Offshore Floating Production

Edited by Stuart Beadnall; Simon Moore; Max Lemanski

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CHAPTER 2 FPSO design

Stuart Beadnall

A Introduction

2.1 In this chapter, we look at particular requirements regarding the design of FPSOs – whether for a newbuild or a conversion project. An FP Contractor’s choice of a newbuild or a conversion is addressed in , but here we examine how the division of responsibility relating to vessel design and the inevitable changes to design parameters that occur during the development of an FPSO project are handled in the case of a typical FPSO charter and how they affect the construction subcontract. 2.2 Each FPSO is different. There may be major variances in the hull structure. For example, in addition to production equipment being installed onto a traditional ship shaped vessel, a concrete or steel barge hull may be used, or a circular hull may be employed. Some spar and semi-submersible hulls have also been equipped with limited oil storage. Different types of mobile production unit, including FLNGs, are described in more detail in , Part (ii), with an evaluation of the choices in , Part (iii). Even if the whole structure of the FPSO is generic, the production equipment and other key features may vary considerably. 2.3 The reason behind the differences, and the bespoke nature of an FPSO design, is the specific requirements of the field at which the FPSO is to be deployed. These requirements are usually identified in a ‘basis of design’ which is prepared by the Company to identify the characteristics of the unit that will be needed to provide continuous production in the relevant conditions. The reasons for variations in those requirements, even between fields within a similar location, include characteristics of the reservoir(s), wellhead temperatures and pressures, the gas/oil ratio, viscosity, density and wax content. The reservoir properties, combined with the number and placement of the wells, dictate the expected volumes of production and quantities of oil, gas and water. These change over time and may require volumes of water or gas to be injected to support production. In addition, the selected subsea architecture, water depth, metocean conditions, distance from shore and local regulatory regimes all influence the design of the FPSO. All these factors are taken into account in the preparation of the basis of design.1 2.4 From this, the functional requirements of the production unit will be drawn up, identifying the key performance characteristics required to enable continuous production of the expected volumes at the site in the prevailing conditions. A description of the key

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features of a functional specification are set out in , Part (iv), Section D, the main aspects of which are the governing regulatory regime, the local environmental and seabed conditions, reservoir fluid properties, the desired production performance standards and reservoir support requirements (e.g. water injection, gas lift), quality specifications for export product, the interfaces with the subsea architecture (e.g. number of risers) and certain standard technical requirements. These requirements include the minimum storage capacity, the desired offloading rate and matters such as the design lifetime. Functional specifications vary widely in the degree to which supplementary technical requirements are specified. Some companies have extensive internal standards, while others will rely more or less entirely on an FP Contractor’s preferred solution. In other words, the expectation is that whatever the shape and structure chosen to perform the floating production operations, if that facility is capable of achieving the requirements of the functional specification, it will be capable of continuous production operations, as required. 2.5 Sometimes, detailed specifications are developed by the Company to accompany the functional specification and form part of the charter contract with the FP Contractor. In other cases where such detailed specifications do not exist, the responsibility to develop the FPSO design to meet the requirements of the functional specification may be transferred to an EPIC (engineering, procurement, installation and commissioning) contractor. This may be a construction shipyard experienced in design and construction of floating production units, or it may be the responsibility of the FP Contractor, who will, in effect, take on responsibility of an EPIC contractor as against the Company charterer, and subcontract key features which may include design, procurement, fabrication, transportation, installation and mooring.

B Design responsibility

2.6 The precise extent of an EPIC contractor’s responsibility to develop a Company-provided preliminary design into a complete design capable of achieving the functional specification requirements is covered in detail in legal texts on offshore construction.2 The purpose of the current text is to examine the FP Contractor’s obligations to procure and deliver a unit capable of achieving the technical requirements under the FPSO charter. 2.7 A crucial feature of the successful performance of the FP Contractor’s obligations is the performance of its major subcontractors. For example, the FP Contractor may develop (perhaps with assistance from a design subcontractor) the technical requirements of the basis of design into a FEED (front end engineering design) or other standard of preliminary design.3 The FP Contractor may then transfer the responsibility to complete the design to a construction subcontractor, whose task it will be to develop the design to the level required to achieve the functional requirements.4 If the construction subcontractor fails to do this successfully, the FP Contractor would be exposed to liability to its Company client under the charter terms for failure to procure the unit to meet the functional

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requirements. In that event, opinions may diverge on whether the subcontractor’s failure is due to errors or inadequacies in the basis of design and other technical information provided by the Company under the charter terms, or whether there were mistakes in the preliminary design or FEED prepared by or on behalf of the FP Contractor, or whether full responsibility for completion of the design had been transferred from the FP Contractor to its construction subcontractor, and whether the errors lay in performance of the EPIC subcontractor or its subcontractors. To minimise such uncertainties and reduce the scope of potential disputes, an experienced FP Contractor may prefer to perform the role of EPIC contractor itself. It would complete the basic design and may procure major equipment and subcontract the construction, integration and installation work. 2.8 Whilst disputes concerning allocation of responsibility for design risk are not uncommon in major engineering projects, a particular feature of floating production projects is that the opportunity to test whether the design is sufficient to achieve the requirements of the functional specification may not arise until production commences at the FPSO site. Arguments at that point as to failures in the design process that may have occurred months or years previously may be difficult to resolve. It is also an inherent feature of most floating production projects that oil or gas reserves have not previously been exploited at that field, in those particular conditions. Inevitably, there will be uncertainties and unknowns which may influence views on whether failure to achieve the functional requirements is due to errors in the development of the design, or the original basis of design on which it was based. In this context, the significant point to note is that the FP Contractor stands in the middle of the dispute. Whatever opinions there may be concerning reasons for failure to achieve the required functions, if the reality is that the minimum performance levels have not been met, the FP Contractor is prevented from achieving acceptance and commencement of the charter for which the FPSO has been procured. Whatever remedies the FP Contractor considers it may ultimately have against any of its subcontractors, its primary and most immediate concern is to avoid the Company being able to exercise its remedies under the charter terms.5

