Scotland - Norway Technology Partnership Event 2015 Key legal issues in a decommissioning project

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Bernadette Clark
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Scotland - Norway Technology Partnership Event 2015 Key legal issues in a decommissioning project 26 November 2015 From Kluge; Partner Thomas Abrahamsen (Head of Energy Practice Group)

1 Scotland - Norway Technology Partnership Event 2015 Key legal issues in a decommissioning project 26 November 2015 From Kluge; Partner Thomas Abrahamsen (Head of Energy Practice Group) Disclaimer: The content of this presentation can not be relied upon as legal advice from Kluge. Kluge will not accept any liability, in whatever form or shape, in connection with this presentation.

2 Three topics Legal framework Differences between decom and offshore fabrication Contract issues relevant for UKCS and NCS

3 Legal framework Norwegian legal framework: Removal is a statutory obligation resting on the licensee and the owner, cf. Chapter 5 of the Norwegian Petroleum Act International legal framework: Law of the Sea Convention, OSPAR Convention, IMO Guidelines Main rule: The entire installation shall be removed Exception: Large steel frame and concrete structures No capital in the license for decom costs to be covered by cash calls during the project Licensee carry full ownership risk until the decom project is completed carries counterparty risk for Contractor (financial risk) Removal contracts are in-house standards No standard contract (agreed form) developed yet Existing removal contracts are based on standard contracts used by the industry (NF 07, NTK MOD 07, NCS 05, LOGIC Marine Construction (with appendix)) LOGIC planned to draft a decom standard status unknown Standard format - EPCI approach = EPRD contract (Engineering, Preparation, Removal and Disposal) with one Contractor using subcontractors HSE «see to duty»: Decom projects involves complex and difficult offshore work (heavy lift, «hot work», etc.). Safe to assume that the operator potentially can have an opinion as to exactly how the scope of work is executed. Example: Yme was deemed by the operator not to be safe. Dispute with Contractor SBM

4 Decom is not reversed fabrication significant differences Difference in scope of work: Regular offshore contract (NF 07, NTK 07 MOD and NCS 05) scope is to deliver a physical object + related services Decom project: Basically a service contract Why bother with this difference? Can be important in many situations transfer of risk, warranties, guarantees, insurance, etc. Important to remember this fundamental difference in the contract drafting Most of decom work scope is done offshore whereas in a construction project hook up and installation is done offshore but bulk of construction in done onshore The facility has probably been changed, modified, developed, re-built, etc. over a period of years. Current owner will have difficulties in presenting updated and correct and complete information to the contractor in terms of the current status of the facility. Marine spread (heavy lifting vessels) constitutes a significant part of the total cost and vessels may be unique/difficult to replace Progress is of less importance in the removal contracts compared to fabrication contracts (no first oil, more sensitive to VOR s, less willing to pay for that perfect solution )

Drafting the Scope of Work (SoW) Either Catch all -defining the performance: The work required for removing the installation Minimizing the need for amendments/clarifications through right to

5 Drafting the Scope of Work (SoW) Either Catch all -defining the performance: The work required for removing the installation Minimizing the need for amendments/clarifications through right to instruct Seemingly, the result is a clarified work obligation although the scope of work is uncertain Significant compensation risk related to scope of work allocated to Contractor Leaving little room for VOR s (compensation and/or schedule) Or Detailed description of the installation to be removed, which and how the work shall be performed Less compensation risk related to scope of work allocated to Contractor Leaving more room for VOR s (compensation and/or schedule)

6 Drafting issues related to the marine spread (1) Is lump sum or firm prices for the heavy lifting vessel really lump sum or really firm? Standard solutions : Rig contracts: Time risk with Company Subsea projects: Time risk with Contractor (cause of delay will decide) Decom projects: Hybrid needs to be negotiated Our finding often the contract is not clear on this significant risk allocation (!) Example: Lump sum language used in the T&C s, however with estimate language in the compensation schedule how to interpret? Typical decom risk: What if the marine operation takes more time because Contractor has been given wrong or non complete information from Company about the condition of the facility prior to contact award?

