided or awarded without prior negotiation. All respondents refer negotiation as an alternative of tendering and at the same time part of tendering.

However, in addition to negotiation, framework agreement was found as another possibility. This means that if companies have reached framework agreement that is mainly long term agreement, then they will not tender and be directly supplied by that supplier. As a result they may reduce the timescales required for commissioning requirements. They may also be used to ensure that better value for money is obtained though economies of scale or to improve supplier relationship management. Framework agreements can be also tendered in the same manner as other contracts.

Negotiation and tendering’s criteria by (Walters and Cloete 2008) discussed in the theory, can be used to compare and outline the pattern of criteria of negotiation and tender on NCS. When vendor prepares bid and gives final price, he/she should split up costs and explained in detail how the final price has been calculated. The price given by vendor is defined by the market. This especially applies to the current scenario, where vendors shall take into consideration the low oil price.

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Highlighted Criteria Tender Negotiated contracts Price Defined by the market Negotiated between players Transparency Tendering process is Less transparent however fair transparent treatment of supplier New entrants Opportunity for new entrants Network integrity Intense integration / Intense integration and Limited collaboration communication only during evaluation process Buyer and seller expertise Client designs, Need for expertise evaluates and awards the tender Flexibility Room for innovation Higher flexibility than in tender and flexibility Training and development Investment on training and development Table 15. Tendering and negotiation criteria Tender on NCS has been revealed as a transparent process where buyer clearly defines how selection, evaluation and award process will be handled which will not favor particular suppliers. In addition, defined evaluation criteria according to the procurement strategy cannot be changed. While negotiation can be relatively transparent where terms and conditions, price, delivery time, etc. can be negotiated and agreed between parties.

Announcing tendering on NCS implies that tendering gives a chance to new entrants. Additionally, it allows them to become a qualified supplier for the particular buyer. Dolphin Drilling for instance, provided an example when tendering had been awarded to the new company, which showed high competence and capability of delivering service. When it comes to network integrity, the results showed that even though tendering process includes communication from-to supplier, it is at a certain level limited. This applies when bid evaluation process starts where buyers are not allowed to communicate with suppliers. However, prior process to evaluation and post tendering process include high communication and collaboration with suppliers. As for negotiation, whole process requires high collaboration between parties. When it comes to expertise, in tendering process client

116 is the one who designs and evaluates tender. Their commercial and technical team are clue for this, whereas in negotiation there might be need for expertise.

One of the analysis of the interviews is that when it comes to innovation and flexibility, they do not correspond with reviewed literature. Namely, literature says that in tendering there is little room for innovation and flexibility. Furthermore, it also mentions that tendering prevents innovation. That is not the case on NCS. By contrast, tendering gives a birth to innovative solutions. All interviewed companies confirmed that trough tendering they have reached to innovative solution and outcomes. A good example was from AXTech, which conducted study for their client since they were suggesting something new that had not done before. Of course, there was high risk but after they proved and provided with the study plan how they would execute and handle the project, the buyer came back to their solutions that have been implemented successfully. Furthermore, Dolphin Drilling includes in their tendering procedure that called ‘alternative solution’, where vendors are asked to suggest an alternative way of delivering service. However, it should be emphasized that this does not mean that vendors can avoid specific requirements. Moreover, they must deliver in compliance with technical standards as required by the industry and by the client.

The book I found on internet called: Bids, tenders and proposals, by Harold Lewis, published in 2015. Fortunately, the library at our university college ordered the book for me. The author has drawn his experience as a specialist consult in bidding and writing competitive tenders. This is the only book so far that I can relate tendering to innovation. In another words, a new form of tendering procedure is an innovation partnership. According to (Lewis 2015) this new procedure, in which suppliers and contractors bid to enter into a partnership with the contracting authority, is intended to assist the development and subsequent purchase of new, innovative products, works and services. Hence, my findings through interviews and the book by Lewis, allow me to conclude that some literature might need to be updated and more practice examples shall be applied into the theory books.

6.7. Auctions

Even though auctions are part of procurement and tendering, the result of the interviews showed that parties on NCS are not often using auctions. The only two companies using auctions and e-auctions are Statoil and Shell. These companies can use it if there is a need for small purchase like materials, small equipment, helmet, gloves, etc. The reason why

117 auction is not commonly used by the parties, especially electronic auctions, is that usually the business need required by the client is complex and risky that contains lots of documents, standards and certification, qualification and communication between parties that is not easy to carry out within this method, especially within electronic method. Hence, auctions is not common when it comes to oil and gas industry on NCS mainly because of its characteristics.

