Watson Millican & Company’s technical experts were retained through counsel for a contractor consortium responsible for the design, construction, and commissioning of a greenfield refining and petrochemical complex in Asia in a dispute with the owner of the facility. The project was contracted on a lump sum turnkey basis. The dispute resolution was international arbitration.
The Dispute
This dispute had multiple facets with claims and counterclaims between the parties in excess of $500 million. These included non-payment claims for alleged out of scope work and contract variations, defect claims, deficient design and owner design interference claims, along with delayed mechanical completion and commissioning claims, and claims for liquidated damages. The start-up of the project was delayed by approximately one and half years due to the issues addressed in the claims.
Watson Millican & Company Scope
Watson Millican experts investigated the claims and counterclaims, and evidence provided, regarding the various incidents which occurred during the construction and commissioning of the facility with reference to the industry standards, contractual specifications and procedures, and common industry practice. Watson Millican assessed the findings and conclusions of the opposing experts. Multiple expert and rebuttal reports were prepared on many topics detailing the basis of opinions and findings. Five Watson Millican experts testified multiple times during a series of hearings held across a one-year period. Technical expertise provided included mechanical, chemical and electrical/instrumentation engineering, along with refinery and chemical plant design, construction, and operations. Three examples of the more than two dozen issues evaluated are summarized here.
Crude Oil Delivery
The contractor contended that the owner failed to arrange for the timely delivery of sufficient quantities of crude oil to the refinery to allow for the execution of the refinery performance tests. The contract included schedule milestones, which if not met, incurred financial penalties for the contractor. The performance tests were delayed by approximately four months due to this issue. The owner operated the crude distillation unit for a prolonged period without most of the downstream process units in operation. This created a large quantity of intermediate feedstock and slop which had to be stored in tanks including half of the crude oil tanks’ capacity. This use of the crude oil tanks constrained the Refinery’s ability to timely offload VLCC crude oil carriers. Additionally, Watson Millican concluded that the owner was delaying crude oil purchases for cash flow management. Watson Millican assessed the crude oil purchase and delivery schedule along with the refinery operating records and tank inventories. Using experience in oil movements and a review of the meeting records and other correspondence, Watson Millican assessed the delay as being caused the owner’s decisions and the responsibility of the contractor’s actions.
Flanges
The owner claimed that the contractor failed to fabricate, align, and tighten properly thousands of bolted flange connections across the refinery, resulting in leaks and requiring extensive retesting and rework which caused delay to initial acceptance which was a contract schedule milestone. The owner’s pressure testing procedure required pressure testing at low and high pressure with nitrogen or air. Additionally, hydrogen piping systems were tested using high-pressure hydrogen. All units passed the nitrogen/air pressure tests; however, some leaks were detected during the hydrogen pressure tests. All hydrogen pressure test leaks were resolved. However, the owner subsequently decided to conduct a comprehensive review of all refinery process unit flange installations. This activity significantly delayed the refinery initial acceptance. Watson Millican reviewed the owner’s criteria and methodology used to evaluate the flange installations compared to the contract requirements and industry standards, concluding the owner exceeded the contract and industry standards requirements.
Continuous Catalytic Reformer Unit Defects
The owner claimed that construction defects in the Continuous Catalytic Reformer (CCR) unit caused a critical delay of eight months to initial acceptance. One product from the CCR is hydrogen. This hydrogen was used in other process units for testing and start-up requiring the CCR to startup first. The CCR heaters, reactors and other equipment needed to be dried out prior to CCR startup. The planned dry-out took much longer than planned. Watson Millican investigated the logs, the defect notices and other documents to identify the reasons for the extended dry-out. The identified defects were promptly remedied and were not the primary cause of the extended dry-out period. Watson Millican concluded that the primary reason for the delay was the owner’s operating practices to dry-out the reactors and regeneration sections sequentially rather than simultaneously. Owner inspections post dry-out identified additional defects which were investigated by Watson Millican. Some defects were found to be valid. However, Watson Millican’s analysis concluded that the owner’s claim of critical delay to initial acceptance due to these defects was not supported.
Project Scope:
Value: US $9 Billion
Services: Design; Construction; Commissioning; Chemical, Mechanical and Electrical/Instrumentation Engineering; Refinery and Chemical Plant Operations
Sectors: Refining and Chemicals