Offshore Floating Production

Edited by Stuart Beadnall; Simon Moore; Max Lemanski

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CHAPTER 12 Decommissioning

Simon Moore

A Introduction

12.1 Decommissioning projects entail many of the same risks as offshore construction projects, including the risks associated with conducting large and complex operations at sea in varying weather conditions, personal injury, property damage and pollution. However, decommissioning projects also entail some unique challenges and risks, including those associated with:

1. Disposal of a large volume of waste material;
2. Handling and disposal of hazardous materials;
3. Fully identifying the facility, equipment, materials and substances to be removed from the field; and
4. Increased reputational risks.

12.2 This chapter seeks to address these issues through the following further sections:

(B) FPSO decommissioning projects and contracts;
(C) Reputational risks;
(D) International obligations on the decommissioning of offshore installations;
(E) EU Regulations applicable to the decommissioning of offshore installations;
(F) UK domestic legislation and regulations applicable to decommissioning of off-shore installations.

B FPSO decommissioning projects and contracts

12.3 The decommissioning of an offshore field where a FPSO has been deployed will often be undertaken in the following stages:

1. Planning;
2. Cessation of production;
3. Flushing of the risers and subsea pipelines;1
4. The disconnection and removal of the FPSO from the field;
5. Permanent plugging and abandonment of the wells;
6.

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Removal, dismantling and disposal of subsea facilities including Christmas trees, pipelines, wellheads; and
7. Seabed clean up.

12.4 Different work scopes require different expertise and different specialist vessels. Further, different contract forms are typically used for each. Although it would be legally possible to have a single contract to procure all the work required for a decommissioning project, this does not happen in practice.

(i) The disconnection and removal of the FPSO from the field and recycling of the FPSO

12.5 If the FPSO is owned by an FP Contractor and contracted onto the field by the operator then it is likely that the FPSO charter will specify the extent of the FP Contractor’s obligations to remove the FPSO at the end of the contract (or the operator’s obligation to redeliver the FPSO at the end of a bareboat charter). In this context the FP Contractor’s contractual obligations are often referred to as demobilisation (rather than decommissioning) obligations. The demobilisation of the FPSO is however part of the decommissioning of the entire field. 12.6 The FPSO charter will often require a demobilisation plan to be developed to detail the activities, required resources, schedules and responsibilities in order to conduct a safe and timely demobilisation. The FP Contractor may accept the responsibility for the demobilisation of the FPSO including disconnection activities, retrieval of the mooring system, disconnection of the risers and towing the FPSO out of the field. The FP Contractor will procure support for such activities from specialist offshore contractors who own the specialist vessels (including tugs and anchor handlers) necessary to perform the work. 12.7 The Company will often be required to provide the necessary vessels or facilities for receiving any processed oil remaining on board the FPSO. The charter may require the FP Contractor to dispose of the residual slops including those remaining in the oil storage tanks post discharge of the oil cargo. The Company may agree to pay the FP Contractor a lump sum demobilisation fee or to pay for the FPSO’s documented costs of demobilisation to a named place (such as a local port). 12.8 From a UK regulatory perspective, OPRED2 guidance recognises that there may be a requirement to remove an FPSO from a field in advance of the approval of a decommissioning programme (e.g. because the FPSO charter has come to an end before the Company has prepared the decommissioning programme). In these circumstances, removal of the FPSO can be agreed through an exchange of correspondence between the operator and OPRED. This is treated as a partial decommissioning approval. The documentation should detail all decommissioning activity to be undertaken in order to release the FPSO from its offshore operating location and move to the next location. If dismantlement is the most likely end point for the FPSO then the OPRED guidance

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indicates that documentation should also include details of the dismantlement activity and should comply with UK and EU ship recycling/disposal obligations. 12.9 Once the FPSO’s useful life on the relevant field is coming to an end, there will be the question of its next destination. The options often considered include:

1. Refurbishing or upgrading the FPSO in order that it may be redeployed to exploit other opportunities as an FPSO; or
2. Scrapping, dismantling, recycling or decommissioning of the FPSO.