6.8. Ethical standards

The interviews showed that players have high ethical standards in procurement process. This is especially crucial on buyer side, however their suppliers/partners are also expect to have high ethical standards. Ethics codes of conduct are taken into account in all phases of tendering process. Additionally, anti-corruption and corporate social responsibility must apply in the process. The examples provided by buyers confirmed high attitude towards ethical standards and highlights again that handling of conflict of interest in supply chain management is crucial which must be evaluated continuously and necessary actions must be taken. (Kadefors 2005) referred in the theory review that competitive tendering increases the risk of conflict of interest. Therefore, the companies assess if any factors disqualify one from involvement in the procurement process, strategy development, prequalification, enquiry and evaluation and agreement management in tendering process.

Figure 27. Ethical standards

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As described in tendering process, tender committee has high vote for selecting suppliers. They are especially required having high responsibility and ethics. Namely, if there is a member who knows bidder and they have done some non-business together, this member is most likely to incline towards that supplier and therefore, he/she will be excluded form tender committee. One of the rules of tendering is fair treatment. Hence, relation, friendship and acquaintance with a particular bidder must be put aside.

As referred in the literature, managers are more likely to integrate ethical codes when there is a strong internal culture and pressure to do so from stakeholders. Indeed, high ethical behavior between companies also roots from culture in Norway, where conflict of interest, bid rigging and corruption are unacceptable. In addition, stakeholders play an important role. Statoil, for instance, launched in 2011 a new e-learning on business ethics and anti- corruption compliance. The latter is an introduction to the Norwegian and US anti- corruption legislation, as well as nine interactive cases built upon Statoil’s Ethical Code of Conduct. The program is mandatory for Statoil’s employees (Statoil 2016). This also indicates that big companies and especially ones with high public shares are more expect to establish high ethical standards and apply into their business.

Analysis also showed that there is a high trust among Norwegian companies. Trust is an essential part in their business. As respondents mention, if supplier suggests low price, but there is no trust, this supplier will not be selected. When it comes to doing business abroad, then buyer is more careful and examines whether in particular country corruption and bid rigging occur. In addition, they will check if suppliers involve in their work minors, ethical standards, etc. Based on the interviews, it can be said that there are no bid rigging and corruption between players on NCS. Furthermore, they are conducting their business with high ethical standards, where each employer is obliged to read and be fully aware of ethics code of conduct before signing the contract.

6.9. From upstream to downstream

The supply chain in tendering process on NCS shall be explained in order to understand how regulations and requirements occur. To provide a vivid example, let’s take Nyhamna project, where Kværner works for Shell. Kværner also have suppliers for this onshore project where

119 the latter also have subcontractors. In this chain, the end user is Shell, while Kværner is a client for its supplier. All requirements and needs defined by Shell will be reflected to Kværner’s suppliers and subcontractors. (Puil and Weele 2014) mention that this called back-to-agreement where major conditions of the contractor between client and the contractor are translated one-to-one in the contracts with downstream subcontractors and suppliers. In practice, this means that code of conduct and ethics, anti-bribery policy, specific technical requirements and standards, HSE policy, quality assurance, system for managing and auditing their subcontractors, etc. will be required trough entire chain, as defined by Shell (Figure 28).

On NCS many projects are complex and therefore all partners of the value chain are engaged in close cooperation. Additionally, complex and highly commoditized works on NCS are as stated by (Manu et al. 2015) where the main contractor depends mainly on the specific knowhow of a subcontractor. When it comes to contracts as (Puil and Weele 2014) say in the oil and gas industry most contracts are fixed-price, in another words lump-sum agreements. This agreement on NCS is common between parties. The advantage of this type of contract is that price to be paid is established in advance and sometimes work schedule. This means that player save time and resources. On another side, contractor’s cost price and profits may be opaque.

Figure 28. Supply chain in tendering

120 The entire process of tendering shall ensure that the end-users receive goods or services of satisfactory quality. For this purpose, post tendering process on NCS includes supplier performance management. The latter mainly focus on HSE, delivery, quality, cost and behavior. In addition, supplier relationship management and contract management are included. This can be displayed in the figure below.

