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New report on HSE in contracts

Financial incentives in contracts affect HSE performance in the petroleum industry. A new report shows that the players have gotten better at achieving more long-term relationships. This provides more predictable working conditions, and a better foundation on which to build a common HSE culture. However, the report also points out a number of remaining challenges.

Financial incentives in contractual relationships can have a positive or a negative impact on HSE work, depending on how the incentives are formulated. The contractual relationships have an effect on the way the players interact and conduct themselves, and thus have significance for the risk of incidents and accidents.

Gunnar DybvigAs early as in 2002 Storting White Paper No. 7 (On health, safety and environment in the petroleum activities) pointed out the necessity of clarifying how contractual relationships affect HSE performance on the shelf. The background for this was, in part, that a number of industry-guided framework conditions challenge HSE, or lead to class distinctions between different groups of employees.

In 2001 and 2005, Working Together for Safety (SfS) developed two recommendations for HSE in contracts. These recommendations are to ensure that no contracts contain wording that leads to competitive outsourcing of the HSE work and the work covered by the safety delegate service. These recommendations shall also ensure that the HSE work can be carried out within the framework of statutes and regulations.

Long-term relationships
In 2003, a study was conducted of HSE in contracts for hiring of facilities used for drilling operations (Toft/Osmundsen et al.).
"Since then, we have noted several improvements as regards the award, assignment and follow-up of contracts. The players have gotten better at working towards more long-term relationships. We also see that it is no longer common to tie financial incentives to reactive HSE indicators (based on incidents that have occurred, such as the absence of injuries, spills, etc.)," says PSA economist Gunnar Dybvig.

"In other words, good HSE results are considered to be a prerequisite, not something to be rewarded," he adds. Dybvig emphasizes that it is now important to continue to work on the remaining challenges:

New player scenario - new division of power
Today, the Norwegian petroleum activities are characterized by a more complex player scenario than was previously the case. An increasing number of smaller operating companies are taking the field. At the same time, the Statoil-Hydro merger means that one company will be the operator of more than 80 percent of the production on the Norwegian shelf - and thus a dominating employer.

"A higher number of players could lead to a more complex scenario and variable contractual and working conditions for the contractors. The merger between Statoil and Hydro will change the balance of market power and negotiating strength to the disfavour of the contractors. This could mean that the supplier will have to assume greater risk in projects. This will have consequences on the ability to safeguard responsibility for HSE," says Gunnar Dybvig.

Clearer and more binding
The report shows that the use of incentives to affect HSE performance is not very specific: In those parts of the contracts that are most binding, the incentives to affect health, safety and environment are only discussed in general terms.
"This could mean that HSE conditions will receive less attention, giving way to demands on efficiency and costs," says Dybvig.
Even though the players have largely moved away from linking reactive HSE indicators to various reward systems, the use of quantitative and reactive indicators still dominates the picture.

"This means that contractors are pre-qualified and rewarded on the basis of incidents and accidents that have already occurred (such as lost time injuries and spills)," Dybvig points out.
"This is happening instead of using indicators that describe the organization's ability to prevent, predict and manage risk, i.e. proactive incentives," he explains.
"Examples of proactive indicators include the status of implementing improvement plans, results of audit programs, management involvement and the quality of how incidents and risk assessment processes are followed up," Dybvig says.
"It is also important that the operator makes sure that contractors have incentives to carry out good improvement and risk reduction processes (ALARP)," he adds.

Variation and low awareness.
The report indicates that contractors experience significant variations in contractual conditions. For example, there are different practices as regards weighting of HSE-related indicators as compared with efficiency-related indicators.

"These differences contribute to a lack of predictability in planning, managing resources and implementing more long-term projects to improve HSE," Dybvig explains.

Furthermore, the study shows that there is little awareness of how contractual conditions affect risk-sharing between operator and contractor.
"It is very important that the operator does not downgrade its duty to ensure compliance, when conditions in the contract assign most of the financial consequences of errors and accidents to the contractor. Moreover, the contractual conditions are not supposed to reduce the contractor's ability to manage HSE in a long-term perspective within its sphere of responsibility," says Gunnar Dybvig

Spotlight on contracts
The Petroleum Safety Authority Norway (PSA) will maintain its focus on HSE in contracts, e.g. through direct supervision and follow-up of the recommendations made by Working Together for Safety (SfS). The PSA expects the industry to improve the way HSE is safeguarded in contracts, and to develop incentives that benefit safety.

The report "HSE in contracts" was prepared by Proactima for the Petroleum Safety Authority Norway.

Contact in the PSA:
Inger Anda, press spokesperson
E-mail: inger.anda@ptil.no
Telephone: +47 970 54 064