The Application of Contracts in Developing Offshore Oil and Gas Projects

Philip Loots, Donald Charrett

• Publisher: Informa Law from Routledge
• Year: 2019
• ISBN:
  9780429639043
• Edition: 1
• Topic: Jura
• Subtopic: Rechtstheorie & -praxis

This book provides a comprehensive overview of the key aspects and contracts involved in the process of developing oil and gas projects, with an emphasis on offshore developments.

Project development in oil and gas carries with it numerous unique risks and challenges. By identifying and managing risk through the various contract stages, each stage of the project is seen in perspective and therefore gives readers a better understanding of how that stage was arrived at and what is expected to come later. To do this, the authors use illustrative international case studies from past and current projects, thereby deepening the reader's understanding and awareness of risk from practical experience, as well as suggesting answers for those who are involved in developing oil and gas projects.

The Application of Contracts in Developing Offshore Oil and Gas Projects is intended for project owners, project managers, contractors, finance managers, commercial managers and lawyers who seek to understand the subject from a practical point of view.

Chapter 1
Introduction

1. 1.1 Overview
2. 1.2 Terminology
3. 1.3 Offshore oil and gas projects - technical considerations
   1. 1.3.1 Floating production systems
   2. 1.3.2 Offshore platforms
   3. 1.3.3 Subsea facilities
4. 1.4 Context of oil and gas construction contracts
5. 1.5 Project identification and evaluation
6. 1.6 Final investment decision
7. 1.7 Contracting strategy
8. 1.8 Front-end engineering and development/design (FEED)
9. 1.9 The procurement process
10. 1.10 Construction
11. 1.11 Commissioning and startup
12. 1.12 Risk allocation and insurance
13. 1.13 Project performance reviews
14. 1.14 International contracting
15. 1.15 Managing risk
16. 1.16 Variations
17. 1.17 Economic duress
18. 1.18 Megaproject challenges
19. 1.19 Decommissioning

1.1 Overview

This book provides a comprehensive overview of key aspects involved in developing oil and gas projects, with an emphasis on offshore projects. It is intended for those who seek to understand the subject from a practical point of view. Illustrative case studies from past and current projects are provided, to deepen the understanding of how these key aspects apply in real life.

The risks in offshore oil and gas construction are different from, and significantly greater than those in onshore projects.¹ Construction frequently takes place in very deep water, subject to severe and unpredictable weather, in locations far from existing logistical support, and the technology may be at the cutting edge of what is technically feasible. Large and specialised construction equipment is required, which because of worldwide demand, may need to be contracted several years in advance. The large capital investment and anticipated cash flow mean that any delays in completion will have significant financial consequences.

This chapter provides an overview of the steps involved in developing oil and gas projects, generally following the stages of project development and shows the process, and context in which such project development takes place. In addition, a discussion of the oil and gas industry itself is provided in Appendix A.

The following sequential stages are typical of a project:

• Project identification – definition of, and parameters for, the study phase.
• Project planning, encompassing initial studies of the technical and financial feasibility – the desired project outcomes (‘project deliverables’) are defined, and decision criteria and timing are specified for determining whether to proceed with the project.
• Concept report – the engineering, programme and estimate are provided, and decisions are made about long lead time procurement.
• Detailed design is started and the tendering phase of procurement follows almost simultaneously – contracts are placed as the detailed designs are completed.
• Fabrication and construction follows award of contracts, accompanied by a rapid increase in the flow of document deliverables: contractor’s drawings, schedules and reports.
• Commissioning begins as the construction of particular areas of the facility become available and as procured items of equipment are delivered for integration into the facility.
• Once all areas of the facility are commissioned and tested together, the facility is fully operational.²

There are direct, indirect and external participants in oil and gas projects, and these include:

• Government, private or public bodies who have an interest in the project’s outcome and who may be able to influence the project’s outcome directly (or indeed decide if it is able to proceed at all).
• Various groups within the Owner’s organisation and, depending on the financial structure of the project, joint venture participants, all of whom may influence the project’s outcome indirectly. Involvement by personnel in the Owner’s organisation and those other entities mentioned above who have a direct influence on the outcome of the project.
• The Contractors, project managers, designers and vendors and suppliers.³

The project participants are considered in more detail in Chapter 2.

1.2 Terminology

Definitions in lower case are of terms that have a generally accepted meaning in the industry but are usually not defined in contracts. Where terms are first used in this book they are in bold. Although the definitions used here are typical contract usage, the exact wording of a definition may vary according to the contract being used. Some of the terminology commonly used in oil and gas contracts differs from that used in other types of construction contracts.

In this book, capitalised terms typically have a defined meaning in a specific contract. The Owner, sometimes defined as the Employer, Principal, Client or Company, is the oil company, often an international oil company (IOC), that plans and implements the project, and for whose benefit the facility will ultimately deliver saleable oil and gas products. The Owner contracts for services (for example, design or construction management) or purchases goods (equipment and construction materials).

The Owner is also usually the Operator – the oil company in a joint venture arrangement that operates the oil and/or gas facility in accordance with a Joint Operating Agreement (JOA) and acts as an agent for the other joint venturers. The Operator could be acting on its own behalf if it also holds a participating interest in the venture.

The Contractor is the party that provides the services or goods pursuant to a contract with the Owner. Such a contract will be referred to as the Contract.

A Third Party is an entity that has no contractual connection to any of the existing parties to the Contract or is an entity that is not a party to the Contract but is a party to another contract with one of the main parties and which may have the benefit of certain rights.