Supplier Relationship Management

Supplier Performance Management

Contract Management - Relationship - Performance - Administration Figure 29. Supplier performance management

The analysis show that KPIs is widely used on NCS while conducting post tendering process. Namely, end-user and buyer are the ones who monitor supplier performance within KPIs. This controls all activities and work while delivering service and supply to ensure that they are in accordance with established procurement strategy.

6.10. Business relationships Since tendering process involves buyer and vendor, relationships and networks between parties on NCS shall be also analyzed. As in business markets, tendering is related to the context of relationships. Trough interviewing, is has been revealed that relationships between parties are based on trust and norms where players share common goals. Information sharing is also intense and important between parties. The latter also includes eagereness of vendors where they are keen to get feedback and debrief from contractor. Furtermore, as the informants mention between Norwegian companies there is high trust where players have common objectives. The foudation for such a relationships might be explained from the counrty’s percpective where corraption and bid rigging are not acceptable. Furtermore, ethical behaviour policy within organizations is highly established and used in daily business. And eventually, high reputation of contractors who treat bidders equally, affects their relationships.

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Even though it is rare when parties eliminiate “self-interest seeking with guile”, the opportunistic behaviour could not be observed between the inteviewed companies. The reason might be that the major respodents are Norwegian companies. This referrs to the envinormnet and atmosphere that are influencing interaction and relationship between parties. However, different scenario can be noticed when dealing with foreign vendors. As companies on the demand side mention, they are more carefull with those vendors and sometimes it takes more time to evaluate and assess their entire background, check corruption in particlular country and examine supplier’s entire chain. Furthermore, as the respodents mentioned sometimes they are asked for higher rates since vendors from foreign counrties percive them as from rich country that can be charged more than other buyers. In this case might be scenario where opportunistic behaviour and conflict of interest between buyer and vendro arise. However, this does not apply to those foreign vendros, whom contractor has long and established relationships. All in all, even though this study did not aim to address buyer-seller relationships, trough interviewing the general picture of business relationships can be conveyed as trust based relationships where parties are intensely engaged in collaboration, cooperation and information exchange. As a result their trust based relationship reduces opportunistic behaviour where parties share common objectives.

6.11. Darkside of NORSOK Standards

As mentioned earlier, NORSOK standards are developed by the Norwegian petroleum industry to ensure, adequate safety for the petroleum industry developments and operations. These standards and rules describe in detail every part of product and process, they even indicate how specific products should be built, including technical and processual details. The standards contain more than 100 pages and can be defined as one of the most detailed and complex rules.

It turns out that, respondents with technical backgrounds who are familiar with these standards, criticize the regulations. They refer these standards as expensive and time consuming procedure. Namely, NORSOK standards are technically fine and necessary but in some cases it is waste of money, say the respondents. Some parts of these standards do not affect quality. The players want to reduce standards and focus on quality needs from

122 these regulations. Hence, players want the complexity of Norwegian Sea standards to be reduced. Lisbeth Varhaugvik highlighted that technically NORSOK is good which gives standardization. However, they need to be shorten. For instance, if Kværner has to deliver set of wells, they have to deliver a lot of documentation. And some of the requirements within documentations are quite heavy that arises extra costs and time. Hence, these aspects in NORSOK regulation can be better if authorities reduce complexity and focus on quality.

6.12. Findcontract.no and Findsupplier.no in the shadow

As mentioned in the secondary data, the intention behind findcontract.no and findsupplier.no was connecting suppliers and buyers on NCS. This independent platform was created with support of the Norwegian government, Statoil, Eni Norge, Kværner, Shell and others. Originally, these websites were used by players for publishing contracts and finding market opportunities. In addition, searching suppliers and looking at their expertise and experience. Findcontracts.no is the place where mostly big companies are publishing their contracts. Statoil used to be one of the biggest supporters and users of this service. While findsuppliers.no is supposed for small companies.

Nowadays, the websites are rarely used by the players. Through interviews it can be concluded that players would like to have an opportunity to publish their contracts and find suppliers. However, low activity from players and sometimes lack of information are faced problems. Therefore, currently, EPIM, new owner of findcontract.no is working on a strategy for further development and management of findcontracts.no in collaboration with the Norwegian oil and gas industry and the Norwegian government. Hopefully, new updated and developed web sites will be widespread trough NCS and buyers will not be highly relying on their database. Additionally, more small companies would register and become accessible for buyers.

