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Dr. Ray Irani & the Emperor CEOs: Where Are They Now? [Gaille Energy Blog Issue 58]

I was a young lawyer at Vinson & Elkins when one of its partners recommended me for a job in Oxy’s new Dubai office.  My first interview was with Oxy’s General Counsel, Donald de Brier.  When I was escorted into his cavernous office, Donald had his back to me and was gazing toward the distant Pacific Ocean.  His assistant introduced me, and I sat down, but Donald did not acknowledge my presence.  One minute after another passed while I waited patiently for my interview to begin.  Finally Donald spun his chair around and asked:

“I see you went to the University of Texas for college.  Couldn’t you have gotten into a better school?”

Notwithstanding my choice of college, I was offered the job of Legal Manager for Occidental Middle East Development Company, which chased new deals for Oxy’s CEO, Dr. Ray Irani.  Dr. Irani was a graduate of American University in Beirut, Lebanon.  He spoke fluent Arabic and was personally acquainted with many Middle Eastern rulers.

Our team in the Middle East would get 95% of a deal negotiated, and then Irani would arrive on his Boeing Business Jet—a Boeing 737 turned into a flying palace with an office, bedroom, and shower. During one of these meetings, an Abu Dhabi sheikh complimented Dr. Irani’s new BBJ. The sheikh then bragged about how he had a fleet of them, each configured for 24 passengers.  Dr. Irani, witty as ever, quipped back:

“My BBJ is configured for one.”

The sheikh laughed so hard he almost fell over.  When Dr. Irani was in his element among sheikhs and sultans, there was no one more charming.  He remains the best deal closer I have ever seen.

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Dr. Ray Irani

I also had the opportunity to support Irani during Oxy’s 2004 reentry into Libya (after sanctions were lifted):

Irani wanted to be first in line and was granted a meeting at Kadafi’s desert retreat. Speaking in fluent Arabic, the Lebanese-born Irani made his pitch – even though Kadafi seemed noncommittal.

“He was courteous, but clearly he wanted us to have a cup of coffee and leave,” Irani recalled.

But the 70-year-old Irani pressed on, Kadafi kept listening and the pair met again two months later. Then, in January, Libya awarded its first batch of 15 exploration sites – with nine going to Occidental.

“That’s not a bad batting average,” Irani said in an interview. “I was pleasantly surprised.”  James F. Peltz, “Well-Oiled Turnaround” (Los Angeles Times, June 5, 2005).

Dr. Irani was the second CEO in Oxy’s storied history—succeeding Armand Hammer, who ran Oxy until his death at 92.  Irani’s reign as Emperor of Oxy lasted for ~23 years.  His 2013 departure was the result of a “brutal boardroom struggle” with his chosen successor, Steve Chazen. Clifford Krauss, “Occidental Chairman Agrees to Step Down Ahead of Schedule” (New York Times, May 3, 2013).

Notwithstanding his premature exit, Dr. Irani’s tenure at Oxy was impressive.  During his time at the helm, Oxy’s market cap increased 15-fold.  Irani’s best (personal) year was 2006, in which he earned ~$460 million, mostly from equity gains.  While such extreme payouts made Irani the target of executive compensation crusaders, many believed he was worth it:

The rebound “has been nothing short of spectacular,” analyst Ben Dell of Sanford C. Bernstein & Co. wrote in a report . . . Occidental is “one of the few genuine turnaround stories” in the exploration-and-production industry, he added.  James F. Peltz, “Well-Oiled Turnaround” (Los Angeles Times, June 5, 2005).

How’s he doing now?  The 82-year-old Irani has a net worth of ~$1.5 billion, and he’s been selling off Oxy stock to fund his charitable endeavors and investments elsewhere:

Working out of his Westwood family office, Irani further diversified his portfolio, which includes investments in medical-related real estate properties, private equity, and bonds. . . . He is a trustee of USC, his alma mater. Irani donated $20 million toward the university’s under-construction USC Village complex. . . .  His wife, Ghada, was recently named to Unicef’s national board.  “Wealthiest Angelenos” (Los Angeles Business Journal, August 28, 2017)

During my time at Oxy, I had the opportunity to interact with several other Emperor CEOs:

  • Exxons Lee Raymond.  This quote from Lee Raymond summed up his view of the world—“We see governments come and go.”  Raymond was the emperor of emperor CEOs, and he knew it.  I saw him in action at a closing ceremony, where he wanted little to do with the other two CEOs in the room—who were both from smaller multi-billion dollar companies. Raymond retired from ExxonMobil with a $400 million package at the end of 2005. The 79-year-old Raymond currently serves on the Board of Directors of JPMorgan Chase.