C The design development process

2.9 The Company will usually prepare a functional specification and sometimes a concept design, derived from its basis of design, based on its study and analysis of the characteristics of the reservoir and the field, the metocean conditions and its objectives for production. This will form the basis of the scope of work to be contracted to the FP Contractor under the FPSO charter terms, either in a comprehensive charter for the provision of FPSO services, or split between a lease of the FPSO and a contract for the provision of O&M services. If the latter structure is chosen, the requirement for the provision of an FPSO capable of meeting the requirements of the basis of design will be contained in the lease, and the O&M services obligations will commence once the FPSO has successfully been provided and is ready for operations. 2.10 A functional specification is derived from the basis of design. The fundamental requirement is for the FPSO to be capable of achieving each of these functional

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requirements. Accordingly, acceptance tests are included in the scope of work, which the FP Contractor is required to pass before acceptance is achieved. The acceptance process is explained in more detail in . Whether the FPSO charter contains other technical requirements imposed by the Company, or includes an additional level of design, such as a FEED study, will depend on the experience and capability of the Company. As may be expected, large companies with longstanding experience will wish to impose their own specifications and standards. However, whatever the level of design prepared by the Company and incorporated in the charter terms, the FP Contractor’s responsibility will be to complete that design, using subcontractors as needed. 2.11 It is obviously important for the FP Contractor’s ability to complete the design that any preliminary work performed by or on behalf of the Company is accurate and complete. There is scope for considerable difficulty here. By its very nature, preliminary design work is just that, based on assumptions, estimates and calculations which may prove to be short of the mark when the preliminary design is then verified during the detailed design process. The consequences of errors in the preliminary design or FEED may be considerable. This is especially so on the many FPSO projects described as ‘fast-track’. Although the oil and gas reserves may have happily laid undisturbed for over 200 million years, it is usually the case that once a decision is made to extract them, time is of the essence. In other words, the timely completion of the project is paramount, not to be disrupted by the inconvenience of major changes to design during the procurement and construction process. 2.12 Three major legal issues arise concerning provision of the preliminary design or FEED in the charter terms. The first is the level of responsibility that the Company undertakes for the accuracy of its preliminary design.6 As mentioned, given the inevitable variations that will occur as the preliminary work is developed into a final design, it cannot reasonably be expected that whatever is produced by the Company will in all aspects be accurate and complete. Even without any specific charter terms addressing the point, the FP Contractor clearly must take some risk concerning the lack of accuracy or incompleteness in the preliminary design – that is the nature of the turnkey obligations assumed by an EPIC contractor.7 2.13 Nevertheless, given that inaccuracies in the preliminary design may have major consequences for the FP Contractor’s ability to perform as required, the FP Contractor would normally require the charter terms to include some level of compensation for the consequences of changes to its design work due to errors in the design and information provided by the Company. This is usually achieved by the parties segregating the two types of design and information provided by the Company. 2.14 The first is generally described as ‘rely upon’ information, any material change to which would entitle the FP Contractor to a variation order, adjusting its costs and schedule (provided the variation procedures are properly followed). The second is described as

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being ‘for information only’, perhaps with the proviso that changes to this category would not be treated as a variation, or just described as other company-provided information, without its precise status being specified. 2.15 Although an arrangement of this type provides some comfort to the FP Contractor, it should be noted that, by isolating specific rely upon information in this way, the FP Contractor is accepting that other information and design provided by the Company will be at the FP Contractor’s risk. Given that the whole purpose of the design and information being provided by the Company is for the FP Contractor to rely on it in the development of its design, there is clearly a risk that information not included in the definition of rely upon information may have a detrimental effect on the FP Contractor’s performance, without remedy. To avoid this risk, the FP Contractor may ask the Company to warrant the accuracy of all information it provides, at least to the extent of requiring changes beyond the normal expectation of the design development process. However, the Company rarely agrees to provide such warranty – the consequence of this would be that any material inaccuracy would constitute a breach of the Company’s warranty, entitling the FP Contractor to recover its loss on a normal damages basis. The Company would not wish to expose itself to this liability. 2.16 If design and information is provided by the Company without there being any agreed mechanism in the variation regime for identifying rely upon information, or without a warranty of the accuracy of the information, what would the FP Contractor’s remedy be if material defects in such design and information are discovered?

(a) Illustration 1 – off-spec hydrocarbons

2.17 The scenario: The basis of design includes an analysis of the characteristics of the reservoir hydrocarbons. The FP Contractor provides an FPSO designed to process hydrocarbons with these characteristics, which then fails to achieve the required processing targets. The FP Contractor alleges that the reason for the shortfall is an alteration in the characteristics of the actual hydrocarbons produced, compared to those described in the basis of design. 2.18 The issues/arguments that might arise: This would give rise to disputes of a technical nature concerning whether the hydrocarbons are truly outside the design parameters, and whether, even if the hydrocarbons are off-spec, this is the cause of the shortfall. The Company would usually require the FP Contractor to prove that if the hydrocarbons had been within spec, the design would have been sufficient to achieve the target production. However, the important legal issue here is whether, by including the hydrocarbon characteristics in the basis of design, the Company has warranted their accuracy, or accepted responsibility if the actual hydrocarbon characteristics are different. As noted earlier, it is rare for an explicit warranty of the accuracy of the Company-provided information to be given. The Company would argue that in the absence of any explicit warranty, no implied warranty may be assumed. The information has been provided in good faith, and represents the Company’s knowledge at the relevant time, but no promise has been given that the actual hydrocarbons will match entirely the characteristics shown. 2.19 The FP Contractor would nevertheless argue that as the characteristics have been included in the basis of design, it should not be penalised for the consequences of the work to be performed being different from its contractual scope of work. The Company would counter with an argument that all that is needed is for the FP Contractor to provide