123 Chapter 7

Theoretical & Business Implications, Conlusions, Limitation of the Study & Recommendation for Further Research

7.1. Theoretical Implications The study has explored three sets of literature; first, literature related to tendering process and procedure, second – risk and mitigation actions related to tendering process and third, managing suppliers and subcontractors. The objective was to get understanding how competitive tendering is addressed in literature, which risk factors arise within process and what kind of techniques are suggested by theory. Additionally, for regulator’s perspective dealing with contractors and their subcontractors are addressed. As a result the research aimed contributing the application of tendering in the Norwegian Petroleum Industry. After theory, secondary data contributes to provide picture of the industry, regulations and standards, changes on public procurement directives and pre-qualification system used by players.

The study can be defined as descriptive that seeks to cover theory related to tendering and link it with the industry. It has described and conceptualized tendering process theoretically and practically. Furthermore, one of the main concerns was on qualification, evaluation and selection on bidders. Main incentives and benefits of competitive tendering have been discussed in order to get insight behind ‘best value for money’.

The findings revealed how theory works in practice. As discussed in literature, one of the main focuses in tendering is on risk assessment and its mitigation actions. Especially, within petroleum industry, characterized by complexity and high risks. The evidence showed that rendering related risks are reciprocal and therefore both players assess them. However, as (Puil and Weele 2014) mentioned there are also risks carried jointly by parties, as HSE, ethical behavior, quality assurance. Theory also revealed that there are more risks contractors have to identify and assess, rather than vendors. Whereas the latter’s risk, mainly depends on offered price.

In the study, comparison of discussed theory and practice is also given which showed that some parts of reviewed literature do not correspond findings. Whereas reviewed literature refers tendering to prevention of innovation, the practice showed different picture. Namely,

124 competitive tendering on NCS is related to innovation and flexibility, where alternative solution is highly needed within industry.

7.2. Business Implications The study also provides business/practical implications that can be fruitful to the players to take into account while conducting tendering process or participating in bidding process. The findings have shown changes on public procurement directives, namely EEA’s decision, where Norwegian oil and gas industry are excused from tendering rules of Directive 2004/17/EC. This decision is indeed interesting and shall be observed what consequences it would have for client and vendors and in the end for the industry. However, since the decision was made two years ago, big changes cannot be observed now, mainly because tendering process and procedure are still similar with EU directives. Nevertheless, some differences can be noticed. Clients do not have to advertise or make tender public. However, private and public tenders have in common three main principles: non-discrimination, transparency and fair treatment. In addition, current tendering procedures are also similar with public ones, with the exemption that tendering in the petroleum industry does not include open procedure. By contrast, process is restricted where only pre-qualified vendors can be considered as bidders. Another difference can be observed that public authority publishes weighted criteria, whereas private players do not reveal what weighted criteria would be and how scoring system will be used. However, both sectors shall evaluate vendors objectively and transparently based on weighted criteria defined prior to tendering. It can be also noticed that private sector is more forthcoming about meeting with contractors and bid clarification with vendors that are necessary in the petroleum industry. Moreover, private sector have more flexibility while conducting tender and more innovative and alternative solutions are welcome, while public authority outline stricter their needs and have less flexibility. But eventually, both public and private players have equal concern for ‘best value for money’. After literature review and obtained findings, following recommendations are proposed for players on NCS:

1. Widen supplier and bidder list As (OECD 2009) says tendering only gives an efficient outcome where there is a competition and reasonable number of bidders. In another words, number of bidders to sustain a competition. Players on NCS first have long list of suppliers, where each company

125 defines minimum required suppliers. After prequalification some vendors will be excluded and as a result number of vendors will be limited. Companies should have minimum three bidders in order to sustain competitive tendering. However, trough interviewing, it has been revealed that clients are anchored with their supplier database and Achilles. Being registered in Achilles can be costly for new entrants or for small companies. As mentioned in the analysis, findcontracts.no and findsuppliers.no are in the shadow and rarely used by players. Therefore, EPIM, new owner of findcontracts.no in collaboration with oil and gas association is working on development on web-pages to become usable by parties that will connect regulator and supplier again. However, it should be mentioned that some companies are not aware of these web-pages and had never used them to find suppliers. This refers to lack of information and EPIM shall spread wider. But if they manage to develop web-pages properly, then there would be again interest from big companies to post their contracts. Furthermore, this would allow small companies to be registered there and become accessible for big companies. And as a result update supplier and bidder lists. Indeed, the interviews, showed that players wish these web-pages functioned and used by parties again. Especially those buyers who contributed and put effort for establishing the network for buyers and vendors connection.