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Lee Raymond

  • Totals Christophe de Margerie.  While at Oxy, I spent a year as the Senior Advisor for Gas Marketing to the Dolphin Gas Project—a 2 bcf per day Qatari gas field development and pipeline jointly built by Oxy, Total, and the government of the United Arab Emirates.  At various Dolphin events, I had the opportunity to become acquainted with Christophe de Margerie.  He reminded me a lot of Dr. Irani—another larger-than-life deal closer.  De Margerie boasted that “[n]othing replaces human warmth and handshaking.  You don’t win a contract by telephone.”  Sadly, his private jet crashed in 2014, ending his life and career prematurely at age 63.

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Christophe de Margerie

  • BPs Lord John Browne.  I first met Lord Browne at the World Petroleum Congress in Johannesburg, South Africa, when he was still CEO of BP. Not long after our first meeting, he left BP and joined Riverstone.  I had been working with Riverstone for several months to finalize the firm’s backing for round two of my African oil and gas exploration company—Passenger Energy Partners.  I recently sold my first company (which had acquired interests in Cameroon, Madagascar, and South Africa) and was looking for $100-$200 million of equity to build a new portfolio of non-operated interests in West and East Africa.  The “Passenger” name came from my concept of riding alongside first-class operators such as ExxonMobil, Anadarko, and BHP—letting them absorb all the risks of operatorship.  After a few trips to New York, I had the backing of Riverstone’s board—except for Lord Browne.  I flew to London for a one-on-one meeting to change his mind. Browne was a formidable opponent for my non-operated concept because he had an “operator only” philosophy at BP.  I was unable to win him over. In 2015, Lord Browne resigned from Riverstone to become “Executive Chairman of L1 Energy, an oil and gas investment vehicle which acts as a subsidiary of LetterOne Holdings, co-owned by Russian billionaire Mikhail Fridman.” Wikipedia. john-browne-lg

Lord John Browne

  • Anadarkos James Hackett.  Hackett is now a partner at Riverstone and CEO of Silver Run II, a $1 billion publicly-listed energy investment fund.  Hackett also is on the faculty of Rice University.

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James Hackett

  • ConocoPhillips James Mulva.  Mulva exited with a $260 million package in 2012 and currently serves on the Boards of Directors of General Electric and General Motors.  He has made significant donations to the University of Texas at Austin, including $50 million to create the Mulva Clinic for Neuroscience.

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James Mulva

All of these personalities could sit with world leaders as equals—wielding power that, for better or worse, few current industry CEOs have.  When one of these men made a promise, everyone knew it would be kept.  At their heyday, no one was second-guessing them.  Were these CEOs any more talented than their companies’ current leaders?  Probably not.  But they were able to do more—because of their authority.  Maybe such supremacy gave them the confidence and presence to stand toe-to-toe with kings, emirs, sultans, sheikhs, and, well, dictators.

Over the last decade, the Internet has lessened the power of CEOs.  Their every move is subject to criticism on social media and message boards.  Boards of directors are more powerful than they used to be, too.  While the transparency created by the Internet has rightfully ended the careers of many who should not have been CEOs, it also has shackled and diminished those who could have been great ones.

We now live in an age in which there are no heroes.  Even past heroes’ mistakes are dissected, paraded about, and focused on until that’s all anyone remembers about them.  The current state of affairs brings to mind a Japanese proverb: The nail that pops up is always hammered down.  Our current crop of industry CEOs may be more focused on survival than achieving greatness.

About the Gaille Energy Blog.  The Gaille Energy Blog discusses issues in the field of energy law, with periodic posts at www.gaillelaw.com.  Scott Gaille is a Lecturer in Law at the University of Chicago Law School, an Adjunct Professor in Management at Rice University’s Graduate School of Business, and the author of three books on energy law (Construction Energy Development, Shale Energy Development, and International Energy Development).

Images available on the Internet and included in accordance with Title 17 U.S.C. Section 107.

 

 

Energy Construction: Can Change Orders Be Used as Amendments? [Gaille Energy Blog Issue 57]

A common area of confusion in construction agreements is whether a modification to the agreement and its exhibits should be papered via a change order or an amendment.  Both change orders and amendments are signed by the owner of the project and the contractor undertaking the work.  The principal difference is that change orders usually are used to modify certain exhibits related to work—whereas an amendment can modify any part of the construction agreement.

Below is a typical definition of a change order:

“Change Order” means a written document in substantially the form of [attachment reference] signed by both Parties that contains the terms agreed upon by the Parties with respect to a modification of the Contractor’s work.