12.10 Sometimes the FPSO will be sold, but the change in ownership does not itself change the options. Sometimes the first option is considered for an extended period before the cost of maintenance and lack of suitable commercial opportunities makes the second option inevitable. 12.11 Conversion, refurbishment and upgrade works are discussed in . Scrapping, dismantling, recycling or decommissioning a FPSO gives rise to its own challenges. The different terminology of ‘scrapping’, ‘dismantling’, ‘recycling’ and ‘decommissioning’ is not intended to indicate a different activity or work scope, but reflects the range of language that is used to describe the same process. ‘Recycling’ is now more commonly used reflecting society’s increased environmental concerns. The language of ‘scrapping’ is reminiscent of the now controversial practice of disposing of ships by beaching them and breaking them up in jurisdictions such as Pakistan, Bangladesh and India, with less rigorous health and safety practices and a failure to protect the environment. 12.12 When a decision is taken to recycle, the FPSO owner (FP Contractor) will want to ensure that it complies with the international, EU (if applicable) and national laws discussed in Sections D, E and F later in this chapter. In accordance with the Ship Recycling Regulation,3 the FPSO should already have on board an inventory of hazardous materials and a ship recycling plan should be prepared prior to recycling. In the North Sea, the FPSO may only be sent for recycling at yards on the approved European List. This may mean that the FPSO owner has limited number of lawful and credible counterparties to bid for and undertake the recycling work. 12.13 Deliberately disposing of a UK flagged FPSO or one which was operating in the UK Sector of the North Sea by transporting the FPSO to jurisdictions such as Pakistan, Bangladesh or India to be beached and broken up would be a breach of UK, EU and international law. The question then arises – what if the owner sells the FPSO to a third party who decides to on-sell the FPSO to a breakage yard in Pakistan, Bangladesh or India for the scrap value of the steel? The risk of this scenario is significant because the breakage yard will pay a substantial sum based on the scrap value of the steel in the hull of the FPSO. In contrast, a European approved yard will likely require payment of a substantial sum to recycle the FPSO. A middleman might seek to take advantage of these pricing differentials and offer to buy the FPSO for a nominal sum. The case of the North Sea Producer FPSO illustrates what can go wrong.

(a)

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Illustration 1 – North Sea Producer FPSO

12.14 The MacCulloch field in UK Central North Sea was developed in 1996/97 and had an expected life of ten years. Production commenced via the North Sea Producer in August 1997. This vessel was owned by the North Sea Production Company (NSPC) (a joint venture between Maersk and Odebrecht). 12.15 The North Sea Producer was disconnected from the MacCulloch field infrastructure in 2015. The works were conducted following an exchange of correspondence agreed with OPRED. Thereafter, the vessel was taken to Teesside by the owners for possible future re-use. The FPSO was then sold in 2016. The FPSO was cleared to leave the UK for further work in Nigeria, but was towed by the buyer to Chittagong, Bangladesh, a place well known for shipbreaking using poor health and safety practices and little (if any) environmental controls. 12.16 The NSPC claimed it had sold the vessel to a third party for redeployment and that it did not know the FPSO would be scrapped in Bangladesh. However, in November 2019 a court in Bangladesh ruled that the import, beaching and shipbreaking of the North Sea Producer in Bangladesh was illegal. 12.17 There are lessons to be learnt from this case. Where an FPSO is being sold ostensibly for future redeployment by a third party then the seller should conduct due diligence on the buyer. If the buyer is not in the business of operating FPSOs, the seller should be particularly wary about proceeding with the proposed sale. The seller may also wish to (i) include an ‘anti-recycling/scrapping’ clause in the sale agreement; (ii) require the buyer to indemnify the seller for all consequences of breach; and (iii) require security for the buyer’s compliance with its obligations. If in any doubt, it should be kept in mind that the reputational risks of the FPSO ending up beached in Bangladesh may outweigh the benefits of the sale. Further, there may be the risk of criminal sanctions on the seller and its officers (including fines and imprisonment) where the vessel is sold to a middleman and then on-sold for scrapping.4

(ii) Well plugging and abandonment

12.18 The plugging and abandoning of wells is a significant part of any decommissioning project and of its total cost. It will typically be performed by drilling contractors using drilling rigs, although some well plugging can be performed by specialist well intervention vessels. The hire of drilling rigs for this work is likely to be done on a drilling contract form such as the IADC offshore form,5 a modified LOGIC drilling contract form6 or the oil company’s/operator’s standard drilling contract form.

(iii) Removal, dismantling and disposal of subsea facilities including Christmas trees, pipelines etc.

12.19 The contracts to remove the physical installations from the field other than the FPSO itself are commonly referred to as decommissioning contracts. 12.20

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There are two standard form decommissioning contracts current at the time of this text: one published by LOGIC in December 2018,7 and a second published by BIMCO in September 2019.8 It remains to be seen whether these contract forms will be widely adopted or whether oil companies will continue to seek to contract on the basis of their own forms (which are often amended EPIC contracts). Both standard forms are drafted for use when decommissioning and removing offshore structures (i.e. topsides, jackets and subsea structures). The LOGIC and BIMCO standard forms are both relatively well balanced, but also contain nuances and important differences, some of which are outlined in the following paragraphs. 12.21 Both forms of contract respect the knock-for-knock risk allocation that is typical in North Sea projects, with the FP Contractor taking the risk of:

1. Personal injury to employees of the Contractor Group;
2. Damage to Contractor Group property;
3. Personal injury and damage to the property of any third party to the extent that any such injury, death or disease or loss or damage is caused by the negligence or breach of duty (whether statutory or otherwise) of the Contractor Group;
4. Pollution emanating from the property of the Contractor Group including Contractor Group’s vessels; and
5. Consequential losses suffered by the Contractor Group.