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an FPSO capable of achieving the specified target levels of production, and it has failed to do so. Until it does so, the charter does not commence. 2.20 The conundrum faced by the FP Contractor in this situation is as follows. Even if the FP Contractor is successful in its variation argument, the variation provisions would not explicitly compensate the FP Contractor for the consequences of its inability to achieve the target production and the commencement of charter day rates. Further, the FP Contractor’s entitlement to additional compensation and schedule extension under the variation provisions may be limited if the FP Contractor has not followed the charter procedures, which require notice of a claim for a variation before work is performed.8 2.21 The FP Contractor’s difficulties may be compounded if the information concerning hydrocarbon characteristics has been provided by the Company but does not form part of the basis of design. Without a warranty of accuracy or other explicit provision, it may be less easy for the FP Contractor to establish its entitlement to a contractual variation, as there has been no change to the basis of design from which its scope of work is derived. The Company’s argument would be that the information has been provided in good faith, and in the absence of any specific contractual provision, the FP Contractor takes the risk that the actual hydrocarbons may differ. 2.22 The solution: Clearly, the consequences of changes in the hydrocarbon characteristics should be covered in a specific charter clause. This would often provide that where particular characteristics vary beyond a margin of tolerance, the FP Contractor is entitled to a variation order. However, as mentioned, this may not be sufficient for the FP Contractor if the deficiency is discovered only late in the day when construction work is complete and acceptance tests are being performed. The more difficult question here is whether the Company would agree in the charter terms that, if the variation to hydrocarbon characteristics can be proven at the acceptance stage, the acceptance tests may be deemed to have been successfully achieved, even if performance falls short of target. It is unlikely the Company would agree this, and thereby accept the risk of an underperforming FPSO. However, the Company may be willing to agree that the modifications required to the FPSO in order to process the actual hydrocarbons to the level required for passing acceptance tests should be treated as a variation order, notwithstanding non-compliance with the variation procedure (i.e. the charter notice deadlines have been missed). The FP Contractor would wish to ensure that such a variation order compensates it for all its loss incurred as a consequence, including standby time occurring before the commencement of the charter.

(b) Illustration 2 – weather loading windows

2.23 The scenario: The Company’s functional requirements specify the weather conditions within which the FPSO must be capable of offloading product to an offtake vessel. This is a vital aspect of the design. If the storage capacity has been calculated on the assumption of regular offloading without delays due to bad weather, there is a risk of storage tanks becoming full, leading to suspension of production, if the prevailing weather conditions at site are worse than contemplated in the functional requirements. The vessel may have successfully passed offloading tests, but subsequently may be prevented from offloading as planned due to weather conditions being worse than anticipated. 2.24

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The issues/arguments that might arise: In such case, the Company may refuse to pay the FP Contractor for periods of non-production caused by storage tanks becoming full, on the basis that suspension of production falls within FP Contractor’s responsibility. The FP Contractor will insist on payment, arguing that if the weather at the FPSO site is frequently worse than contemplated in the design requirement, the delay caused by bad weather should be treated as the Company’s inability to provide an offtake vessel on time, and not as the FP Contractor’s failure to perform offloading. 2.25 The solution: The outcome of the dispute may turn on whether the FP Contractor has committed to achieving continuous production only within the design parameters of the functional requirements, or to achieving continuous production in the actual conditions prevailing at the FPSO site. This topic is covered in more detail in dealing with the FP Contractor’s fitness for purpose obligations.9

(c) Illustration 3 – design assumptions

2.26 The scenario: As mentioned, the preliminary design or FEED may be based on various estimates, calculations and other assumptions, to be verified by the FP Contractor during the design development process. A key assumption in the development of a floating production system is the centre of gravity (COG) of the unit topsides, which is essential to the stability of the vessel. The COG may vary according to the height, weight and layout of the topside equipment to be added to the vessel hull. The design may have been well-developed, with long lead items of procurement already designed and ordered, before it becomes apparent that the assumption on which the COG has been based is incorrect. This may have anticipated a lower height, weight and distribution of topsides than the FP Contractor determines is necessary to achieve the level of production required for processing the hydrocarbons with the characteristics shown in the basis of design. The miscalculation of the COG may have an effect on the overall stability of the vessel, but also may affect the operating parameters of the equipment to be installed. 2.27 The issues/arguments that might arise: The Company would argue that the design of topsides equipment to meet the estimated COG falls within the responsibility of the FP Contractor. This may be correct to the extent of available choices in design and layout. However, the FP Contractor may argue that whatever design is chosen, the functional requirements of the charter cannot be met due to the hull being insufficient to bear the weight and volume of processing equipment required to achieve the target volume production. 2.28 The solution: To overcome this difficulty, it may be necessary to increase the size of the hull, which would obviously be a major departure from the intended scope of work, with substantial delay and additional costs. Alternatively, stability may be improved by increasing the capacity of ballast storage, with a proportionate reduction in the capacity of cargo storage. The consequence of this would be failure to achieve one of the essential functional requirements of the unit; reduced storage may have a direct effect on the ability of the FPSO to achieve continuous production of the target volume. The third solution may be a total redesign of the topsides, equipment and materials to be used, which inevitably would have a major effect on costs and schedule, with the added

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uncertainty of whether the design changes would be sufficient to meet the requirements of the basis of the design. 2.29 This leads us to the second major legal issue. In the event of changes to the preliminary design or FEED being required in order to meet the requirements of the functional specification: how is responsibility for changes to basis of design allocated in a typical FPSO charter?

D Changes to basis of design

(i) Changes – some issues and illustrations

2.30 As mentioned in Illustration 3, the inherent limitations in a floating production design development relating to weight, height, layout and stability may require changes to the basis of design or other technical requirements imposed by the FPSO charter terms. There may be more than one proposed technical solution. Without the certainty that any of the proposed solutions will achieve entirely what is required, often a substantial period of design reassessment occurs before an acceptable solution is adopted. In such a case, the question arises whether the FP Contractor is entitled under typical FPSO charter terms to put on hold the design development process pending such reassessment. In many instances, such a suspension would be advisable from the viewpoint of wasted costs; in Illustration 3, long lead items had already been ordered before the design had been completed. A suspension may also be desirable to minimise delay to the overall schedule. If work proceeds before the design is complete, the time taken for rework may be greater than if the work had paused pending the completion of design. 2.31 The FP Contractor’s entitlement to suspend the work pending a design reassessment may be included in the detail of the charter terms. However, assuming the point is not specifically addressed, the question arises whether the FP Contractor would be in breach by suspending work. The Company, which may be anxious to ensure that work is completed as quickly as possible, may complain that the suspension is in breach of the FP Contractor’s obligation to proceed with the work with all due despatch. The charter terms would usually include a provision whereby, following notice by the Company, failure to continue the work with due diligence may lead to termination. However, the FP Contractor would argue that in suspending work until the design is reassessed and completed, it is indeed proceeding with all due diligence. Quite apart from any argument that responsibility for the defect which requires the design reassessment flows from the preliminary design, the charter does not give the Company the authority to order the sequence in which work is performed. Rather, the charter would ordinarily impose liquidated damages for failure to meet target completion dates with the risk of termination if agreed deadlines are not then met. Thus, it is the FP Contractor’s responsibility to determine how best to achieve those target dates and deadlines in order to avoid the burden of liquidated damages or termination. 2.32 The more difficult question may be to determine the FP Contractor’s entitlement to insist on making a change to the basis of design. The Company’s rights to impose changes are dealt with in concerning contractual variation procedures.10 Such

