FLOATING PRODUCTION, STORAGE AND OFFLOADING FACILITIES (FPSO)

Transcription

1 LECTURE 8: PUL 821 LLM FLOATING PRODUCTION, STORAGE AND OFFLOADING FACILITIES (FPSO) Kato Gogo Kingston, PhD (Law, East London) Associate Professor of Energy & Natural Resources Law: Oil and Gas Faculty of Law, Rivers State University, Nigeria MEANING OF FPSO The abbreviation FPSO stands for Floating Production Storage and Offloading (FPSO) facility. It is a floating facility, generally made from converted ship hull which was designed as an oil tanker. It is specially prepared and equipped with crude oil processing equipment for the separation and treatment of water, crude oil, and gases, directly extracted on board the hull from sub-sea oil wells through the aid of flexible pipelines. On board the cargo tank within the hull are fitted cargo tanks where the treated crude oil is stored in the FPSO. Also, the treated natural gases are used to power the FPSO power generation systems. The surplus gases are often re-injected into the sub-sea reservoirs whilst some of the surpluses are transported through pipelines to other waiting tankers and to the shore. The water and contaminated crude oil produced during production processes are discharged into the sea from the FPSO. However, where the regulatory regime is strict, there are maximum limits for the discharge of the waste into the sea. Also, some form of regulatory frameworks does require that the waste should be injected back into the seabed. It is crucial to note that, the FPSO is a floating vessel hence, must be anchored and allowed to rotate up to 360 degrees. The rotary and anchoring system generally, use the Bluewater core technology known as 1

2 the turret mooring system (metal anchors), usually fixed inside the FPSO s hull. The turret is fastened to the seabed with strong chains, wires and anchors flexible enough to tolerate free and unobstructed 360 rotation of the FPSO around the turret. This rotary allowance is called weathervaning. There are spaces in the FPSO for the oil workers to use as living quarters, including the machine, medical rooms, fire control and mechanical control rooms. In some larger FPSOs there are spaces for bars, restaurants, swimming pool and gymnasium. The processing paraphernalia aboard the FPSO are the same as those used on stationary rigs. However, the FPSO ship does have in-built components, including: FPSO water separation, gas treatment, oil processing, water injection and gas compression. Crude oil stored on board is commonly transported to shuttle tankers and ocean barges going to the shore, through extended loading hoses. This loading process is known as tandem loading. Also, gases are usually transported to shore through pipelines. THE RATIONALE FOR FPSO The cost of constructing and decommissioning stationary offshore Oil rigs and platforms are huge. As of the early 1950s, when offshore production of crude oil became popular, all the offshore oil rigs were fitting to the seabeds. In about 1972 offshore crude oil exploration were being shifted far into deep sea waters. The shifting were necessary because of the discovery of crude oil reservoirs too far into the deep sea horizons. The idea of the floating production systems came to prominence as a means of eliminating the huge cost and improving efficient production. As of April 2018, there are an estimated 276 FPSOs in the World. All these came in the backdrop of the first FPSO (the ship) manufactured in Spain in The technology of the FPSO enables the oil companies to capture crude oil from the most remote offshore and deeper water, which otherwise would have been very complicated to achieve with other 2

3 available technology. Moreover, FPSOs have relatively reliable storage capacity for the preservation of crude oil. They also make it easier to offload and transfer the crude oil to sea tankers for shipment to various refineries, instead of depending solely on pipeline transportation. One of the advantages of the FPSO is that it can be detached from the anchors and moved to another deepsea location such as a marginal field. TYPES OF FPSOs FSO, Floating Storage and Offloading FPSO, Floating Production, Storage and Offloading FDPSO, Floating, Drilling and Production, Storage and Offloading FSRU, Floating Storage Regasification Unit. FIG 1: Old Style FPSO Source: google images 3

4 Fig. 2: AN FPSO FITTED WITH FLEXIBLE PIPELINES SOURCE: google images FIG 3: FPSO CLEARLY FITTED WITH ANCHORS, FLEXIBLE PIPELINES ETC SOURCE: google images 4

