Facing unprecedented challengesJuly 29, 2020
Suryadi Kresno, director of JGC Indonesia, talks to The Energy Year about how the company’s work as an EPC contractor has been impacted by the Covid-19 crisis and the difficulty of declaring force majeure in current contracts. As the local subsidiary of JGC International, JGC Indonesia provides integrated solutions for EPC projects.
This is a unique crisis in which everyone is faced with the same challenges. Could you tell us how Covid-19 has specifically affected your company and your operations, and how you have faced the challenges?
This is a very unique issue for our business and no one has had the experience of facing it. It looks like our government was not ready, so when Covid-19 started in March, it tried to prepare and immediately issued a kind of semi-lockdown. After that, all of the companies were required to follow this government instruction. We closed our offices from March 27 because the government prohibited people from gathering.
However, it affected not only us but most of the clients, like our major client, Pertamina. They started to work from home from March 23. They cannot say they closed the project, but they asked us not to gather at the site. There have been different responses from several clients.
Pertamina tried not to stop working and came to us to continue with a decreased activity level, but they still allowed us to continue our service. However, as you know, it is not easy because Covid protocol strongly requires people to use masks, the people cannot be more than a given number in one place and workers outside need to have a physical distance around them.
We sent a letter to the clients to say that due to Covid, the contractor feels many impacts, for example, vendors who cannot come for commissioning. So how can we proceed with the commissioning, without vendors or specialists to come to the site to witness? This has really impacted the schedule. For contractors, this is useful and they will send a letter for the time extension.
It is also difficult to say whether this is force majeure. In most international contracts, epidemic or pandemic is one of the force majeure cases. However, there is still another condition we have to fulfil before we decide this is force majeure. And frankly, all the clients cannot accept this because they still want to achieve the schedule and completion of the work. This is quite difficult for us. On one hand we cannot accelerate the progress, but on the other hand we cannot compromise on the extension of schedule.
Do you think you should rely on the clients to declare force majeure?
It is quite difficult. For example, take one of our clients. I asked the project manager to have a discussion and when I raised the issue of force majeure, I was told that they cannot accept that because in the contract it mentions that the contractor should show first that they already prepared a protocol. And maybe after that a force majeure might be agreed on. I believe from their gesture that they cannot accept force majeure and still want to continue and complete the project. Now, frankly, we are still in discussion with the client on how to manage this Covid issue.
It seems you are stuck between a rock and a hard place. Do you have conversations with other EPC contractors and your friends in the industry on these critical issues?
Yes, of course. I have discussed it with some directors of EPC companies and basically, they have the same ideas as me. Force majeure will not be a cost claim for the contractor. That is why we should be very careful about the wording of letters to the client.
In fact, the Covid is a cost burden also for our side because we have to provide masks and facilities for the subcontractors, not necessarily because it is written into our contracts with the subcontractors but because our clients push us to apply Covid protocols and measure the temperature of people when they don’t feel well. When their temperature is over 37 degrees, they have to go into quarantine. This is not only a time but also a cost burden for the contractors. We record all of the impacts of Covid on our costs, and we will submit the costs to the client, and have some discussion.
I think the key is that the client will not accept this force majeure because they will say that the government did not enforce a lockdown. It was not strict enough. If there was a full lockdown, my client might be able to accept that it is force majeure because no activity can be done, but now, our government has imposed a semi-lockdown. So that has been a very confusing and ambiguous policy.
Do you think there will be a change in the way you organise the work in your company after the crisis?
This is an interesting issue. EPC is always E for engineering, P for procurement and C for construction. Looking at our current running project, it is very clear that with the start of working from home, the engineering progress went down almost 50%. This means that working from home for an engineering company like us is not easy. The productivity dropped. This is because many software engineering programmes need a certain access, and when you use the internet, it is not always easy.
That is why I decided that in certain cases I would ask my engineers to come and work in the office to accelerate the progress. Site progress is okay. Of course, there are some limitations because of physical distancing and masks, but the work still continues.
What about procurement?
Procurement maybe doesn’t need to have so many face-to-face discussions. And the software is not such a problem. The problem with procurement now is vendor quotation from overseas especially. They cannot send the quotation or materials. Some vendors listed in the vendors list, we have to chase. If someone doesn’t face problems, we can continue of course, but if you cannot deliver the material or send a quotation, I have to find another vendor.
Are you facing more difficulties from specific parts of the world on the side of your vendors?
Yes, of course. We cannot find supplies from China, Italy or France. Nor even India. We have India in lockdown now unfortunately. That is why I have to find other alternatives. Now one of our projects is an oil terminal that only needs a remaining five valves from India. But they cannot deliver, so we will have to find another alternative to complete the project.
Do you think one alternative for the EPC contractors will be to rely even more on local content and locally sourced materials and solutions?
Yes, of course. For the last few years the government has tried to encourage us to use more local suppliers. That is why most contracts now have a local content minimum requirement of 40% or 50%. Learning from Covid, if we can get those materials locally, it will be quite good. But Indonesia is still not ready for that. We have to import many materials. Some of the specific materials, such as refrigerant and LNG tank steel materials, we have to import. We still depend on Europe, America, Korea, etc.
Many people think this crisis is an opportunity for a change of system that would help push natural gas as a less polluting, less heavy-particle-generating, more flexible fuel for future energy. How do you see the post-Covid energy world?
If you talk about energy alternatives, I think this is a long way off as our fuel is already almost empty in Indonesia. Indonesia will be importing, not exporting. That is why alternatives like LNG and LPG are in a long-term vision. Indonesia already has four LNG terminals and there is a plan to build more. But talking about the perspective on our business future after Covid, I don’t know. I am feeling that there are still no advantages for the future of our business operations. Working from home is not easy in our business. I think this Covid is more of a disadvantage than an advantage for our business.
- From the field