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procedures would normally include the FP Contractor’s right to request the Company to agree a variation with additional compensation and schedule extension if it considers there has been a change to the scope of work. However, the charter terms would not ordinarily entitle the FP Contractor to impose upon the Company a change to the basis of design without the Company’s consent. In the circumstances we have described, where a change to the basis of design is required to ‘cure’ the FP Contractor’s inability to complete the design to meet the contract requirements, it would not be surprising if the Company were to insist that those contract requirements remain un-amended, and the FP Contractor continue with its efforts to complete the design in order to meet those requirements. 2.33 The FP Contractor is then left with the difficult task of establishing, to the Company’s satisfaction, that the design cannot be completed to meet the contract requirements, as distinct from establishing that the design can only be completed with substantial additional cost and delay. Therefore, in the absence of favourable contract terms, the FP Contractor is normally left with the burden of negotiating changes to the basis of design in return for changes to the charter commercial terms, with a view to achieving an outcome less costly than the consequences of recommencing the design.

(a) Illustration 4 – insufficient buoyancy

2.34 The scenario: The Company-produced FEED defined the hull as a semi-submersible platform of a particular size, onto which various specified topsides equipment was to be installed; it also specified a minimum deck load requirement. The FP Contractor accepted responsibility to complete the design to achieve the charter specification and subcontracted remaining design work to its construction subcontractor. The construction subcontractor calculated that the semi-submersible hull had insufficient buoyancy to carry the specified equipment and achieve the minimum deck load. It therefore proceeded to undertake major changes to the design, incurring substantial additional time and costs, for which it held the FP Contractor responsible. 2.35 The outcome: The FP Contractor was unable to hold the Company responsible for producing a preliminary design which was incapable of being achieved, as it had accepted full responsibility for that design in the charter terms.

(b) Illustration 5 – relaxation of design requirements

2.36 The scenario: The charter technical requirements imposed detailed specifications concerning the thickness of hull steel for two FPSOs undergoing conversions from tankers. The oil company wanted to ensure that each FPSO was capable of continuous operations at the field for a minimum of 20 years, without dry docking. It included in the specification its standard for minimum hull steel thickness for a 20-year charter. The two tankers chosen for conversion had suffered pitting to cargo tanks, with reduced steel plate thickness in certain areas. The vessels nonetheless achieved the highest classification standard, which the FP Contractor considered was sufficient for the Company’s purposes and due to the as-built thickness of steel plate, had substantial residual thickness notwithstanding the pitting. 2.37 The FP Contractor proposed to the Company that the work should be performed in accordance with a specification for steel renewals which was sufficient to achieve the charter objectives of 20 years’ life of field without dry docking, even though the steel plate renewals fell short of those required to comply with the Company’s standard. The

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Company rejected the proposed modifications on the ground that its charter requirements were clear, and should be adhered to, regardless of whether these were greater than required to achieve the technical objectives. The Company further reserved its right to impose substantial liquidated damages if the work was not performed without delay. 2.38 The outcome: As a consequence, the FP Contractor instructed its construction subcontractor to perform the substantial steel renewal works in accordance with the Company’s contractual standard, incurring considerable costs in excess of what it considered necessary, in order to avoid the consequences of further schedule delay and the risk of termination by the Company.

(ii) Charter amendments

2.39 In each of the preceding illustrations, the FP Contractor’s preferred method of recourse was to place responsibility for design changes on its subcontractor, rather than to confront its Company client to accept responsibility for those changes. This is understandable in the commercial context. The Contractor has a long-term relationship with its Company client, and a short-term relationship with its construction subcontractor. Also, it is often the case that an FP Contractor under a charter faces a heavy burden for the risks of design development, which it then passes to its subcontractor under the construction subcontract, each being a turnkey contract whereby design risk, in the absence of any provision to the contrary, rests with the respective contractor.11 Additional reasons are as follows:

• The FP Contractor’s obligation under typical FPSO charter terms, whether that be a conventional time charter, a lease or an operating agreement imposing the obligation to procure a vessel, is conditional upon it providing an FPSO which meets the specification requirements; it is not simply a services, or O&M, agreement whereby a contractor is remunerated for the services it provides. As a consequence, unless the FPSO meets the acceptance requirements, the charter period does not commence.
• In the event of delay in achieving the turnkey obligations, the FP Contractor faces substantial penalties in the form of liquidated damages or, in a worst-case scenario, termination. Therefore, insofar as there is uncertainty as to the appropriate method of achieving requirements of the basis of design, the burden of delay caused by design uncertainty and the need for a reassessment requiring the Company’s consent rests on the FP Contractor. Inevitably, to avoid delay caused by design uncertainty, the FP Contractor may choose to adopt the more expensive option to mitigate the risk of liquidated damages, or worse, termination.
• The FP Contractor may consider that the Company should consent to changes in the basis of design or relax its specification requirements in accordance with a duty of good faith. This duty is considered in more detail in but in short, English law does not impose such duty where the contract contains detailed terms governing the subject of the potential dispute. In typical charter terms, the contract contains sophisticated provisions concerning variations to the work, as discussed in Sections J, K and L and in .

2.40

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As a consequence, in the absence of obvious errors in the basis of design requiring the Company’s rectification, or the Company’s willingness to reconsider the basis of design, the FP Contractor is usually left with the difficult choice of negotiating contract amendments, with adjustments to the charter commercial terms, in preference to risking the consequences of proceeding with performance of the charter with an unamended basis of design.