2. Tender or Negotiate - this is the question As evidence showed negotiation is very important in oil and gas industry. There is a high economic value, where high costs and risks are involved. Every project is unique and has specific size and scope where some projects without negotiation cannot be awarded.

It is recommended that clients consider particular scenario and address applicable method of procurement. There might be case when instead of tendering, an alternative method would be preferable. Regulators shall take into account specific business need, assess it and decide whether tender or negotiate. Indeed, findings revealed that players on demand and supply sides, consider negotiation as an alternative of tendering and emphasize its importance in oil and gas industry where close collaboration, bid clarification, information sharing and negotiation are crucial. The reason trace its roots from characteristics and complexity of the industry. Since all informants perceive negotiation as alternative method to procure, it shall be advised some assessment to decide whether tender or negotiate. (Wallis, Bray, and Webster 2010) propose number of factors that one can ponder and make a choice between these two strategies, depending on specific circumstances. Namely, the

126 authors suggest to identify number of factors related to environment and specific scenario. They propose and illustrate a model when having a dilemma in deciding whether tender or negotiate. The authors identify seven factors related to the expected environment and performance of the current contractors. The identified factors are as follows: efficiency of existing tender prices, current service quality performance, current operator enter entrepreneurship (service development, response to incentives), current operator relationships (trusting partnerships), contract complexity and completeness, expected strength of supplier market (i.e. potential bidders), and period since previous open market testing. The model, illustrated below shall guide contractor to identify factors and measure them within model to favor tendering or negotiation.

Factor Favor competitive tendering Favor negotiation A. Efficiency of existing tender prices B. Current service quality performance C. Current operator entrepreneurship ( service development, response to incentives) D. Current operator relationships (trusting partnerships) E. Contract complexity and completeness F. Expected strength of supplier market (i.e. potential bidders). G. Period since previous open market testing

Figure 30. Factors favorable to tendering or negotiation, adopted from (Wallis, Bray, and Webster 2010)

127 3. Diminish high cost involvement of participating in tendering Trough interviewing it has been found that there is high cost involvement in participating in tendering. This can be explained due to fact that tendering on NCS implies vendors being pre-qualified in Achilles data base and being in compliance with ISO and NORSOK standards. And sometimes even in accordance with API. Firstly, to be registered in Achilles is related to fee where vendors must update their background and financial statement. For registration on to this database an annual non-refundable fee is payable by a supplier. Such fee is payable by the methods set out on the website from time to time (Achilles 2012). In addition, as mentioned earlier, Achilles consists of different industry categories and if vendors would like to be registered in more than one category, then this is related to additional fee. Secondly, getting certified as ISO standards holders. And thirdly, NORSOK, the Norwegian continental shelf standards. The latter as mentioned earlier, can be defined as one of the most detailed and complex standards. Therefore, vendors with technical background, who are aware of these standards and regulations, would like NORSOK to be reduced and focused on quality. Namely, standards are technically important and well defined, however, they also contain some procedures that do not affect quality and need to be shortened in order to save time and avoid less unnecessary procedure and costs. Additionally, new agreement between the Federation of Norwegian Industries, the Norwegian Oil and Gas Association, and the Norwegian Ship owners Association, as of 1 July 2015, most NORSOK standards will be subject to a fee. Exemptions are primarily hoisting operations and HSE standards which will remain available for free to everyone (Standard 2015a). This is associated with barriers and costs especially for new entrants. And in the end everything shall be documented in tendering which refers to additional costs.

However, it shall be mentioned that tendering is also costly on demand side where cross functional team, ‘facilitators’, prepare tenders, all tender related documents and contracts, specialists who need to identify and assess size, scope and risk of particular project and eventually evaluation and following up of supplier. All these factors lead to high costs where human resources are intensely involved.