Standing alone, what does “modification of the work” mean?  The strictest interpretation is that change orders can only be used to modify the “Scope of Work” exhibit—the actual description of the work that contractor is responsible for undertaking.  But can the change order also be used to modify exhibits that are related to the work, such as the specifications, policies (safety and environmental), and price (including time, material, and equipment rates)?  For example, if the work being performed by a contractor is changed, the price may need to be revised.  The broadest interpretation is that a change order also can amend the body of the agreement (terms and conditions)—since the entire agreement is about the contractor’s work.

The use of change orders to modify the body of the agreement is problematic.  While lawyers are required to review amendments, they may not be asked to review change orders.  The prospect of non-lawyers drafting amendments (via change orders) to complex construction agreements can create conflicts and ambiguity across the documents, thereby increasing the probability of litigation.  Another problem is that there are usually far more change orders than there are amendments—reflecting various additions and subtractions to the contractor’s Scope of Work. Tracking amendments separately from change orders ensures that there are no “forgotten” amendments lurking in the voluminous change order files.

The best practice is to include a provision in the construction agreement that states unambiguously which exhibits can be modified by change orders.  Consider the following example:

“Change Orders can never be used to modify: (a) the Terms and Conditions [i.e., the body of the construction agreement] or (b) any Exhibits other than the following Exhibits [list those exhibits related to the work, typically the Scope of Work, specifications, and pricing].”

The parties then know that any requirements of the project included in those listed exhibits are subject to modification via a change order—but nothing else.

Chapter 6 of my textbook, Construction Energy Development, offers a further description of the construction change process.

CED Cover

About the Gaille Energy Blog.  The Gaille Energy Blog discusses issues in the field of energy law, with periodic posts at www.gaillelaw.com.  Scott Gaille is a Lecturer in Law at the University of Chicago Law School, an Adjunct Professor in Management at Rice University’s Graduate School of Business, and the author of three books on energy law (Construction Energy Development, Shale Energy Development, and International Energy Development).

Images available on the Internet and included in accordance with Title 17 U.S.C. Section 107.

 

 

Dollars vs. Percentages & the Probability of Busted Asset Deals [Gaille Energy Blog Issue 56]

“[H]euristics are simple, efficient rules which people often use to form judgments and make decisions. They are mental shortcuts that usually involve focusing on one aspect of a complex problem and ignoring others. These rules work well under most circumstances, but they can lead to systematic deviations from logic, probability or rational choice theory. The resulting errors are called ‘cognitive biases’ and many different types have been documented. These have been shown to affect people’s choices in situations like valuing a house, deciding the outcome of a legal case, or making an investment decision.”  Wikipedia.

Much of my career has been spent on the merry-go-round of buying and selling petroleum assets.  The price dance usually starts with the buyer making the first offer—either in a competitive process (in which the seller solicits multiple offers) or a direct negotiation (in which one of the parties has approached the other).  I have noticed that dollar differences—rather than percentage differences—tend to predict whether the bid/ask range will be closed.  The greater than the gap in dollars (even if the percentage is relatively small), the less likely the price will be agreed.

All things being equal, why would a seller be willing to accept a 10% discount on a $50 million deal—but not on a $500 million deal?

“It isn’t that people are lazy or irrational, says Gerd Gigerenzer, managing director of the Max Planck Institute for Human Development and director of the Harding Center for Risk Literacy in Berlin. It’s that over the course of human history, people have typically encountered statistical information in ways they can count (say, seven instances out of 10), rather than contemplate in the abstract (as in 70%). People make better statistical projections, he says, when information is presented in concrete ways they can understand, such as a dollar amount. . . . Tell consumers the fee for a $100,000 investment is 1%, and they won’t think it’s very high . . . But say the fee for that $100,000 investment is $1,000, and they will think it’s much higher, even though the dollars involved are the same. . .”  Charlie Wells, Percentages vs. Dollars—a Battle for Investors’ Attention (Wall Street Journal July 6, 2014).

Offers in asset purchase agreements are expressed in dollars, and it may be harder for an executive to accept an eight-figure discount than, for example, a seven-figure one.

Large dollar gaps, irrespective of the percentage, also create other issues, including enhanced scrutiny by seller’s stakeholders. Large bid/ask spreads tend to arise from more valuable assets, which are material to the seller.  This means that the selling price for a major asset will be scrutinized by other executives, the board of directors, and investors.  Decision makers may fear that a big discount can be used by others (with the benefit of hindsight) to criticize their judgment.