(iii) Charter notice requirements

2.41 The third major legal issue arising is the usual requirement under a charterparty for the consequences of changes to the basis of design to be notified promptly. As set out earlier, it is normally the case that although the FP Contractor under the terms of the charter takes on EPIC responsibilities, it will subcontract a substantial part, if not all, of that responsibility to a third party. Defects in the basis of design may not become apparent until a late stage in the development of the design, possibly following procurement of long lead items. The construction subcontractor may raise claims based on the terms of the subcontract, which the FP Contractor may wish to reject. As the main focus of work activities at that time would be the performance by the subcontractor, the ultimate consequence of its underperformance may be the FP Contractor’s failure to deliver the work to the Company’s satisfaction on time and in accordance with the FPSO charter. Therefore, it would be natural for the FP Contractor to reject its subcontractor’s claims for additional costs and schedule extension and to insist on expedited completion. However, in so doing, it is important that the FP Contractor should have an eye on its potential remedies under the FPSO charter. 2.42 Although the FP Contractor may dispute its subcontractor’s claims, these should nevertheless be notified to the Company in accordance with the notice requirements of the charter as though they were valid, in order that the FP Contractor may reserve its right to claim additional costs and schedule extension under the FPSO charter terms, in the event that the subcontractor successfully establishes its entitlement. 2.43 Under English law this ‘back-to-back’ method of contract management is well-understood. The FP Contractor, being piggy in the middle, is entitled to dispute its sub-contractor’s claims for additional costs and schedule extension, whilst at the same time relying on its subcontractor’s claim as grounds for an equivalent compensation under the charter terms.12 2.44 Failure to meet the charter notice deadlines may be fatal to the FP Contractor’s claim for an indemnity from the Company for the costs that the FP Contractor has suffered under its subcontract with the construction subcontractor. Thus, if the construction subcontractor continues to pursue its claims for additional costs, and ultimately succeeds against the FP Contractor, due to changes in the basis of design that are the Company’s responsibility under the charter, the FP Contractor may risk the loss of its rights to compensation under the charter, even though its liability to the subcontractor is caused by the Company. Therefore, the charter notice provisions require close scrutiny. 2.45

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If the notice provision says clearly that late notification is a bar to a claim, that would be construed as an effective exclusion. However, in the context of a failure to give timely notice of a defect under a warranty clause, there is authority for the view that, without such clear wording, such failure should not bar a claim but should rather sound in damages.13 If a valid claim is notified to the Company late, but it is aware already of the variation and is expecting to receive a claim, it is difficult to see what loss the Company may suffer due to late notification. 2.46 It is important also for the FP Contractor to meet the notice requirements in order to avoid exposure to liquidated damages for late arrival and completion at the FPSO site. If the FP Contractor is late, liquidated damages may be payable even though the reason for lateness is delay caused by changes to the Company’s basis of design, unless the dates for arrival and completion have been postponed in accordance with the charter procedures. Again, these will require adequate and timely notices to be given. Note these are not the notices of expected date of arrival; compliance with these notice provisions is covered in concerning installation and acceptance. The provisions relevant to postponement for design changes would ordinarily require notice to be given before work is performed, often months or years before the intended arrival date. 2.47 There may be more flexibility in the notice provisions concerning causes of delay than found in those concerning claims for additional costs. If the delivery terms under the construction subcontract and the charter are truly back-to-back, any delay in performance of the subcontract would automatically entitle the FP Contractor to an equivalent postponement of the charter arrival and completion dates, unless the causes of delay are attributable to the FP Contractor. If delay is caused by design changes, technically the delay under the subcontract would be attributable to the FP Contractor, as this is its responsibility under that contract, even though under the charter it may be the Company’s responsibility. However, it would be a perverse reading of those charter terms if the FP Contractor is not entitled to a postponement of delivery under the charter for subcontract delay caused by reasons attributable to the Company, on the grounds that those reasons are attributable to FP Contractor under the construction subcontract. 2.48 Nevertheless, such an outcome is possible if the charter and subcontract terms are not entirely back-to-back, which is usually the case. Thus, the FP Contractor takes the risk under the charter of the subcontractor’s delay and the burden to prove under the charter terms that the subcontractor’s delay is caused by changes to the Company’s basis of design. The practical difficulties here are obvious; the FP Contractor may face what it considers to be exaggerated claims for delay from its subcontractor. Notwithstanding, it is vital for such claims to be addressed to the Company under the charter to comply with the notice provisions. The legal difficulty is then for the FP Contractor to meet whatever standard is required under the charter to justify a postponement to the full extent of actual delay incurred; if the FP Contractor successfully demonstrates under the subcontract that only part of the delay is caused by changes to the basis of design, it follows that the FP Contractor cannot justify the full extent of the postponement it seeks under the charter. 2.49 To avoid this potential conundrum, the FP Contractor would often seek to negotiate in the charter terms a more generous entitlement for extension of time than it allows to its

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construction subcontractor. For example, under the construction subcontract, the contractor may be obliged to prove that the delay was caused entirely by the design changes, and also prove the extent of delay through a critical path analysis – i.e. to show the change to the work affected the progress of critical items of work which in turn had a direct effect on the date of completion. In contrast, under the charter, the FP Contractor may be entitled to a reasonable extension of time if it can establish that delay has been caused by the design changes. In other words, the FP Contractor avoids taking the same burden of proof under the charter as it imposes on its subcontractor. Where the delivery terms are not back-to-back, this may be a sensible compromise between the Company’s wish to impose responsibility on the FP Contractor for delay caused by its subcontractors, and the FP Contractor’s wish to avoid liability for delays outside its control.

E Design integration

2.50 A particular feature of developments in floating production is the integration of processing and ancillary plant onto a vessel hull: oil and gas technology combined with conventional marine engineering. This presents two principal concerns: one is the integration of contrasting philosophies into an overall FPSO design, and the other the procedure for installation of topsides on to the hull. 2.51 Technical issues are described in , Part (iv) (Technical definition and design phases). The legal issues relevant to design development concern allocation of responsibility between the various parties involved.

(i) Allocation of design risk

2.52 The various parties involved in design development may include:

• The Company who produces the original basis of design and the engineering product such as FEED and any design subcontractor appointed by it;
• The FP Contractor who is responsible to develop that design under the charter terms, and any design subcontractor appointed by it;
• Vendors and manufacturers of major equipment;
• The designers and suppliers of specialist mooring equipment such as turrets and swivels;
• The fabricators responsible for delivery of topsides modules (which may not be delivered under EPIC terms);
• The shipyard responsible for the fabrication or conversion of the hull;
• The shipyard responsible for the integration of topsides equipment on to the hull;
• The shipyard (in the case of an EPIC contract) with overall responsibility to deliver a fully functioning FPSO;
• Owners or licensees of intellectual property in the design.

