Performance-Based Closure Portfolio
Over the past several years, many major oil companies have vigorously pursued strategies to reduce the overall cost of ownership and increase cost certainty related to their downstream petroleum environmental portfolios. These strategies – each tailored to match the company’s business objectives and needs – frequently utilize some variant of a performance-based contracting (PBC) approach.
In this instance, a global oil giant sought an efficient approach to managing a 137-site retail portfolio spanning 21 US states. The company retained environmental responsibility for these properties subsequent to divestment. Their goal was to remove these liabilities as rapidly and as cost-efficiently as possible, while responsibly maintaining regulatory compliance and protecting health and safety.
With over 15 years of experience implementing various forms of performance-based contracts, GES was able to develop and implement a highly responsive plan to manage this portfolio. The plan, aligned with client objectives, assigned each site an endpoint of regulatory closure or liability transfer based on the arrangements of site’s purchase-sale agreement. Under this innovative strategy, GES assumed responsibility of the portfolio for a fixed price under a cost-to-close (CTC) contract that would last no longer than 10 years. The contract’s shared risk and reward approach provided incentives to both parties by specifying a division of any fees left in reserve at the end of the contract term.
To ensure a streamlined approach with expedited communication and contract execution, GES implemented a structured program centered on a dedicated program manager with regional teams assigned to steward groups of sites. Each site has a distinct milestone-based plan and pathway to closure that reflects site-specific conditions and regulatory requirements. Performance reviews are provided to the client on a quarterly basis, with budgets awarded incrementally with achievement of project milestones.
Under this innovative program, the major oil company is relieved of much of the cost and administrative burden of managing these environmental liabilities while retaining the assurance that sites are managed according to high levels of quality, safety, and social responsibility. GES serves as client advocate in proactively working to gain approvals from regulating authorities in supporting landowner negotiations and legal settlements. GES’ early analysis helped identify the eligibility of 21 sites to apply for reimbursements from state trust funds valued at approximately $4 million. Just under three years into the term of the contract, GES has stewarded more than 45% of the sites to their site-specific endpoints, well ahead of initial estimates.