FPSO Conversion and Utilisation Contracts

Standard Asia Offshore Forum

Paul Aston, Partner 7 December 2006

www.hfw.com

Different type of Offshore Structures

Variety of Offshore Structures

FPSO; Various Component Parts

Bow Turret FPSO

FPSO

FPSO in Field with Platform

FPSO; Risers and Mooring Arrangement

FPSO in Field with Manned and Unmanned Platforms

FPSO; Deep Water Usage

STL / STP

TLP and Spar

SPM; Single Point Moorings

Bow Turret Loading System

WHY FPSO?
Speed into the field Marginal fields can be developed commercially because of improved drilling techniques Abandonment concerns avoided Lower Capex Lower Opex and quicker revenue generation feeds further investment and development in field.

Approach to Defining and Coping with Risk

Who is best able to manage the risk? Negotiating Position Consider;
How serious the occurrence of the identified risk would be, The likelihood of that risk occurring.

In upstream contracts important to have regard to terms of development contract (license or PSA) entered into by Operator. Operators will expect to pass onto their contractors those risks they have assumed under documentation relating to services to be contracted out. If you cannot manage a risk consider insurance. Obviously disaster type risks cannot be managed and are insured out.

The Risks
Commercial
Counterparties Price/Timing Economic Issues Risk or Disaster

Financial Operational
Scope of Work Force Majuere Insurance Due Diligence/Mitigation Liability Indemnities Financial loss Protection of Assets/Rights Legislation

Legal

Political

FPSO Development 5 year plan

Discovery Concept design Detailed design and procurement Execution (Construction) Hook Up Inshore Commissioning Start Up Sub sea Development Production Drilling

Consortium / Project Concerns

Participating Interests Obligations of Participating Interests Establishment of an operating committee Powers and duties of operating committee Voting Procedures Establishment of work programs and budgets Itemization of expenditure Over expenditure provisions Revenue split Capitalization future Default Withdrawal by one party Carried interests and costs.

Component Parts
Accommodation and Helideck Offloading and Flare Process Systems Blast Walls and Escape Tunnel Hull Main Deck Turret System.

FPSO; Various Component Parts

Contract Stages in FPSO Project

Conversion or New Build Mobilisation and Hook Up Utilisation Demobilisation

Interfaces

Gap between shipyard practices and off shore standards Industrial Culture Country Culture Company Culture

Insurance during Conversion. BAR or SRL?

Builders All Risk: Subject to specific terms, conditions and exclusions, the BAR insurers against all risks of physical loss of or damage to the subject matter insured caused and discovered during the period of insurance, including the cost of repairing, replacing, renewing any defective part condemned solely in consequence of the discovery therein during the period of insurance of a latent defect. Ship Repairers Liability Insurance: Covers shipyards legal liability to pay by reason of liabilities imposed on it by law for physical loss of or damage to watercraft (including an FPSO) in its care custody and control for then purpose of re[pair or alteration. The legal liability is normally the result of negligence of the bailee (the shipyard) to the property of bailor (the Owner). BAR; covers all risks of physical loss / damage to the subject matter insured (unless excluded) including consequences of faulty design. SRL; no coverage without negligence. BAR; covers all latent defects. Covers damage to unit and any others property / personal injury caused, if lines part and unit breaks away from repair berth. SRL no coverage for latent defect without negligence.

Conversion Contract
1 2 3 4 Ensure that Yard BAR covers faulty welds Ensure Yard insurance Include coverage for Faulty Design or Defective Part Contract out of the QA/QC systems If use Buyers insurance then Yard should be named as a Co-assured with rights to proceed directly against underwriters and have administration of claim.

Points of Concern during Conversion

Condition of Vessel on arrival Defects or problems discovered during conversion Details of Works Standard of workmanship Supervision and Testing Change Orders Suspension Termination Delays

Scope of Works
DRAWINGS; APPROVED FOR CONSTRUCTION DRAWINGS.
Delays in obtaining AFC Drawings? Who is responsible? Effect on Timeline?

TPS/OFE/BDE
Technical Purchase Specification (TPS). Not just for rigs but also relevant to other building projects where specialised equipment has to be sourced from third party such as FPSO Contracts. Whether Owner or Yard is responsible for procurement, Yard needs to be involved with supplier. Owners Furnished Equipment (OFE). There will still be a necessity for the Yard to approve which supplier or manufacturer is chosen and whether that equipment will integrate into the design of the Vessel. Whilst Buyer pays Yard has to ensure:
That Buyer orders equipment that is compatible with the overall design, That Buyer orders the equipment in time, according to TPS

TPS/OFE/BDE
Buyers Designated Equipment (BSE). Buyer tells Builder what equipment to procure and he gives Builder funds in advance to pay. (If not Builder exposed before first installment paid.) Builder has to get involved in the procurement and approve jointly with Buyer the suppliers. He must also
Check that equipment is ordered on time; Check that it is compatible for design; Attend Factory Acceptance Tests (FAT).

Procurement Owners Equipment

Tendency by some Owners to treat Yard as a fabricator, rather than a specialist; but when things go wrong stick the Yard for all delay and design problems. These responsibilities have to be expressed clearly. Close coordination with Class. Failure by Owner to do this can hold up project later on. Yard should not assume Owner is doing this on OFE. Incorporate the procurement schedule into the Building Contract where there are significant Buyers items/supplies. Prioritisation, that is, arranging for most important items to be procured and delivered first. Yard attendance at FATs. Storage and maintenance of Owners Supplies. Need to be adequately protected. Who insures?

Change Orders

Owners Modifications Contractors Modifications Regulatory or Class requirements

Utilization Contract
Day rate on Hook Up Not flow of Oil !
Scope of responsibility Quality of Oil

Day Rate
Capital Cost Element Hire Element Escalation and Inflation Linking

Deductions
Net Loss of Time or Period? Total or Partial All or any one service Define Critical Systems and make special provision. Maintenance generally

Utilization Contract
PURCHASE OPTION
Exercisable within limited period Owner to have continuing management duties

SUSPENSION
Partial or Total? How Long For? Suspension Rate

TERMINATION
With Cause Without Cause Mutual Consent

Demobilization
Lump sum. Repairs to Unit. Demucking / Sludge removal Cleaning up bad chemicals. Mercury On site debris.

Consequential Damages
Damages in English Law for breach of contract falls into two categories: Direct loss; which is recoverable from the party in breach; and Indirect loss; which is only recoverable if it was reasonably foreseeable at the time the contract was entered into. Courts generally interpret consequential losses as falling within second so that an exclusion of such loss will not necessarily extend to loss of profit, loss of production, etc, as such loss may be held to constitute a part of direct loss. (BHP Petroleum and Others v British Steel Plc (1999) I Lloyds Rep 387)