2.53 If the overall design is defective, which of these parties is contractually liable? Obviously, who may be liable from a technical viewpoint is factually important, but this does not determine legal responsibility. The legal starting position, as always, is whether the FP Contractor takes turnkey EPIC responsibility under the FPSO charter. If it does,

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it is liable to the extent it cannot transfer or apportion such liability under the charter terms or any related subcontract. 2.54 The FP Contractor’s responsibility as EPIC contractor under the charter terms is referred to in paragraph 2.5; the questions to be considered here are the extent to which the FP Contractor may have transferred all or part of that responsibility under subcon-tract terms, and, if responsibility is passed to more than one subcontractor, where does responsibility rest for integration between the work of each subcontractor? 2.55 For example, topsides design may be subcontracted to a specialist oil and gas process designer, turret and mooring systems to a specialist contractor, and the hull to a construction or conversion yard, which may in some cases also be responsible for delivering a fully functioning FPSO. The turnkey nature of the construction yard’s delivery obligations may indicate it takes overall responsibility for integrating the design of hull, topsides and mooring systems. This may be so. However, if the construction subcontractor’s responsibility is to complete a preliminary design provided by the FP Contractor, including the topsides and mooring design, the subcontractor may be entitled to insist that liability for any error in that design remains with FP Contractor. In the example given in Illustration 3, the misplaced COG may have been due to an error in the topsides design, wrongly influencing the hull stability and mooring requirements to be determined by the other specialist subcontractors. The error may have become evident only in design development undertaken by the subcontractor. Its claim for rectification of the error and for its consequences would be made not under any contract between it and the topsides designer – no such contract exists – but against its FP Contractor client.14 2.56 To mitigate the risk of the topsides design not being compatible with the hull and mooring design, the FP Contractor may wish to undertake substantial design development itself, taking some or all of the integration responsibility. However, unless the FP Contractor has experience of the hull and mooring design development, it may prefer to require the construction subcontractor to verify the preliminary design, including top-sides and mooring systems, and to take responsibility for errors that may subsequently be discovered. This is a contentious topic covered in more detail in the text on offshore construction,15 but in short, the subcontractor may be reluctant to take on responsibility for verifying the absence of errors in the preliminary design if it may be expected such errors would not become apparent until a substantial degree of detailed engineering has been performed. In Illustration 3, the true extent of the error did not become apparent until contracts for long lead items had already been placed.

(ii) Separate hull and topsides yards

2.57 Another particular feature of the design of FPSOs and similar vessels is the prospect of the hull being fabricated or converted at one shipyard and removed to a second shipyard for the installation of topsides equipment. The reason for this may be that the cost of fabricating or converting the hull in one yard is cheaper than the vessel being built

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at the yard installing the topsides equipment and delivering a fully functioning FPSO. It may be the hull construction yard lacks the relevant expertise to handle the topside scope. Often the decision is driven by a requirement for a certain quantity of work to comply with local content rules, in order to transfer skills and provide employment in the location where the FPSO is to be operated. Splitting construction work in this way gives rise to particular legal difficulties concerning delivery and acceptance which are covered in . The legal issues relevant to design in these circumstances may be illustrated as follows.

(a) Illustration 6 – interface design

2.58 The scenario: The FPSO design was developed in the usual way from a basis of design to a detailed specification. During design development, a shipyard in Singapore was contracted to build the hull and accommodation, and to complete the marine engineering design, and a yard in Norway was selected to install the topsides equipment. Those parts of the specification concerning installation of topsides equipment were incorporated into the scope of work of the Norwegian yard. Following completion of the hull and accommodation in Singapore, the vessel was transferred to Norway for completion, requiring delivery on location at the North Sea field. A number of difficulties were encountered, including the fact that the work performed in Singapore was found to be inadequate for the purpose of installation of topsides as contemplated in the specification agreement with the Norwegian yard. In short, the detailed design required for the adequate installation of the topsides on the hull structure fell between the gaps of the two design development processes, one being for the marine systems in Singapore, and the other for the oil and gas systems in Norway. This issue formed part of a larger dispute concerning the compliance of the FPSO with Norwegian regulatory standards, which is covered in more detail in the case study in .16

(b) Illustration 7 – handover design

2.59 The scenario: The FPSO’s hull and accommodation block were completed in Korea and transferred to the North Atlantic for installation by a yard operating under local content requirements. The topsides design included stainless steel piping for the fire water safety system. The design anticipated the removal of sections of the fire water system delivered with the hull in order for installation and integration of the topsides equipment and connecting pipework. Therefore, the hull firewater system design incorporated sections of temporary piping which, to save cost, used only carbon steel. During the installation and integration work, it was discovered that the interaction of saltwater with the temporary carbon steel had caused corrosion which then caused damage and blockages in the components of the firewater system, such as deluge nozzles and valves. The rectification work was performed by the local content yard, at a far greater expense than if the work had been performed in Korea. The desire to save cost for a temporary element of the hull scope meant that the overall project cost was increased significantly.

F

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Location

2.60 We consider in the role of warranties of fitness for both general and particular purposes.17 A typical FPSO charter contains a number of specific warranties that, although not labelled as fitness for purpose, may nevertheless fall into that category, the most common being those concerning the place of operations. 2.61 The FP Contractor may be required to warrant the FPSO is capable of operating at the designated location, often identified by reference to the block in a particular field. The FP Contractor would wish to avoid giving a warranty that extends further than compliance with the requirements of the basis of design; for reasons mentioned in paragraph 2.3, the obligation to ensure the basis of design is suitable for the particular requirements at the location would usually rest on the Company. This would contrast with the FP Contractor’s obligation to comply with the basis of design in order to ensure the FPSO is capable of operating at the location. An obligation of this nature would place on the FP Contractor the burden of filling gaps in the basis of design to achieve its objectives, but not to change the basis of design to make it fit for purpose. 2.62 The location provisions may include the possibility of the FPSO being relocated to a field outside the designated block. These relocation provisions are rarely anything more than an agreement to agree – not enforceable obligations. The parties may be obliged to discuss terms for relocation in good faith, but an obligation to agree cannot be extrapolated from a duty to negotiate; in each case, neither party is obliged to put the commercial interests of the other party ahead of its own. 2.63 The allocation of responsibility for ensuring the location is in all aspects safe and suitable for the FPSO operations may be controversial. It is the Company’s location, and it may be assumed that the Company knows all that is needed about its safety and suitability; the duty placed on the FP Contractor is usually to acquaint itself with the site conditions, the point being that the FP Contractor should not be able to claim a variation order or other compensation for the consequences of unfavourable site conditions if those conditions could have been discovered and suitable provision for them being incorporated into the FPSO design. 2.64 In performing its due diligence, the FP Contractor may take account of information provided by the Company, for example its survey report of seabed conditions. To minimise risk of disputes, it is important any such report or information be categorised either as for information only or rely upon information, for the reasons described in Section C. 2.65 The obligation to prepare the site ready for FPSO operations would usually rest with the Company, including preparation of the wellheads, and obtaining all required authorisations and permits for FPSO operations at the site. The FP Contractor’s obligations concerning permits and authorisations at the site would usually relate to its own performance, and that of its subcontractors, in order to comply with local law requirements. As there may be overlap between permits required for operations at the site and for the FP Contractor’s performance, it would be usual to provide that one party is obliged to obtain all authorisations that may be required at the FPSO site except those specifically identified as being the other party’s responsibility.