A few years ago I was sitting with Lord John Browne (former CEO of BP) in his Riverstone London office. Browne said that the most valuable lesson he learned at BP was “do the biggest deals possible.” He went on to explain that if two deals yield the same percentage return, the larger will be more profitable.  He also noted that the transaction costs of big deals are often similar to those of smaller ones.

Lord Brown

While Lord Browne’s observations were correct, he left out the risk of busted deals.  Of course, large companies such as BP can more easily absorb such costs.  But what about start-ups?  Even if they have private equity money backing them, PE may not start funding a management team until they have acquired their first asset.  This means the legal fees and other overhead for busted deals are absorbed by the management team.  PE-funded teams usually have a limited runway of savings with which to fund their ventures.  They may only get one or two shots at closing a deal before having to go back to work elsewhere.  As such, start-ups can improve their probability of success by pursuing middle-market acquisitions—where the bid/ask spreads are more manageable.

About the Gaille Energy Blog.  The Gaille Energy Blog discusses issues in the field of energy law, with weekly posts at http://www.gaillelaw.com.  Scott Gaille is a Lecturer in Law at the University of Chicago Law School, an Adjunct Professor in Management at Rice University’s Graduate School of Business, and the author of three books on energy law (Construction Energy Development, Shale Energy Development, and International Energy Development).

Images available on the Internet and included in accordance with Title 17 U.S.C. Section 107.

Energy Construction: Classification of Contracts [Gaille Energy Blog Issue 55]

Construction agreements bring to bear both tangible materials and intangible services to achieve an end product—the facility. As such, many of the same terms and conditions used in construction agreements also appear in procurement and services contracts. Procurement agreements are used primarily for purchasing and leasing tangible goods, materials, and equipment—whereas services agreements are used primarily for securing intangible skills.

The following figure provides a simple classification of industry agreements according to three functions: (i) works; (ii) services; and (iii) goods.

Picture1

As the figure shows, the industry has created many variations of construction, services, and procurement agreements to meet its needs. The overlapping circles represent how the functions often overlap within any agreement (e.g., a purchase order may also include installation services).

  • Construction Agreements.  Construction agreements require a contractor to construct a facility designed by the owner (the “Sponsor”) using materials mostly procured by the Sponsor.
  • Engineering, Procurement, and Construction Agreements (EPC”). EPC agreements—as the name implies—add two categories of contractor responsibility: (i) engineering—the contractor is responsible for the detailed engineering and design of the project; and (ii) procurement—the contractor is responsible for tendering, purchasing, and coordinating substantially all materials.
  • Engineering, Procurement, and Construction Management Agreements (EPCM”).  Whereas an EPC agreement places more responsibility on the contractor, the contractor under an EPCM agreement does not undertake the construction itself. Rather, EPCM contractors act as managers of the construction—hence the “CM” of EPCM. The EPCM contractor is usually an engineering firm charged with providing professional services to the sponsor, particularly the management of engineering, procurement, and construction. In addition to the fees for its services, the EPCM contractor also may receive a bonus if, for example, the ultimate cost of the project is less than its target price.
  • Service Orders.  Service orders typically are fill-in-the-blank documents used for small projects. The front of the service order identifies the contractor, the start date, the termination date, a description of the services, the price for the services, and a cap on the total amount of payment under the order (“not to exceed $x”). On the back of the service order are boilerplate terms and conditions that usually are not subject to negotiation.
  • Service Agreements. Higher-value or riskier service arrangements may be subject to stand-alone agreements with more extensive provisions tailored to the specific needs of the parties.
  • Purchase Orders.  The front of the purchase order identifies the vendor, the date of the purchase, the delivery date, the delivery location, the shipping terms, a description of the goods, equipment, or materials, a reference to attached or incorporated specifications, pricing, payment terms and timing, liquidated damages for late delivery, and a cancellation schedule including amounts payable for cancellation of the order at various points by the Sponsor. On the back of the purchase order are boilerplate terms and conditions that usually will not be negotiated by the Sponsor.
  • Purchase Agreements. Higher-value or riskier procurements may be subject to stand-alone agreements with more extensive provisions tailored to the specific needs of the parties. For example, pipe purchase agreements entail the manufacturing of steel pipe for natural gas and oil pipelines.
  • Standing or Master Agreements.  Standing or master agreements are designed to establish the terms and conditions for multiple projects over a period of time when the nature and scope of the work needed for the projects is unknown at the outset. Rather than negotiate a series of independent construction or services agreements—one for each scope of work—the standing or master agreement provides standard terms and conditions applicable to all future work. The bulk of the terms do not need to be renegotiated with each transaction. The parties only need to focus on the commercial terms for the specific work being commissioned. Whenever a new project is needed, the Sponsor provides a release order that summarily describes the scope of work, specifications, schedule, and pricing. The contractor is then required to comply with both the release order itself and the more detailed provisions of the standing or master agreement.
    • Master Construction Agreements (MCA”).  MCAs are utilized for engaging a contractor for a series of smaller construction jobs, none of which justifies a full construction agreement. Each time the Sponsor wishes to commission a new project, it issues to the contractor a release order that describes the construction needed.
    • Master Services Agreements (MSA”).  The MSA functions similarly to the MCA, in that it provides both (i) a framework for the Sponsor’s issuance of a service order and the contractor’s acceptance of the service order, and (ii) terms and conditions that apply to any service order released under it.
    • Master Purchase Agreements (“MPA”).  The MPA is the procurement equivalent of the MCA and MSA.  It establishes common terms and conditions for future purchases.  When the Sponsor needs to procure goods covered by the MPA, it can do so more expeditiously because the purchase order’s terms and conditions have already been agreed to by the vendor.   
  • Hybrid Agreements.  Certain agreements used in construction and procurement are difficult to characterize as works, services, or goods.  One example of a hybrid agreement is a concrete coating arrangement (after the purchase of the pipe from a vendor). Pipe destined for marine environments usually is concrete coated for purposes of providing ballast and stability.  While industry practice varies, a stand-alone installation of concrete coating on pipe (that is owned by the Sponsor) seems more in the nature of works—that is, construction. The Sponsor is looking to the concrete coater to deliver an integrated whole that requires it to accept and handle the Sponsor’s materials (pipe), procure the feedstock for the concrete, and execute the installation of the concrete onto the Sponsor’s pipe. As such, the best starting point for a concrete coating agreement is usually a construction agreement, as the responsibilities, liabilities, and indemnities being assumed by the contractor are similar.