5 FIG 4: REAL LIVE FPSO Source: google images LIST OF FSO AND FPSOs IN NIGERIA Yoho FPSO, Operator: Mobil Producing Lagos, Nigeria COMMENCED: 2006 Usan, FPSO. Operators: Esso Exploration & Production Lagos, Nigeria Total Courbevoie, France, Started: 2011 Unity FSO, Elf Petroleum Lagos, Nigeria. Total Courbevoie, France 2002 Sea Eagle FPSO, OPERATOR: SHELL. EA, Gulf of Guinea, 2003 Myatras FPSO, Okono, Okpoho, 2004, Gulf of Guinea, Operator: Agip Armada Perkasa, FPSO, Okoro Setu, OPERATORS: Afren / AMNI, 2009 Armada Perdana FPSO, 2010, OYO, OPERATORS: Allied Energy / Agip Akpo FPSO, Akpo, Gulf of Guinea, Total, 2009 Agbami FPSO, Star Deep Water Petroleum Lagos, Nigeria, 2007 Abo FPSO, Abo, Gulf of Guinea, AGIP 2002 Bonga FPSO, Bonga, Gulf of Guinea, 2005, Shell ENGINA FPSO, Off The Coast Of Bonny/Andoni, Total,

6 NIGERIA S LARGEST FLOATING CRUDE OIL PRODUCTION SYSTEMS FPSO -BONGA FIELDS Bonga is the first large deepwater project of the Shell Nigeria Exploration and Production Company (SNEPCO) in Nigeria. The reservoir is located 120km southwest of the Niger Delta, in a water depth of more than of 4,160 metres and situated within the 60 square kilometres field. The drilling started in 1993 and continued to 1996 with oil prospecting license (OPL) 212 and new deepwater development in OML118. The first Bonga discovery well was drilled between September 1995 and January The reservoir is estimated to hold about 600 million barrels of oil. The FPSO produces 200,000 barrels of crude oil and 150 million standard cubic feet of natural gas per day. The FPSO was constructed in Asia in 2002, the compartments have a hull of 300,000 tonnes capacity. Bonga is operated by SNEPCO under a production sharing contract for the partners, namely: The Nigerian National Petroleum Corporation (NNPC) (55%), Esso (20%), Agip (12.5%), Elf Petroleum Nigeria Limited (12.5%). Gas from the Bonga is conveyed to the Nigeria Liquefied Natural Gas (NLNG) plant at Bonny via pipelines. LNG is exported to Atlantic and European markets via tankers. Prior to direct offloading, the oil is stored on-board the production facilities. The cost of the full field development of the FPSO is $3.6bn. 6

7 ENGINA FPSO Sailed into Nigeria on 23 January Located some 130 km off the coast of the Niger Delta at water depths of more than 1,500 metres Project type: Ultra-deep offshore Operator: Total (24%) Partners: NNPC, Total, CNOOC, Petrobras Sapetro Start date: January 2018 Estimated Production Capacity: 200,000 barrels/day Number of Well: 44 subsea oil wells Hull Capacity: 2.3 million barrels of oil. FIG 5: Photo of Engina FPSO Source: google images 7

8 LEGAL AND PRACTICAL CHALLENGES OF FPSO PROJECTS The legal issues that usually arise from FPSOs are: a) CONTRACTUAL STRUCTURE ISSUES FPSO contracts must never forget to define the following elements: the technical requirements and performance criteria; the hire structure; and the scope of the owner's rights and obligations towards the FPSO client. In addition to the vital elements of the contracts, the prevalent contractual issues involve the analysis of the entire certification concerning the projects including: The concession licences, Manufacturing of the FPSO, Funding agreements, Marketing of the crude oil sales, and Allocation of profits and liabilities. Ownership, including financing and mortgages Registration and flag Maritime liens and rights of civil arrest Civil jurisdiction Penal jurisdiction Salvage Limitation of liability Liability for pollution Removal of decommissioned structures and wrecks conversion contracts with shipyards; procurement contracts concerning main components or equipment; 8