G

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Compliance with local regulations

(i) General

2.66 The intended location of operation of the FPSO is normally known when the charter and related subcontracts are agreed. Indeed, the whole purpose of the FPSO design is to exploit a nominated field. The FPSO will be required to comply with normal maritime regulatory standards, but, as it operates as an oilfield installation, it will be required also to meet the standards applicable in that jurisdiction, which can extend to matters of fiscal metering, safety and maritime compliance. Compliance is determined by a local inspector or series of inspectors appointed on behalf of the oil and gas state. For example, in Norway, the PSA (Petroleum Safety Authority) has the overarching responsibility for safety in the petroleum industries, but it depends on the NMA (Norwegian Maritime Authority) for marine matters and the DSB (Directorate for Civil Protection) for electrical safety matters. It is usually a condition of the FPSO charter obligations that the FP Contractor should ensure that the FPSO is fully certified by the local inspectorate(s). Satisfying the requirements of the inspectorate may be difficult from a technical viewpoint and may give rise to a number of legal difficulties, including the following. 2.67 A frequent difficulty encountered in the design development process is the subjective nature of the inspector’s authority. Those conversant with regulatory requirements in shipping and shipbuilding are familiar with the approach taken by classification societies. These will certify compliance with their own rules, and, where appointed by the flag state, compliance with international regulations. During the construction and testing process, a classification representative will be asked to attend and certify that the rules and regulations have been met. This will of course depend on the adequacy of the work performed, and the suitability of design. Those involved in the design will be familiar with the classification and international regulatory requirements and will be able to incorporate these into the design as needed. The classification representative will be asked to approve the design. That approval would ordinarily be sufficient for procurement and construction to proceed in the knowledge that, provided the work complies with the approved design, the work will be duly certified. 2.68 However, where certification as an oil and gas installation is required, the process is less certain. In some jurisdictions, the only formal contact is between the oil company and the state regulators and the FP Contractor cannot control formal direct communications with the regulators. During the design process, the inspectorate may be willing to indicate its preferences and may require changes to the design to ensure, in particular, that its safety requirements are met. The classification representative may also, when approving the design, indicate whether, in its view, it would be acceptable to the inspectorate. But such an indication can be unsafe to rely on, as it is not until the later inspection (after the work has been performed) that the test of whether the FPSO design does satisfy the requirements of the inspectorate is made. If the inspection is at the shipyard, changes may be made there by the construction contractor, although these may require expensive rework and schedule delays (and there is always the prospect of a dispute over responsibility). The extent of these consequences will be even greater if the work is performed in the hull construction yard but rejected at the topsides installation

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yard by the local inspector.18 The worst case would be if the work is rejected when the FPSO arrives in the country of production or at the oilfield. 2.69 In accordance with its turnkey obligations under the FPSO charter, responsibility for ensuring acceptance by the inspectorate, and the consequences of rejection, would normally rest on the FP Contractor; until such acceptance is given, the FPSO charter period does not commence. The FP Contractor may have subcontracted elements of design to a construction subcontractor, whom it may expect has the relevant experience of previous work to anticipate the requirements of the inspectorate. Whether the FP Contractor in fact has more experience of the local requirements than the construction yard will of course depend on the parties involved, but it is clearly important at the outset to determine which party is to take a leading role in determining the requirements of the inspectorate(s), in order to avoid unpleasant late surprises. 2.70 Although the FP Contractor may have ultimate responsibility to ensure compliance with requirements of any relevant inspectorate, the relationship with the inspectorate usually rests with the Company, the charterer under the FPSO agreement, being also the operator, or agent of the operator of the oil and gas field being certified. The operator has to ensure and demonstrate that the oil and gas operations as a whole are safe and compliant, not just the design of the FPSO. Therefore, the FP Contractor’s interests are best served not just by having good communication between it and its subcontractors concerning the requirements of the inspectorate, but also in ensuring a similar degree of co-operation between its Company client and those involved in the design development process.

(ii) Flaring 19

2.71 The local regulations may also concern restrictions relating to flaring of gas produced from the well. This has always been a controversial issue. In the early days of offshore oil and gas production, a large proportion of the produced gas was often flared. That is obviously not currently acceptable, with the possibility that for future operations, gas flaring will be prohibited other than for emergency cases. The responsibility for mini-mising the flaring of excess gas rests primarily with the Company, under the terms of its development licence. The Company would seek to transfer some of this responsibility to the FP Contractor under the terms of the FPSO charter. Few locations allow the FP Contractor access to a gas pipeline which would receive all produced gas. There may be a requirement in the basis of design to reinject gas into the well. Some of the gas may be used for production of energy for the FPSO machinery, although it should of course be noted that the exact volume of gas to be received from the well would be difficult to predict and will vary over time. If an FPSO currently in operation does not have sufficient characteristics to allow it to achieve continuous production without resorting to flaring, it is likely, in order to achieve future carbon emission targets, that substantial modifications to the FPSO will be required. 2.72

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If the basis of design does include characteristics capable of managing produced gas without the need for continuous flaring, the Company may introduce a zero flaring philosophy. What exactly this contains will vary and can often be no more than a statement of wishes rather than firm commitment. The FP Contractor would usually be required to acknowledge the philosophy, and perhaps agree that it should be implemented in full. However, it is currently rare for the FP Contractor to undertake a contractual obligation to achieve zero flaring targets. Thus, the FP Contractor’s obligation may be no more than an agreement to agree, or a statement of intent rather than a contractual obligation.

