Solution

Word Count: 3248 Words

Executive Summary

In this assessment, an evaluation of the contractual terms and impact on power distribution in Abu Dhabi National Oil Company (ADNOC)  and risk of supplier and organisation has been evaluated. A general contract used in ADNOC purchasing of goods has been used for achieving the aim of this assessment. Also, desk research and statistics have been used for the purpose of generating the expected findings.

The findings in this report evidence that the power and risk distribution of the buyer and supplier has a direct implication on the level, scale and contract delivery. This is informed by the contractual terms guiding risk measurements linked with the scale, diversification and critical features of the offered services. To recognise this, different sections of the contract which represent the areas influencing power balance have been reviewed and analysed. For the different areas, it is evident that buyer has a power and the risk being distributed to the vendor. Through the application of different tools including Mendelow Stakeholders Matrix, SWOT analysis, different risks have been identified which influence the success of the organisation in Implementing their contracts and mitigation of contract term issues. Also, the findings of Kraljic Matrix evidence the importance of contractual terms for ADNOC since they appreciate the scope of contractual risks and power distribution.

In this assessment, there are various gaps that have been identified in the findings. To fill these gaps, various recommendations have been provided which include;

• Expansion of ADNOC contract terms and conditions by defining aspects of scale, diversity and flexibility
• Prioritising interests of different stakeholders with simplified terms and conditions for easier understanding
• Harmonise contracts terms and conditions to have one
• Aligning contractual terms and conditions with UAE laws and international treaties

Table of Contents

1.0 Introduction. 3

1.1 Abu Dhabi National Oil Company (ADNOC) Background. 3

1.2 Scope of Report 4

2.0 Selected Contract Terms and Conditions. 4

2.1 Introduction of Gas Turbines Suppliers and Supply Market. 5

2.2 Summary of the contractual terms and conditions. 5

3.0 Strategic Importance of the ADNOC Contract 6

3.1 Stakeholders Analysis. 7

4.0 Power and Risks Distribution between Parties. 10

4.1 Power Distribution Among Parties. 10

4.1.1 Turnkey- Design and Build Model 14

4.1.2 BOOT (Build, Own, Operate and Transfer) 14

4.2 Risk Distribution by different parties. 15

4.2.1 Risk Appetite. 15

4.2.2 Risk Evaluation. 16

4.2.3 Risk Register. 16

5.0 Conclusion and Recommendations. 18

References. 20

Appendices. 22

Appendix 1: Terms and conditions summary. 22

Figure 1:ADNOC Organisation Structure. 4

Figure 2:Kraljic Matrix Analysis. 7

Figure 3:ADNOC Mendelow Stakeholders Analysis Matrix. 8

Figure 4:Suppliers Preferencing Matrix Summary. 11

Figure 5:Porter’s 5 Forces Analysis. 13

Figure 6:Risk Appetite (CIPS Notes) 16

Table 1:Summary of ADNOC Gas Turbines Suppliers 5

Table 2:Essentials of Valid Contract 6

Table 3:ADNOC Risk Register 18

1.0 Introduction

1.1 Abu Dhabi National Oil Company (ADNOC) Background

In this report, the organisation of focus is Abu Dhabi National Oil Company (ADNOC). This is for understanding the impact of contract terms and conditions on distribution of risk and power with their suppliers. This is an organisation which began its operation in 1971 and today is ranked as the leader in diversified energy group which is owned by Abu Dhabi Government (ADNOC, 2022). The organisation network of holistically integrated business has based their operations across the entire energy value chain assisting their capacity for meeting overall demands of the consistently changing energy markets. For remaining competitive, the organisation has allocated $15 billion for advancing and accelerating lower-carbon solutions, investment in new energy solutions and decarbonisation technologies for lowering their carbon intensity with 25% by 2030 and successfully facilitating their NetZero by 2050 target.

The company has a network of fully operational companies that operate throughout the entire hydrocarbon value chain, handling tasks including exploration, production, processing, storing, refinement, and supply in addition to manufacturing a wide range of petrochemical products.

I work as a Contract Engineer for ADNOC Offshore, one of the company’s divisions. The offshore division of ADNOC is responsible for the delivery and development of oil and gas resources in the waters surrounding Abu Dhabi. With OPEX and CAPEX, ADNOC Offshore spends over 3,000 million dollars annually. The organisation structure is as illustrated in figure 1;

Figure 1:ADNOC Organisation Structure

1.2 Scope of Report

This assessment intend to assess the contractual terms used by ADNOC in a category of spend to identify how this influence distribution of power and risks of suppliers. The selected terms and conditions are used by ADNOC in sourcing for gas turbines. A summary of the contract terms and conditions is provided in appendix 1. Through the contract evaluation, a review of their terms and conditions has been provided with power distribution and risk of the suppliers and ADNOC considered.