9 design and engineering contracts; and consultancy and pre-delivery management agreements. Contracts regulating the operation period (ie, mainly management and support contracts) are at the bottom of the pyramid. b) ALLOCATION OF FPSO CLAIMS ISSUES One of the very complex legal concerns regarding offshore oil and gas projects, is how courts and regulatory institutions classify the various types of floating exploration, production, storage, and offloading ships. From a legal and regulatory standpoint, there seems to be some confusion as to whether FPSOs should be regarded as transportation ships or as oil tankers. Also, whether the FPSOs should be regulated as permanent offshore E&P installations such as well-head rigs. In reality, however, two significant issues often arise. First, not all aspects of FPSO operations can be divided precisely into either ship-related or E&P-related and regulated independently. Second, conflicts can arise between certain shipping and offshore laws and regulations, meaning that it may not be possible for an FPSO to comply fully with both regimes at the same time. This means that, in the event of a cause of action arising, only one route should be pursued. ASK YOUR LECTURER TO CLARIFY. These practical considerations lead to the common sense conclusion that, in any given place, there should be a single and consistent body of laws and regulations for FPSOs. Furthermore, given the diversity of location of many FPSO projects, the fact that some FPSOs can be deployed in more than one place, and the increasingly transnational nature of the offshore oil and gas industry, there should be consistency - if not close harmonization - between the applicable laws and regulations of producing states. 9

10 An authoritative and internationally recognized determination on the legal and regulatory treatment of FPSOs - as ships or as offshore installations. There is, of course, an enormous range of relevant laws and regulations, which differ from country to country. They may extend to matters of health and safety, structural integrity, licensing and permits, pollution and environment, and civil liability, to name just a few. LIMITATION OF LIABILITY Many countries permit ship owners, and sometimes other parties, to limit their liability for third-party claims for loss or damage relating to the operation of a ship. The widespread adoption of international conventions on civil liability in the marine industry means that a ship owner s entitlement to limit liability is today recognized with reasonable consistency across many trading states. Two main international conventions permit ship owners to limit their liability, namely: (a) The International Convention on Limitation of Liability for Maritime Claims, 1976 (The LLMC Convention) The International Convention on Limitation of Liability for Maritime Claims (LLMC) deals with a range of claim types, including claims relating to death, personal injury, and property damage occurring on board or in direct connection with the operation of a ship. The LLMC entitles a ship owner (which also includes a charterer, manager, or operator) to limit its liability with respect to such claims, and the level of limitation is calculated by reference to the ship s gross tonnage. (b) International Convention on Civil Liability for Oil Pollution Damage (commonly called the Civil Liability Convention or CLC), 1969, renewed in 1992 (The CLC Convention) 10

11 The International Convention on Civil Liability for Oil Pollution Damage (commonly called the Civil Liability Convention or CLC) deals specifically with claims arising from loss or damage caused by the escape or discharge of oil from a ship. The owner of a ship is deemed to be strictly liable for such loss or damage, but is entitled to limit its liability at a level calculated again by reference to the ship s gross tonnage. 1 VITAL CLAUSES FOR FPSO CONTRACTS BACK-TO-BACK CLAUSE Ideally, the terms of all capex and opex-related contracts should be 'back to back' with the related terms of the FPSO contract, so that all risk of cost overrun and unforeseen developments is passed on to the FPSO client (which may pass it on to the government under the production licence or the production sharing agreement). However, this is unrealistic in practice for the following reasons. First, the market for offshore suppliers is currently so good that suppliers are not necessarily willing to accept contract terms that are as strict as those accepted by the owner in order to win the FPSO contract. Second, many FPSO tenders are on 'take it or leave it' terms and bidders may be disqualified if they make too many amendments in order to mirror the terms of the suppliers contract. Examples of the importance of back-to-back terms are force majeure clauses and the risk of facing liquidated damages for late delivery of the FPSO. This risk will be reduced if events involving shipyards and suppliers qualify as force majeure under the FPSO contract. Further, all technical and functional requirements under 1 Paul Dean, Global Head of Oil and Gas Partner, London and Robert Follie, Global Head of Energy Partner, Paris. Legal and regulatory treatment of floating oil and gas vessels needs clarification,