7.3. Conclusions Even though I found many studies written about competitive tendering, there is not much addressed about the petroleum industry. Needless to say about the Norwegian Petroleum Industry. Indeed, this study can be defined as pioneer in exploring tendering on NCS. The study sought to get findings trough qualitative survey, namely, face-to-face interviewing

128 companies in oil and gas industry. Trough interviewing, tendering process and procedure have been revealed. The investigation showed how this method of procurement take place, preparation of tendering process, qualification, evaluation and selection process of suppliers, tendering related risks and their assessment. Post tendering process has been discussed at the end of the process. The study also looked into supply side and discussed chiefly the process of bidding. Additionally, the study revealed changes on public procurement directives while conducting tender. The evidence also gave us benefits and drawbacks of tendering. As an alternative method of tendering, negotiation was proposed, discussed and compared to tendering. All in all, trace back to the research questions to summarize how they were answered:

Question one sought to answer what requirements and needs are of Norwegian Continental Shelf when it comes to tendering? The answer to this question can be as NORSOK standards and Statoil requirements. Those needs in petroleum sector on NCS cannot be separated and called different from international standards, however, they additionally take into account peculiarity and need of Norwegian Petroleum Industry. In addition, high anti-corruption policy and prevention of bid rigging can be explained as NCS’s requirements.

Question two was posed to understand how competitive tendering take place on NCS. The answer to this question could not be straight forward even though similar findings have been obtained from different companies. However, the common patter can be observed. The evidence showed that tendering process stems from business need within company. Next, procurement strategy will be executed by cross functional team. The latter will identify size and scope of the project, how company will handle it, technical and commercial responsible, etc. Under procurement strategy, specific strategy will be created that will identify possible risks and success factors. Risk assessment and mitigation actions can be defined as one of the core activities in tendering that leads to success factors. Afterwards, cross functional team establishes enquiry where well defined project needs, standards, commercial and technical requirements will be stated. Next, regulator seeks to find suitable suppliers through their supplier database and Achilles. Vendors must be pre-qualified. Afterwards, suppliers are qualified according to buyer’s need. From long list, buyer gets limited number of vendors who meet company’s need. In the end, minimum three vendors must remain to have competitive tendering. An invitation to tender will be sent to particular vendors. Followed stage consists of bidding and evaluation process. The latter implies technical and

129 commercial evaluation of bidders. The evaluation and weighting criteria will be based on established procurement strategy. In the end, joint evaluation scoring will reveal the successful bidder. The following stage is contract award to the successful bidder. Managing agreement can be defined as a final stage of tendering process which includes meetings, following up strategy, administration and close out.

Question three and four were addressed to evaluation and selection of vendors. Namely, to get comprehensive picture how clients evaluate tenderers and what drives them to choose them. Theory of (Puil and Weele 2014) and (Lewis 2015) combined with the findings, showed that the evaluation is based on technical and commercial factors. In addition, supplier’s ability and experience, financial background, HSE record, subcontracts, ethical standards and management level will be assessed. The study also mentioned trust, as a crucial factors while choosing vendors. Evaluation process is based on three principles as transparency, equal treatment and non-discrimination. This process is carried out based on defined criteria and their weighting scores. In the end, client gets numerical answers where bidder with highest score will be awarded. Innovation and alternative solution have been found also as clients’ need since they are looking for tailored solution and creativity. However, bids need to be clarified and strengthened to convince client that tenderer would be able to deliver proposed solution in compliance with technical requirement.

Question five was pondered to identity tendering related risk and mitigation actions. The evidence showed that petroleum industry contains high risk and their assessment is important in tendering. Therefore, pre-qualification is used to ensure as basic and enter level of bidder. The main risks have been found related to technical and commercial, HSE and quality factors. Additionally, financial risk on supply side has been identified. As for risk management it varies from company to company, however, risk matrix has been found as often used technique between companies.

The final question was posed to find out how post tendering process take place on NCS. The answer cannot be straight since it varies and companies can have different methods. However, following up and close can be mentioned as a part of post tendering process. The latter includes, meeting and reports, following up to established strategy and supplier performance evaluation before close out.