Construction Energy Development offers a further description of the typical provisions utilized in various construction and procurement agreements.

About the Gaille Energy Blog.  The Gaille Energy Blog discusses issues in the field of energy law, with weekly posts at http://www.gaillelaw.com.  Scott Gaille is a Lecturer in Law at the University of Chicago Law School, an Adjunct Professor in Management at Rice University’s Graduate School of Business, and the author of three books on energy law (Construction Energy Development, Shale Energy Development, and International Energy Development).

 

 

Energy Construction: The Difference between Rework and Warranty Work [Gaille Energy Blog Issue 54]

No contractor (the “Contractor”) is perfect.  Some work will fail inspection and need to be redone (“Rework”).  Other defects will only be identified after the project’s completion, necessitating a warranty claim (“Warranty Work”).

What’s the difference between Rework and Warranty Work?  After, all, in both cases, the Contractor’s work has failed to meet the standards of the agreement and needs to be repaired or replaced.  The easiest way to understand the distinction is one of timing—when was the defect discovered.  Rework includes all defects identified prior to the Contractor’s receipt of a completion certificate.  In agreements with multiple completion certificates, this may represent either mechanical, substantial, or final completion—whichever date commences the warranty period.  The Warranty Work provisions apply only after the Contractor receives the applicable completion certificate.

Rework is less of a concern in lump-sum agreements, pursuant to which the Contractor is paid a lump-sum for delivering a completed project.  In such cases, the Contractor is compensated for results, as and when work is accepted by the project’s owner (the “Sponsor”). The more Rework required to obtain acceptance, the less profit for the Contractor. The lump-sum Contractor protects itself from Rework exposure by including the estimated cost of rework in its lump-sum price.

Rework becomes more contentious in cost-reimbursable contracts, which may lack clarity on the handling of Rework.  In such cases, it is important for the Sponsor and Contractor to discuss various types of Rework and the extent to which the Contractor will be reimbursed for Rework costs and expenses.  Approaches to Rework in reimbursable contracts include:

  • No compensation for Rework. The Contractor is not reimbursed for the cost of Rework, effectively paying for Rework from its fee or profit. For example, the agreement could include a provision stating that the Contractor is only entitled to be paid “Compensation,” defined as: “the portion of the contract price that the Contractor has earned for completion of work in accordance with the scope of work, the specifications, and the other requirements of the agreement.”  Rework is, by definition, not in accordance with the scope of work and the specifications—otherwise it would not have to be remedied.  The agreement also can prohibit payment for specific categories of Rework, such as weld defects, concrete defects, abandoned bores, and failed horizontal directional drills.  See Construction Energy Development for definitions of weld defects and concrete defects.  If the Contractor is not being reimbursed for Rework, then the Contractor should build into its profit percentage the estimated cost of Rework (since some will be incurred).
  • Rework deductible. The Contractor also can negotiate one or more deductibles for certain types of Rework, such that Rework is reimbursed up to a ceiling (typically based on the estimated amount of Rework that could be expected from a Contractor following good engineering and operating practices).  For example, the Contractor may be compensated for repairing weld defects to the extent the weld defect rate is less than 1%.
  • Partial reimbursement for Rework. Contractor is reimbursed for only part of the cost of Rework such that it shares in the loss.  For example, Contractor may be reimbursed for only 50% of its costs and expenses for Rework.
  • No fee for Rework. The Contractor is reimbursed for its out-of-pocket costs for the Rework but does not receive any fee or profit for the work.
  • Indemnity for Rework.  The strongest remedy against Rework is requiring the Contractor to indemnify the Sponsor for Rework.  In such a case, not only does the Contractor not get paid for Rework, but it must reimburse the Sponsor for any costs it incurs, such as secondary inspections and x-rays.

The enforcement of Rework exclusions can be problematic, though. When the Contractor invoices for its crews, how does the Sponsor identify and separate the regular work from the Rework? Rework is typically identified by inspectors in the field. But once detected, the Sponsor needs to track the cost so that invoices can be adjusted. In the case of a drilling subcontractor, for example, it may be easy to exclude the costs for dates on which a failed drill was being advanced. For other types of Rework, the Sponsor can estimate the cost of the Rework and deduct it from the next invoice (based on, for example, how many crews were undertaking the Rework and for how long).

Each of the above approaches to Rework incentivizes Contractors to get the job right the first time.  Construction agreements should avoid a regime in which the Contractor is reimbursed for all of its costs and expenses of Rework, including its fee or profit.  In such a case, the Contractor may actually be incentivized to incur Rework costs—as the amount of its profits increase.

Rework is discussed further in my new textbook, Construction Energy Development.

CED Cover

About the Gaille Energy Blog.  The Gaille Energy Blog discusses issues in the field of energy law, with weekly posts at http://www.gaillelaw.com.  Scott Gaille is a Lecturer in Law at the University of Chicago Law School, an Adjunct Professor in Management at Rice University’s Graduate School of Business, and the author of three books on energy law (Construction Energy Development, Shale Energy Development, and International Energy Development).

Images available on the Internet and included in accordance with Title 17 U.S.C. Section 107.

 

Energy Construction: Change Directives v. Change Requests v. Change Orders [Gaille Energy Blog Issue 53]

Change is an essential part of energy construction. The owner or sponsor (“Sponsor”) of the project must be able to implement changes after a construction agreement has been signed. Time is usually of the essence with energy projects. If the Contractor’s consent must be obtained for a change, then it can slow down a project or, worse yet, enable the Contractor to use its consent to extract unearned value from the Sponsor.  Construction agreements typically address these concerns through three separate documents: the Change Directive (which is filed by the Sponsor); the Change Request (which is filed by the Contractor); and the Change Order (which is jointly executed by both the Sponsor and the Contractor).

Change Directive.  The “Change Directive” enables the Sponsor to unilaterally—without the Contractor’s consent—modify certain exhibits describing the Contractor’s work. Note that Change Directives cannot alter the body of the agreement itself (i.e., the terms and conditions).  The content of a Change Directive depends on the circumstances of the change. At a minimum, the Change Directive must specify the modifications being made to the scope of work or specifications. If the Sponsor believes that the Change Directive is increasing the Contractor’s cost or extending its schedule, then the Change Directive also should include the Sponsor’s calculation of the price increase and schedule changes. Similarly, if the Change Directive is reducing the amount of the Contractor’s work, it should include the amount of the associated price decrease or schedule acceleration. This establishes a baseline for the Contractor to evaluate the impact of the Change Directive and decide whether it wishes to seek additional relief.

Change Request.  The “Change Request” enables the Contractor to either (i) propose a change to the exhibits or (ii) seek price or schedule relief (following a Sponsor’s Change Directive). The use of the word “request” connotes the difficult nature of Contractor-initiated change. The Sponsor controls the project—and can therefore direct changes. But the Contractor can only request that the Sponsor make a change. As such, a Change Request is most commonly used as a Contractor’s response to a Change Directive. The Contractor may believe that the Sponsor’s proposed change imposes additional costs on the Contractor or impacts its schedule. Rather than delay the change while the amounts of money and/or time are being negotiated, the Change Request commences a process by which the Contractor can be made whole in parallel with undertaking the additional work.  Unlike Change Directives, Change Requests are never binding on the parties.