12 the FPSO contract must be similar to those included in the contracts between owners and suppliers, and guarantee periods should be of similar duration. RISKS ALLOCATION CLAUSES According to Bhinder, 2 FPSO construction is inherently challenging. Such projects require the integration of distinct components: the hull, topsides and modules, plus the subsea mooring and riser systems, which require hook-up to subsea equipment, and commissioning of the vessel in the field. The unique design requirements of the business, the incorporation of new and old equipment, the integration of owner provided equipment, and the use of multiple contractors provide the ingredients for potential delay problems. The interdependent nature of various aspects of FPSO construction means that risk allocation of delay events, in particular, the extension of time and liquidated damages regime, needs to be carefully understood, assessed, and applied. The following risks must be considered when negotiating FPSO contracts: a) The credit risk for FPSO clients and the need for parent bank guarantees are often underestimated; the contract must clarify whether the oil company is acting on its own account or on behalf of a licensed group with pro rata liability between the participants (if so, the contract must identify the participants); 2 See: Baldev Bhinder, Legal insight informs risk allocation in FPSO construction contracts, Ashurst LLP, 2014 online at: 12

13 b) Liquidated damages and the penalty structure for late delivery must be specified; the procedure for acceptance of the FPSO vessel under the FPSO contract often involves integration risks that should be placed with the FPSO client; c) The owner should not suffer financially if undersea installation is delayed or the FPSO client is not ready; d) A performance-based hire structure may be complicated and may depend on integration and interfacing with other parties or on reservoir management that is out of the control of the owner; e) Subjective termination rights should be avoided; f) The early termination fee should cover the net present value of the contract; g) The owner should never accept reservoir-related risks; h) Exceptions from the 'knock-for-knock' principle in liability provisions must be identified and preferably clarified with the insurers; i) Net earnings after deduction of local and central taxes (including withholding taxes) must be stated; it may be an advantage (and often a requirement) to operate through a company located in the jurisdiction of operation; j) Local content requirements may be difficult to satisfy due to the unavailability of competitive and qualified local resources; and k) Risks of political or legal changes should be borne by the FPSO clients. 13

14 A typical construction contract delineates various delay events according to the risk assumed by the respective parties: Owner's risk events, such as requests for additional works, are typically termed "Relevant Event(s)" with a corresponding right for a contractor to seek, among other things, an extension of time to the completion date on account of the Relevant Event; Neutral events such as those arising from inclement weather (or other force majeure events) are typically termed "Permissible Delay" and also will provide the contractor with a right for an extension of time; and, Contractor's risk events, such as labour shortages, are naturally at the risk of the contractor and will not entitle the contractor to an extension of time, thereby exposing it to liquidated damages for any delay beyond the completion date. EXTENSION OF TIME CLAUSES Risk allocation for delay events must start with a proper understanding of extension of time (EOT) clauses. The common perception of EOT clauses is that it is intended to benefit the contractor because it extends the date for completion of the works for delay events, thereby reducing the period from which an owner can seek liquidated damages. Owners, therefore, typically view such clauses with considerable suspicion, and seek to limit its scope and application, with the belief that the fewer opportunities a contractor has to rely on an EOT clause, the greater the owner's chances to claim more liquidated damages. Such a belief is misplaced. The reality is that EOT clauses operate for the benefit of the owner as well, as such clauses avoid the operation of what is known as the "prevention principle." The prevention principle is not a novel concept, 14