130 In the end, it can be concluded that competitive tendering gives regulator the best solution combined with cost efficiency and competition among suppliers. This leads to ‘best value for money’. As evidence showed, regulators follow their tendering procedure and strategy to qualify, evaluate and select suppliers. Ethical behavior has been found as an important factor in every stage of tendering to ensure that employers conduct the process based on their procedure and principles, as non-discriminatory, equal treatment and transparency.

7.4. Limitations of the study Even though this study encompasses 11 companies on NCS, it can be said that reliability and validity of data are promising. The data provides many information, including confidential ones, obtained directly from companies. Face-to-face interviewing allowed me, to gain trust and readiness to be shared information that navigate me to answer posed research questions. Moreover, the respondents’ presentation made tendering process more comprehensive.

Despite all these factors, as in every study, there is some limitation that shall be admitted. It shall be mentioned that it involves a single industry and would be difficult to generalize findings. First of all, 11 companies are not high number that can allow us, to generalize findings and conclude that every company is following the same pattern of process. The same goes for bidding process. However, technical and commercial terms in evaluation process on NCS, combined with theory and practices, can give us solid conclusion of what evaluation process generally consists of.

Moreover, taking into account some weaknesses of interviewing, as a qualitative research method, it can be admitted that it is bias and focused on particular issue while other important aspects might be left without attention. As (Yin 2014) said interviewee gives what interviewer wants to hear. And eventually, theoretical perspectives shall be mentioned. The latter only provides limited theory of competitive tendering which is relevant and used within industry.

7.5. Recommendation for further research The study was focused on tendering process mainly on demand side. Trough qualitative interviewing, some tentative ideas emerged for future research. Firstly, since study mainly

131 addressed demand side, it can be useful to investigate supply side. Namely, how bidding process from supplier side take place in detail, how vendors shall decide whether bid or not and how bid and bidding strategy are prepared, etc. Secondly, it would be interesting to investigate in future, interaction between tendering and EEA’s decision on exemption the exploration and extraction of oil and gas on NCS from EEA public procurement rules. How this changes will affect tendering process and what can be outcomes in long run, would be definitely an interesting study for future research. This certainly requires time, so that changes and outcomes of this decision become observable. And thirdly, the future area of study can be risk management in tendering. This could provide further study of risk and risk assessment process and techniques used in tendering.

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137 APPENDIX

Interview Guide

1. Intro a. Could you introduce the company at a glance?

b. What is your role in the company? 2. Tendering in general in the Norwegian Petroleum Industry

a. What are the main requirements according to Norwegian Continental Shelf regarding tendering?

3. How is tendering process in the company? a. Overview b. What are incentives for announcing a tender? c. How does the company announce tendering? d. What are the company’s specific need in tendering? e. What is an alternative for tendering in the company? f. What type of recourses and costs are involved in tendering? g. Does the company consider tender submission by consortium or joint venture?

4. Describe the supplier evaluation process prior to contracting o How does the company qualify supplier after pre-qualification of Achilles? o What are main driven-factors for choosing a supplier? o What kind of risks are associated with tendering? a. How is the tendering history in the company? o Did the company achieve cost efficiency though tendering? o Does the company face interest conflict? 5. Awarding process of supplier a. How is the awarding process of the supplier? b. How long does evaluation process take?

 Which departments (besides procurement) is involved in this process?

c. Does the company informs about rejection and its reason to participants in bidding process? / Feedback?

6. After contracting a. How could you describe post tendering process?

b. Who is responsible for monitoring post tendering process?

138 7. Is there anything you would like to add regarding tendering in the Norwegian petroleum industry?

B. The list of the interviewed companies and respodents Companies Respodents 1. Shell, Kristiansund Erik Gjuel 2. National Oilwell Varco, Roar Lervik Molde 3. Kværner, Nyhamna Lisbeth Varhaugvik 4. Aker Solutions, Kristiansund Roy Lien & Kathrine Sorvik 5. Statoil, Stavanger Jan Borkelmans 6. Dolphin Drilling, Stavanger Cato Gundersen 7. AXTech, Molde Richard Myhre 8. Axess, Molde Knut Stefanussen 9. Oss Nor, Kristiansund Sylvia Mundal & Tor Henrik 10. Prezioso Linjebygg, Molde Bjørn Bergsvik 11. Navitas, Molde John-Helge Frøystad

C. Tools used during the interviews: 1. App - Voice Record Pro; 2. Notebook; 3. Power Point Presentation.

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