Change Order.  While a Change Directive is immediately effective and binding without the Contractor’s approval, a “Change Order” is agreed upon, and signed by, both the Sponsor and the Contractor. In this respect, a Change Order is effectively an amendment to the work-related exhibits. Change Orders can serve a variety of purposes:

  • Confirming a Change Directive. If the Contractor has no objections to a Change Directive, then the parties can confirm the Change Directive by executing a Change Order.
  • Bypassing a Change Directive. If the Sponsor and the Contractor mutually negotiate the terms of a change before it is issued, then they can simply sign a Change Order—without the Sponsor first issuing a Change Directive.
  • Incorporating a Change Request. If the Sponsor wishes to accept the Contractor’s Change Request, then its terms are incorporated into a Change Order and executed by the parties.
  • Settlement agreement. The practical result of the filing of a Change Directive and a Change Request may be a negotiation and compromise. The settlement reached can be embodied in a Change Order and executed by the parties.

Once a Change Order is executed, its terms and conditions take precedence and control over any prior Change Directive. Change Orders also serve to establish finality; once a Contractor has executed a Change Order, it may not thereafter seek any price increase or schedule extension with respect to the content of that Change Order.

The below figure is an example of how construction agreements integrate the use of Change Directives, Change Responses, and Change Orders:

Untitled 2

 

 

 

See Chapter 6 of my textbook Construction Energy Development for additional  discussion of the change process.

About the Gaille Energy Blog.  The Gaille Energy Blog discusses issues in the field of energy law, with weekly posts at http://www.gaillelaw.com.  Scott Gaille is a Lecturer in Law at the University of Chicago Law School, an Adjunct Professor in Management at Rice University’s Graduate School of Business, and the author of three books on energy law (Construction Energy Development, Shale Energy Development, and International Energy Development).

Images available on the Internet and included in accordance with Title 17 U.S.C. Section 107.

 

 

The First Hmong Lawyer in Laos [Gaille Energy Blog Issue 52]

Yah grew up in the mountains of northern Laos, a member of the Hmong ethnic group.  The nearest elementary school was a two-hour walk through the jungle of a national park.  He rose at dawn, marching bare-footed through the darkness.  Yah suffered seven bites from giant red centipedes and two from tree vipers—just to reach his school.

When Yah completed elementary school, his family put him to work on their poppy farm.  It wasn’t for him.  He had learned enough to know that his destiny lay elsewhere.

Yah ran away from home at eleven, eventually being taken in by a Buddhist monastery.  The monks continued his education and eventually helped him secure a scholarship to the university in Laos’ capital.   When the scholarship was exhausted, Yah took a weekend job working in a rock quarry.  The quarry paid $5 per ton of rock.  On a good day, Yah managed four tons over eighteen hours of grueling work.  His perseverance paid off, though.  Yah managed to put himself through law school and score in the top 10% on the Laos bar exam.

Last month I had the opportunity to accompany Yah on a journey into his mountain homeland.  We delivered pallets of pencils and note pads to an elementary school — receiving smiles and cheers from its students in return.

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Unfortunately, elementary school marks the end of educational opportunity for most of these students.  I’ve witnessed the same dead-end in so many villages around the world.  Access to education often ends too early.

Energy companies are increasingly sensitive to the needs of local communities impacted by their projects.  A typical example is Chevron Indonesia’s PRISMA program:

“[The] PRISMA (Promoting Sustainable Integrated Farming, Small Enterprise Cluster and Microfinance Access) program provides small grants, capacity-building training, technical assistance and access to loans through microfinance institutions to local farmer groups, small businesses and cooperatives in 11 regions throughout Indonesia. In total, the program supports more than 1,500 beneficiaries and offers assistance in 36 sectors, including agriculture, fishery, processed food commodities, weaving and batik making, and eco-cultural tourism villages.”

While income from economic development programs may enable more families to afford education, energy companies also can directly advance education:

  • Student loans. By working through local banks, energy companies can contribute a small percentage of their earnings toward establishing student loan endowments.  These lending funds can eventually become self-sustaining—so long  as the interest paid exceeds the default rate.
  • Work-study programs.  The higher wages of energy companies often change the life paths of talented young people, pulling them away from education and into lower-skill natural resources jobs (that may not last forever).  Energy companies can require that younger employees participate in work-study programs, with (i) reimbursement of tuition and (ii) continued advancement toward a degree being a job requirement.
  • Family tuition support.  For  employees with children and grandchildren, the energy company can offer tuition stipends for secondary school and loans for higher education.  After all, energy companies routinely pay the private school tuition for dependents of their expatriate employees.