2.0 Selected Contract Terms and Conditions

According to CIPS (2022), contracts terms and conditions is a legal document providing an in-depth specifications of the agreement of different parties in an undertaking. It is either done verbally or through implied terms (natural understanding). To achieve the intended aim of this assessment, the contract selected is sourcing of gas turbines for ADNOC. The rationale of this is informed by the view that today, ADNOC has had a substantial surge on the demand for turbine filters. This is occasioned by ADNOC increased exploration and production activities specifically ADNOC offshore (Mullick et al., 2022). The selected contract terms and conditions is also used by ADNOC in their different spend categories. Hence, it is categorised as a general terms and conditions. In particular, the contract terms and conditions note that;

2.1 Introduction of Gas Turbines Suppliers and Supply Market

Internationally, Allied Market Research (2022) report highlighted that global gas turbine market was valued at approximately $18.5 billion as at 2020. This is expected to increase to $25 billion by year 2030. This is growing at a CAGR of 3.3% from 2021 to 2030. In UAE context, Global Data (2022) report argued that, the gas turbines industry approximate at $3 billion and expected to grow with CAGR 12-14% owing to the increased demand for oil and gas post-pandemic. Hence, this industry has substantially grown increasing the ability of leveraging on competitive advantage and achieving market dominance. A summary of the gas turbines suppliers for ADNOC is as summarised in table 1;

Table 1:Summary of ADNOC Gas Turbines Suppliers

Further, considering the increased demand for oil and gas post COVID-19 pandemic and hence increased in demand for new gas turbines for ADNOC offshore operations, they involve multiple suppliers. Considering their suppliers operate in Dubai, UAE, they make sure there prevail a direct link with the different suppliers in a timely and effective manner.

2.2 Summary of the contractual terms and conditions

According to Stanojević et al. (2021), in order for a contract management to be successfully executed, there are essentials of a valid contract which ought to be prioritised. In table 2 summary, by prioritising on the different noted factors, there is a possibility for identifying validity of a contract in the case for Gas Turbines.

Table 2:Essentials of Valid Contract

3.0 Strategic Importance of the ADNOC Contract

For the purpose of identifying the strategic relevance of the contract for ADNOC and most appropriate strategy of risk management and power distribution, Kraljic Matrix can be used. According to CIPS (2022a), Kraljic analysis is used to identify the importance of a category of spend and market complexity (see figure 2);

Figure 2:Kraljic Matrix Analysis

Leverage Items- This category is comprised of many suppliers controlling and solving evident risks. Costs for purchase of individual items is lowered

Strategic Items- This is the category where Gas Turbines belong and its active implementation as part of the organisation operation. This is due to its availability in a long-term, collaboration and sustainable relations. It influence on contractual terms reduction of risks and issues faced.

Bottleneck Items- The commodity here has many suppliers and as such low risk and issues encountered. The supply process is assured of medium-cost contract implementation with new suppliers engaged.

Non-Critical Items–  This reduce the impacts of organisations day-to-day practices. It is easily obtained with all products being audited in an effective manner.

3.1 Stakeholders Analysis

For noting the relevance of risk and power distribution for stakeholders, analysis is essential.  As evidenced in CIPS (2022b), by use of Mendelow Matrix Analysis, stakeholders analysis is possible (see figure 3);

Figure 3:ADNOC Mendelow Stakeholders Analysis Matrix

Low Influence; Low Interest- The administration and board of directors in ADNOC are tasked with the role of guaranteeing gas turbines supply process both onshore and offshore operations. Hence, they exert less influence and immense interest to the risks and power factors.

High Influence; Low Interest- The finance team, legal department and admin are involved in influencing the risks and power of the contract implementation. In the terms and conditions, it note that;

High Influence; High Interest- For PS&M team in the organisation, they are tasked with a responsibility of management of risks and power held. In supporting this, contract terms and conditions note that;

Therefore, these terms and conditions are linked to the relevance of risks and power distribution.

High Interest; Low Influence– Considering ADNOC operations, end-users and clients have an influence on the practices of the organisation with their legal teams mandated to ensure terms and conditions are aligned to the UAE business environment.

In line with CIPS (2022c) findings, contractual terms and conditions are important for suppliers engagement and noted by detailed conditions, warrant and innominate contractual terms. For the stakeholders analysis in figure 3, contractual terms and conditions offer various options when risks are higher and threatening success of procurement strategy. For identifying the various risks and power in the ADNOC contract, the SWOT analysis is essential. In line with Frimpong et al. (2020), the tool is important to evaluate core areas and risks noted by issues to source the Gas Turbines. This is achieved through the different terms and conditions applied for their mitigation. The best practice entail the terms and conditions applied in their mitigation;

Strengths– Today, ADNOC prioritise on adoption of Purchasing to Pay (P2P) and modernisation of technology use in their overall supply chain. This strategy promote the ability to report, plan, efficient, services offered and their management. The cost factor of the contract highlight;

Hence, the applied technology is applied in the strategy which contribute to accurate and appropriate costs to gain value for money outcomes.

Weaknesses–  For the stakeholders lacking detailed knowledge and skills for the application of gas turbines quality, they are not successful in regard to integration of the organisation Key Performance Indicators (KPIs). The terms and conditions note that;

Hence, the terms and conditions note that the priority ought to be on the quality levels of the ADNOC gas turbines sourced.