1.3 Offshore oil and gas projects — technical considerations

The choice of offshore facility design depends on water depth, operating conditions, reservoir size and life, type of hydrocarbons, distance from markets, size of off-take cargoes, safety, environmental impact and economics. The marketable products produced by oil and gas projects include liquified natural gas (LNG), liquified petroleum gas (LPG) and various grades of oil. The options range from sub-sea facilities to fixed or moored platforms to floating production systems. The choice and location of systems to be used should be a technical and commercial and not a political decision. High safety standards, low environmental impact and lower operating costs can be achieved by selecting the right technology. Advances in technology are being made at a rate never before experienced. While many contracts prohibit the use of prototype equipment, there is an underlying risk that tendered equipment may not be state of the art.

1.3.1 Floating production systems

Floating production storage and offloading (FPSO) facilities produce, hold and periodically transfer oil to trading tankers. They comprise a ship connected to a riser,⁴ which receives crude oil from one or more sub-sea wellheads through flowlines.⁵ Docking equipment allows the vessel to attach itself to the riser by a part of the FPSO called a turret (about which it can ‘weather-vane’ in response to winds and currents). The vessel carries equipment for processing crude oil or gas suitable for transport by tankers, storage tanks to hold the processed oil or gas, and offloading equipment. The processing equipment is usually fabricated in discrete modules attached to the deck of the vessel; these modules attached to the deck are known as topsides.

The FPSO vessel is held on location (station keeping) at the riser either by a mooring system, or by dynamic positioning (use of the vessel’s propulsion systems controlled by a satellite positioning system), to maintain its position within strict limits to avoid damage to the riser⁶ and the connection equipment.

If a mooring system is used, the vessel is anchored to the seabed either by a fixed spread mooring system, or a disconnectable mooring (attached to the vessel’s bow), which is itself moored to the seabed. The FPSO vessel is regularly visited by trading tankers, sometimes referred to as shuttle tankers, to which the oil or gas from the FPSO’s storage tanks is transferred for transport to market.

1.3.2 Offshore platforms

An offshore platform produces oil and/or gas that is transported by pipelines to shore or to off-take tankers. The supporting structure can be constructed in steel or concrete; it can be rigidly fixed, tethered by tension cables or moored to the seabed. The foundation of a fixed platform may be fastened to the seabed with piles driven deep into the seabed, or it may be a gravity based structure (GBS) that depends on mass and penetration into the seabed to transfer the vertical loads and resist the overturning effects of wave and winds. In the former case, the base of the structure supporting the drilling, processing and accommodation facilities is known as the jacket, and in the latter, the substructure is typically referred to as the GBS or caisson. Statoil’s Troll A GBS off the coast of Norway is in 300m water depth. The deepest water in which a fixed platform has been installed to date is Chevron’s Petronius compliant tower south-east of New Orleans in 535m water depth.⁷

A tension leg or semi-submersible platform comprises a hull that is entirely underwater and an operational platform supported well above the surface. Tension leg platforms are typically kept in place by cables fastened to the seafloor and are little affected by wave action. The cables are typically tensioned so that the hull buoyancy holds it firmly in place. Tension leg platforms can operate in water more than 1,500 metres deep.⁸ A semi-submersible platform may also be moored to the seabed; the deepest moored semi-submersible platform currently operating is BP’s Atlantis platform, south of New Orleans in 2,150m of water.⁹

Owing to an offshore platform’s massive size and weight, the practicalities of fabrication, transport and installation are a different proposition from other types of structure and are highly dependent on the availability of specialised construction equipment, including floating cranes, suitable barges and special purpose transport vessels.

1.3.3 Subsea facilities

Subsea production can be used in water depths for which offshore platforms are not technically or economically viable. The development of a subsea oil and gas field requires specialised equipment. The equipment must be reliable enough to safeguard the environment and make the exploitation of the subsea hydrocarbons economically feasible. Manifolds located over the wellheads on the sea-bed regulate and distribute the oil or gas into subsea pipelines for further processing. The deployment of such equipment requires specialised and expensive diving support vessels (DSVs), which need to be equipped with diving equipment for relatively shallow work and robotic equipment for deeper waters, known as remotely operated vehicles (ROVs). Any requirement to repair or intervene with installed subsea equipment is thus very expensive; occasionally of such magnitude that leads to economic failure of the subsea development.¹⁰

Subsea technology in offshore oil and gas production is a highly specialised field that makes exceptional demands on engineering and simulation applications. Most of the new oil fields are located in water that is too deep for fixed platforms, being referred to as deepwater systems. Development of these fields sets strict requirements for verification and testing of the various systems’ functions and their compliance with current regulatory requirements and engineering specifications. This is because of the difficulties, high costs and time involved in changing or repairing a system after it has been built.¹¹

1.4 Context of oil and gas construction contracts

Because of the scale and risk of developing oil and gas projects, Oil Companies generally form a joint venture to exploit the hydrocarbon resources in a particular oil or gas field.¹² The government grants to the Operator and its joint venture partners (JVPs) a production licence or other form of agreement to exploit these resources.

The context in which all oil and gas construction and related contracts must be viewed is against such a licence or agreement with the government. Compliance by the Operator, its joint venture partners and its construction contractors with the requirements of this agreement or licence is of paramount importance, to an extent frequently underestimated by those contractors whose core business is not established in the oil and gas industry. Requirements of safety, quality, environmental compliance and stewardship are often far more stringent than those applied elsewhere in the construction industry.

Consequently, the cost and time implications of compliance with these requirements can be underestimated and significant financial loss and delay to Contractors may result. Since the Operator and the JVPs have much more at stake, namely rights to production which may be curtailed or forfeited as a result of breaches or negligent acts on the part of Contractors, the Operator is likely to insist on continuous education, rigorous adherence to standards, significant penalties for non-compliance and contractual rights to terminate for breaches of such requirements. The reputational equity of an IOC may be disproportionately large in comparison to that of the individual construction Contractors th...