Advancing education in the developing world also mitigates the political risk faced by energy companies:

“Across countries, education and democracy are highly correlated . . . . In our model, schooling trains people to interact with others and raises the benefits of social participation, including voting and organizing. In the battle between democracy and dictatorship, democracy has a wide potential base of support but offers weak incentives to its defenders. Dictatorship provides stronger incentives to a narrower base. As education raises the benefits of civic engagement, it raises the support for more democratic regimes relative to dictatorships. This increases the likelihood of democratic revolutions against dictatorships, and reduces that of successful anti- democratic coups.”

Edward L. Glaeser, Giacomo Ponzetto & Andrei Shleifer, Why Does Democracy Need Education?, HARVARD UNIV. (Oct. 2005)

Then there is the human element.  Many of these children now have some access to the Internet and aware of the academic opportunities they are missing.  Their laments stay with me: “You were lucky to have been born in America and not here.”

 

About the Gaille Energy Blog.  The Gaille Energy Blog discusses issues in the field of energy law, with weekly posts at http://www.gaillelaw.com.  Scott Gaille is a Lecturer in Law at the University of Chicago Law School, an Adjunct Professor in Management at Rice University’s Graduate School of Business, and the author of three books on energy law (Construction Energy Development, Shale Energy Development, and International Energy Development).

Images available on the Internet and included in accordance with Title 17 U.S.C. Section 107.

 

Book Release: Construction Energy Development [Gaille Energy Blog Issue 51]

I am pleased to announce the release of my third textbook, Construction Energy Development (Energy Development Series, Volume 3). Construction Energy Development describes the commercial arrangements used by energy companies to build pipelines and other facilities, providing a comprehensive overview of related contract provisions.

CED Cover

About the Gaille Energy Blog. The Gaille Energy Blog discusses issues in the field of energy law. Scott Gaille is a Lecturer in Law at the University of Chicago Law School, an Adjunct Professor in Management at Rice University’s Graduate School of Business, and the author of three books on energy law (Construction Energy DevelopmentShale Energy Development, and International Energy Development).

Beware of Trickster Lawyers [Gaille Energy Blog Issue 50]

Fans of Breaking Bad and Better Call Saul are familiar with the character of Saul Goodman (aka Jimmy McGill):

Jimmy is a good example of . . . a “trickster lawyer.”  The idea is that many talented lawyers resemble the Trickster of myth and fable who uses creativity and guile to beat adversaries. . . . The Trickster Brer Rabbit uses wit to escape becoming Brer Fox’s dinner.  A trickster lawyer like Gerry Spence showed a similar creativity in crafting his masterful final argument in the Karen Silkwood case.  But sometimes Tricksters are too smart for their own good.  They become so obsessed with showing their cleverness that they take self-destructive actions (John Denvir, Guile Is Good).

My favorite example of a real-life trickster lawyer involved the sale of a gas plant, including its machinery and vehicles.  Prior to the closing, the buyer visited the plant and conducted its due diligence, carefully taking inventory of everything there.  Unfortunately, the buyer’s lawyer failed to notice that the stock purchase agreement only conveyed plant assets “owned as of the Closing Date.”  Between the due diligence visit and the closing date, the seller stripped the plant, removing valuable machinery and driving off its vehicles.  By the closing date, the seller no longer owned these assets.  While this language may have seemed clever to the seller’s lawyer, it merely led to the client being sued.

Saul Goodman’s fate was even worse:

Our final sighting of Saul Goodman on Breaking Bad finds him working behind the counter at a fast food outlet in Omaha, Nebraska wondering if the next customer will be a DEA agent or a mafia hit man.  This is where his cleverness has led [him]. . . .  There is no scarcity of lawyers in real life who are so delighted with their own deft moves that they have no awareness of how their behavior affects others, or even themselves (John Denvir, Guile Is Good).

I’ve come across several trickster lawyers in my career.  When I was a General Counsel, I even made the mistake of hiring a few—although once their trickster nature came to light, I showed them the door.  You see, the energy industry is a small community.  The same lawyers come across each other again and again.  Tricks are remembered, and often repaid.

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About the Gaille Energy Blog.  The Gaille Energy Blog discusses issues in the field of energy law, with weekly posts at http://www.gaillelaw.com.  Scott Gaille is a Lecturer in Law at the University of Chicago Law School, an Adjunct Professor in Management at Rice University’s Graduate School of Business, and the author of two books on energy law (Shale Energy Development and International Energy Development).

Images available on the Internet and included in accordance with Title 17 U.S.C. Section 107.

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