7 Drafting issues related to the marine spread (2) Starting point: At the time of contract award the Company is not entire certain when they will be ready with preparatory works The Contractor (or vessel owner) has a number of projects and a limited number of vessels that can serve these projects Who decides the specific time of performance of the marine operation? Contractual obligation for the contractor to carry out the work within a time slot, or does the contractor have the freedom to choose when to carry out the work? Standard solution: Notifications procedures from Company for initiation of offshore operations + duty to offer designated vessel + caveat for availability of the spread (seldom substitute vessels) What does availability of the spread mean? Other campaigns when are they contracted (first come, best served?) Willful breach of contract chasing a more profitable contract (who is in control?) What if Company changes the time window? Negotiations on priority Our finding: Surprisingly this is often not clear in the contract. These matters should be explicitly addressed negotiated and regulated in the contract.

Allocation of risk for the condition of the installation (1) The facility has often been changed, modified, developed, re-built, etc. over a period of 20-30 years.

risk for errors in drawings, specifications, etc. + unforeseen circumstances during the execution of the work?

8 Allocation of risk for the condition of the installation (1) The facility has often been changed, modified, developed, re-built, etc. over a period of years. Current owner will have difficulties in presenting updated and correct and complete information to the contractor in terms of the current status of the facility Who to carry the risk for errors in drawings, specifications, etc. + unforeseen circumstances during the execution of the work? Market practice: Company will propose that Contractor assumes this risk Will present massive amounts of data to Contractor Understanding, planning and pricing the Scope of Work is made a duty for the Contractor Real contract issue: When can Contractor present a VOR?

9 Allocation of risk for the condition of the installation (2) Three variation order text examples from our review of the decom contracts The installation is as is Transfers significant risk to Contractor Firms up a lump sum approach No limitations? What about the principle of materially different cf. Sale of Goods Act Section 19? Variation order for conditions which are materially different from assumptions What is materially different? Delta between actual condition and the condition a professional and prudent contractor should have expected, given the available information Key word is extraordinary Variation order, unless the impediment could reasonable have been foreseen by an experienced contractor No materiality threshold More contractor friendly regime

10 Thank you for your attention!

11 Back up slides Compensation reimbursable or lump sum Weather risk Pre Removal Surveys The Company s contractual obligations Guarantee provisions Insurance 1

12 Compensation reimbursable or lump sum Decom contracts are often labelled as lump sum contracts, but they have some elements that are not lump sum Disposal of hazardous waste Marine spread Is lump sum the right compensation format for decom contracts? Relevant arguments Who knows the facility best often the Company (especially if owned over a period of many years) Which of the parties are better suited to make judgement calls about the scope of work, methods, etc. Is the Scope of Work firm enough to allow a lump sum pricing? To what extent has the Contractor being offered site visits and been able to understand the condition of the facility? Market conditions are the Contractors willing to take lump sum risk (or should they be)?

13 Weather risk Weather risk = not getting paid for downtime due to weather Contract needs to clarify weather risk NSC 05: Weather risk carried by Company Market practice: Often carried by Contractor Case: Is weather risk transferred when the operation is postponed? Summer campaign moved to winter. Is it necessary to distinguish between delay caused by the Contractor and delay caused by the Company? Caused by Contractor Contractor retains weather risk (time + cost) Caused by Company By choice For convenience For unforeseen circumstances Schedule consequences is a Company risk if caused by Company. What about compensation risk (not getting paid)?

14 Pre Removal Surveys Pre Removal Surveys is another tool Variations/Changes can be submitted in a limited period of time Advantage: Contractor is afforded some room to present change orders What is the downside what was the trade off? More strict regime afterwards?

15 The Company s contractual obligations Company needs to provide certain assistance Provide as-builts, documentation, etc. Access for on-site visits Removal plan important premise for scope of work Interface with authorities are responsible for all offshore operations of the license (including decom) Temporary plugging Shutting down production Prepare for decom Granting access to site when campaign starts Flotel, Heli-transport Our finding these Company duties are not properly reflected in the decom contracts Consequence: Contractor will have to rely on principle of reasonable assistance = risk related to VOR s, schedule, cost/profitability Contractor needs to be clear on what the Company is expected to do what, when, how + remedies if not

16 Guarantee provisions to be tailor made Application of Sales of Goods Act? General view within Norwegian offshore law the Act will apply for purchases What about decom contracts? Since this is mainly services this Act is not likely to apply No need for extensive guarantee provisions Decom project is a service rendered and the contract object is to be scrapped = necessary to re-write the standard guarantee provisions in existing standards

17 Insurance provisions Insurance provisions & knock for knock needs to be tailor made Standard offshore contracts = operator s CAR insurance protects both parties contractor is only exposed to a defined sum (deductible) Decom projects: A special insurance should be taken out, often by the operator, however with contractor having protection under the insurance policy

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