Opportunities– ADNOC practices in Abu Dhabi and in both onshore and offshore elicit a direct influence on the ability of attracting the most qualified suppliers. Further, their operations in oil and gas industry demand an improved capacity of adhering to relevant contractual stipulations. The terms and conditions note that;

Hence, delivery in a timely manner is a significant risk which influence how power is distributed and power balance with ADNOC operations impacted.

Threats- This entail increased competitiveness amongst the earlier identified gas turbines suppliers both in UAE, regionally (Middle East) and internationally. Failing by one supplier in offering the demanded product or services, preferences on alternative with losses being charged is evident. The terms and conditions note;

4.0 Power and Risks Distribution between Parties

4.1 Power Distribution Among Parties

Supplier preferencing matrix is an appropriate tool which is applicable in identification of power distribution (Utama, 2021). As illustrated in figure 4, by categorising the parties into either nuisance, exploitable, core and development, their positioning is identified which is core for sustainable relationships.

Suppliers Preferencing Matrix

Figure 4:Suppliers Preferencing Matrix Summary

Development Customer- In a contract implementation, buyer leverage on a holistic power. As a development customer, sellers involve their buyers to estimate volumes and values of spend put into account in terms of their input to sales revenue. For instance, by engaging the different suppliers earlier identified (see table 1), ADNOC ensure they note the extent of their engagement by noting short and long-term goals. For instance, with COVID-19 and subsequent economic recession lowering the demand for oil and gas, ADNOC revenues have been affected. Hence, this inform the necessity for leveraging on power for attracting an appropriate brand value and integration of appropriate leadership. The contract terms and conditions highlight;

Core Customer- For this category, risk is distributed effectively to the company and vendor. The importance of this is presence of mutual-based trust amongst all stakeholders and investing in teamwork, common platforms, cooperation and developing technologies and product. This is particularly in regard to its appropriateness and alignment with all HSE requirements. As evidenced in the contract terms and conditions, they highlight;

Nuisance Customer- The relationship of the buyer and supplier could be characterised by challenges which elicit a shift in the power distribution and risk. For instance, when engaging a supplier in table 1, there could be delays which are unavoidable. The outcome of this would be the supplier failing in providing the gas turbines on time. By working on a follow-up, suppliers would fail to handle the buyer as a good customer leading to nuisance relations. Suppliers would hence have failed to meet expectation of a buyer and their demands. The terms and conditions note that;

Exploitable Customer– For this form of relationship, the supplier has the ultimate power. This is not in place in ADNOC PS&M considering that they do not grant mutual respect on the payments postponement in a consistent manner. This note postponement of the contracts as not a simplified undertaking and when this prevail, costs overruns is evident. The terms and conditions note that;

Porter’s 5 Forces Analysis

This is an important tool which is used to evaluate power distribution amongst suppliers and buyers. In CIPS (2014), the tool note on the supply markets and associated competitive factors (see figure 5);

Figure 5:Porter’s 5 Forces Analysis

Threats of New Entrants– For Gas turbines market in Abu Dhabi and other UAE Emirates, venturing into this sector represent a significant hindrance. For the entire gas turbines which are used by ADNOC and their subsequent maintenance, they are appropriately positioned and structured for ADNOC practices. In the contract terms and conditions note;

Bargaining Power of Suppliers– There exist many suppliers who work in collaboration with ADNOC as earlier identified in table 1. Therefore, ADNOC has a leverage on full power on their different suppliers at a disadvantage position. Therefore, ADNOC has maximum power over their suppliers and is involved in competitively selection their suppliers provided they meet their set requirements and standards.

Bargaining Power of Buyers– Considering ADNOC organisation, as a leader in Abu Dhabi and UAE oil and gas industry, they have the power to switch to cost effective but quality competitors. Therefore, they are engaged in full control of costs of suppliers and to set the level of expectations and demands. In particular, their contract terms and conditions note;

Threats of Substitutes– This is identified as being similar to the buyer purchasing power. There are substantial threats of substitutes which favour ADNOC. For the suppliers, in implementing their contracts, the costs are not favourable with the buyer having to leverage on right to switch their different suppliers with their volition. The contract terms and conditions note;

4.1.1 Turnkey- Design and Build Model

According to Timilsina et al. (2020), the importance of this model is to evidence the initiatives which need to be put in place to engage external contractors to assume the function of making sure customers (end-users) have key for initiating practices. In ADNOC, to ensure they leverage on full power, they operate with partial turnkey strategy. In particular, their contract terms note;

Hence, considering ADNOC operations, they coordinate their practices with entire supply process pursued in tandem with their different specifications. The PS&M team in the organisation make sure that procurement is successful and promoting coordination with all stakeholders.

4.1.2 BOOT (Build, Own, Operate and Transfer)

In the CIPS Notes 2021, this represent a trend by the public sector based organisations involving private companies in their projects management promotion. The importance of this is guaranteeing power distribution to the supplier. For ADNOC, due to their engaging of private and public sector practices, they make sure they fund the overall sourcing of their gas turbines. Further, since maintenance and other materials considered in the gas turbines sourcing, high-level quality is the preference and as such a leverage on power with all risks lowered. The terms and conditions note;

4.2 Risk Distribution by different parties

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