15 having been established as far back as In essence, the prevention principle operates to preclude an owner from claiming any liquidated damages if some of the delay is due to its own, employees', or agents' default. In practical terms, this means that when the principle applies, time for completion of the works is set "at large." The contractor is no longer obliged to complete the works by the completion date but instead has to do so within a reasonable time. Flowing from that, the owner can no longer seek to claim liquidated damages from the contractor but, to the extent that the contractor has exceeded a reasonable time to complete the works, the owner has to prove its losses as general damages. Most extension of time (EOT) clauses provide for a timeframe from which a contractor is to apply for an extension of time. Whether any timeframe stipulated for the notification of an extension of time should operate as a condition precedent to the operation of the clause depends on the wording of the EOT clause. Can a contractor who fails to notify the owner of a Relevant Event or does not do so within the stipulated time, then assert that it has been prevented by the acts of the owner, resulting in the disabling of the liquidated damages sanction? The weight of the authorities seem to suggest it would inequitable to allow a contractor to be "better off by deliberately failing to comply with a notice condition than by complying with it" and that the contractor should not be able to "rely upon preventing the conduct of the other party where it failed to exercise a contractual right which would have negated the effect of that preventing conduct." THE DOCTRINE OF QUIET ENJOYMENT FPSO clients often demand a 'quiet enjoyment' letter providing that the banks shall not be entitled to enforce a mortgage against the vessel (if it jeopardizes operations) as long as hire payment is made under the FPSO contract. There is no standard quiet enjoyment letter; therefore, banks can strengthen their position towards the FPSO client in a default situation by 15

16 negotiating the terms of the letter. The terms of the letter may be linked to the assignment of the FPSO contract to the banks. Quiet enjoyment letters may include: a) an acknowledgement of the assignment; b) the duty of the FPSO client to notify the bank of any default under the FPSO contract; c) the right of the bank to remedy such default; and the right of the bank to sell the vessel and the FPSO contract (in which case the FPSO client must cooperate). LAWYERS ASSESSMENT OF PROJECT FINANCING If your client is the bank or any other financial institution giving loans for any aspect of FPSO project, you must establish the following: a) Which asset the borrower owns and which it merely has a right to use under a lease/licence; b) What asset of the borrower can a fixed charge/security be created; c) Whether floating charges can be created over the borrower s asset; d) Whether security can be created over future assets i.e. assets to be acquired by the borrower after the creation of the charge; e) Whether security can be created over movable assets without the physical transfer of those assets to the mortgagee or pledgee; f) What degree of control the chargee must exercise over the asset to constitute a fixed as opposed to a floating charge; g) Whether there are restrictions on foreigners taking security over land; h) What creditors, will by law, be preferred over secured creditors; i) Whether third parties or liquidator can interfere with the grant of security or with its enforcement; j) Whether, on a default, the lenders will be able to appoint a receiver over the assets; k) Whether the bank/lenders will be responsible for the receiver s action or whether a receiver can be appointed an agent for the borrower. 16

17 MISCELLANEOUS INTERNATIONAL LAW PERSPECTIVES Nigeria ratified the core International Maritime Organization (IMO) conventions governing the maritime safety, that are relevant to offshore FPSOs. MARPOL CONVENTION Adopted in 1973 (Convention), 1978 (1978 Protocol), 1997 (Protocol - Annex VI); Entry into force: 2 October 1983 (Annexes I and II). This is the International Convention for the Prevention of Pollution from Ships. It is the main international convention covering prevention of pollution of the marine environment by ships from operational or accidental causes. The Convention includes regulations aimed at preventing and minimizing pollution from ships - both accidental pollution and that from routine operations - and currently includes six technical Annexes. Special Areas with strict controls on operational discharges are included in most Annexes. There are other international instruments as follows: a) The International Convention for the Safety of Life at Sea, 1974 (SOLAS PROT 1988); b) The International Convention on Load Lines, 1966 (LL PROT 1988); c) The Suppression of Unlawful Acts against the Safety of Fixed Platforms Located on the Continental Shelf, 1988 (SUA PROT 1988); d) The Convention for the Suppression of Unlawful Acts against the Safety of Maritime Navigation (SUA 2005). 17

18 ACKNOWLEDGEMENTS 1. Finn Bjørnstad; Gaute Gjelsten ; and Trond Eilertsen, Wikborg, Rein & Co Oil and Gas Law Practice, Oslo, Norway 2. YINKA AGIDEE, LEGAL ISSUES IN FINANCING OF THE ACQUISITION OF FPSOs, THE ROCK AND PARTNERS, Lagos, Online at www. trp-ng.com 19 March retrieved 19 March retrieved 19 March retrieved 19 March 2018 = OIL AND GAS LAWYERS ARE THE MOST LEARNED AMONG THE LEARNED = QUITTERS NEVER WIN, WINNERS NEVER QUIT. 18