(a) Illustration 8 – flaring

2.73 The FP Contractor agreed to implement the Company zero flaring philosophy. However, gas flaring could not be avoided during periods of processing shutdown required for repair or maintenance. The FPSO required substantial ongoing maintenance work, due to repeated failures of equipment. The FP Contractor did all it could to repair the equipment as quickly as possible, and to introduce additional preventative maintenance measures. However, in so doing, frequent periods of shutdown were required, leading to gas flaring. The Company complained this was in breach of the FP Contractor’s zero flaring obligations. The FP Contractor rejected the claim on the grounds that the relevant obligation was to ensure that all repair and maintenance work was undertaken as quickly as possible. In performing that obligation with due diligence, the FP Contractor could not be said to be in breach, as a consequence, of the zero flaring philosophy. 2.74 Going forward, it is foreseeable that the FP Contractor may be under more precise obligations relating to elimination of flaring. However, if such commitments are made, they would obviously need to be dovetailed with the FP Contractor’s obligations relating to repair and maintenance, and the capability of the FPSO as described in the basis of design.

H Design changes of necessity

(i) Variation requests

2.75 Once the FP Contractor becomes aware of a change to the Company-provided design or the need for a change, it is usually required under the contractual variation mechanism in the charter agreement to give a suitable notice to the Company. This may be described as a variation request or change order request and mirrors the variation mechanism found in typical EPC/EPIC contracts.20 Incorporating into the charter variation procedures similar to those found in construction contracts is helpful to the extent that, in this way, changes occurring under both the construction contract and the FPSO charter may be kept in step. If the same procedure is followed in both the construction contract and the charter, this may make it easier for the FP Contractor to keep track of the relevant changes for the purpose of its claim for additional time and costs under the FPSO charter. However, once the variation procedure is invoked, it usually follows the same mechanism for adjusting the contract terms applicable to changes introduced by

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the Company. Following service of an instruction or request by the Company, the FP Contractor is obliged to make a proposal containing details of the change, expected cost and time, and other consequences of the proposed change. This follows the normal offer and acceptance procedure which would apply to any contractual amendment, which would require an agreement in a formal change order document which amends the contract terms. However, it assumes that no change will occur until such agreement, or until such time as the Company instructs the FP Contractor to undertake the changes. Therefore, there is no change until this point is reached, in contrast to an FP Contractor’s request for a variation, where a change has already occurred or is required in order for the work to be performed in accordance with the technical requirements. 2.76 If the construction work to be performed includes conversion of an existing vessel or modifications to an existing FPSO, there may be an added complexity in that the changes may not just be to the design to be followed, but may concern changes to the existing vessel, whether by way of repair or modification to existing condition, structure or equipment. The legal difficulty for the FP Contractor in this scenario is that any variations occurring due to the condition of the existing vessel would arise only under the conversion contract, and not the FPSO charter, as it is the responsibility of the FP Contractor to ensure that the vessel to be converted or modified is fit for purpose. Where there is a mixture of changes occurring due to the Company-provided design and also the FP Contractor-procured vessel, it will obviously be important from the FP Contractor’s viewpoint that the conversion contractor21 should fully articulate the consequences of design changes on the one hand and changes due to the characteristics or condition of the vessel on the other. In contrast, the conversion contractor’s preference may be simply to bundle these into a form of ‘global’ claim, requiring additional time and costs regardless of whether the cause was attributable to the design development or the vessel. A global claim would not suit the FP Contractor’s purposes in being able to pass on claims for additional time and costs arising under the charter due to changes to the Company-provided design. For that reason, the FP Contractor would require the conversion contractor to apply strictly the notice and proposal provisions in the variation mechanism. As this particular difficulty arises under conversion contracts, we have set out in more detail provisions relating to variation requests in .

I Preferential design changes

2.77 We turn now to changes to the design which the Company wishes to introduce. The reasons for the Company wishing to make such changes are many. For example, the Company may wish to increase the FPSO’s production capacity due to the volume of oil being greater than originally anticipated. In the current environment, the Company may wish to introduce changes to maximise fuel efficiency and reduce carbon emissions. Some of these changes may be required in order that the state regulators will grant the Company a license to develop the field. It may be necessary to make provision in the FPSO turret for future electrification by shore power. Produced water which was in the past discharged overboard after clean-up may now require to be injected into

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a dedicated disposal well, and CO2 gas released from the reservoir may also require to be reinjected. Although ideally the change would be introduced before significant detailed design or procurement work is performed, it is not unusual for changes to be introduced at a late stage of the design and construction work. The Company may also wish to make variations to the design during the charter period – we deal with this topic in Section L. 2.78 If the Company wishes to introduce a change, the first question is whether it has the right to do so. Under English law, a change to contract terms cannot be introduced unilaterally.22 If the party wishing to introduce the change has no contractual right to do so, the other party may continue its performance of the contract as-is, even though, in a worst case scenario, the consequence would be that the contract fails to achieve its purpose. Thus, if the design of an FPSO is insufficient to achieve full production at the FPSO site, but the Company does not have the right to oblige the FP Contractor to make changes, the Company would be obliged to take delivery of an inadequate FPSO. 2.79 If the charter requires the parties to agree a change before the FP Contractor is obliged to undertake it, under English law the Company has no right to enforce any changes. To avoid this outcome, the Company may wish to introduce a provision whereby the FP Contractor shall “mutually agree” the proposed variation. However, under English law, no enforceable obligation is created.23 Even the requirement that a party “shall agree” presupposes that the other party reaches the same agreement. Where there is disagreement, for whatever reason, no contractual obligation arises. 2.80 Therefore, for projects of this nature, where change is often inevitable and crucial to the success of the contract, it is normal for the variation terms to allow the Company the right to impose changes without the FP Contractor’s agreement. For example:

When instructed in writing by Company, following receipt of a Variation Request, FP Contractor shall proceed immediately as instructed notwithstanding a Variation Order has not yet been agreed.

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