12.22 Similarly, the Company takes the risk of:

1. Personal injury to employees of Company Group;
2. Damage to Company Group property;
3. Personal injury, death or disease or loss of or damage to the property of any third party to the extent that any such injury, loss or damage is caused by the negligence or breach of duty (whether statutory or otherwise) of a member of the Company Group;
4. Pollution emanating from the property of the Company Group; and
5. Consequential losses suffered by the Company Group.

12.23 One of the biggest risks in an offshore decommissioning project is that the decommissioning contractor contracts on a lump sum basis without a detailed understanding of the facility that it is agreeing to decommission, such that the agreed scope of work and price are based on false premises. 12.24 There can be various reasons for this, including that the Company may not have complete and accurate drawings of the facility which may have been installed a long time ago. Even if the Company has the original drawings, these may not accurately reflect the facility being decommissioned; the facility could have been developed in phases with modules added at a later date and/or modifications made during the life of the field. In addition, the structural integrity of the facility will not be in newbuild condition, given the inevitable wear and tear and corrosion. The question then arises as to whether the

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FP Contractor is entitled to additional compensation. As ever, the answer depends on the terms of the contract signed. 12.25 The BIMCO form provides for two classes of information:

1. ‘Technical Information’: as this is not ‘rely upon’ information, the Company makes no guarantee or warranty, express or implied, as to the correctness, adequacy, sufficiency and consistency of such technical information. The FP Contractor is generally not entitled to any variation order (or other remedy) in relation to any incorrectness, inadequacy, insufficiency or inconsistency in such technical information; and
2. ‘Rely Upon Information’: if the rely upon information is incorrect or inconsistent and has an impact on the “Services”,9 the FP Contractor is entitled to submit a variation order.

12.26 In addition, the BIMCO form provides that if any “Assumption”10 proves to be incorrect, inadequate or inconsistent and has an impact on the Services, the FP Contractor shall be entitled to submit a variation order. 12.27 Under the LOGIC form, the parties “acknowledge” that the scope of the work, the programme and the calculation of the contract price have been based on the Technical Information and the Assumptions being correct. If the Technical Information or Assumptions are not correct and the FP Contractor can show that it has suffered delay or incurred additional costs, then the FP Contractor is entitled to a variation. 12.28 Both the BIMCO and LOGIC forms are drafted to allow the FP Contractor to price based on the information provided by the Company, and, provided the information and assumptions are properly referenced and documented in the final contract, the FP Contractor is likely to have a good claim for additional remuneration where there are differences which give rise to delays and additional costs. In contrast, the oil company contract forms we have reviewed in practice have provided the FP Contractor with considerably less scope to claim a variation.

C Increased reputational risks

12.29 In addition to complying with legal requirements and entering into appropriate contracts for the work, the successful decommissioning project will also have close regard to reputational risks from an early stage. Decommissioning entails the disposal of large amounts of materials, some of which are hazardous, and this can naturally attract significant public attention and therefore the risk of reputational damage. Irrespective of the scientific and legal merits, decommissioning projects will not be successful if the Company’s reputation is damaged as a result. 12.30 The Brent Spar is the case in point. The Brent Spar facility (an oil storage and tanker loading installation) was operated by Shell. Following the end of its useful life,

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in February 1995 the UK Government approved Shell’s decommissioning plan, entailing deep sea disposal of the Brent Spar. The proposed disposal at sea attracted significant public attention and opposition. Greenpeace organised a media campaign and, in April 1995, commenced an occupation of the Brent Spar which continued for more than three weeks. By June 1995, public opinion in northern Europe was strongly opposed to Shell’s plans. Chancellor Kohl of Germany protested about the disposal plans to the then UK Prime Minister John Major at the 21st G7 summit held in Halifax, Nova Scotia. Protesters in Germany boycotted and threatened to damage Shell’s service stations and 50 service stations were subsequently damaged with two being fire-bombed and one attacked in a drive by shooting. 12.31 In view of the public pressure, boycotts and attacks, Shell’s original plans to dispose at sea became untenable. Following Shell’s decision to pursue only on-shore disposal options, the Brent Spar was given temporary moorings in a Norwegian fjord before being recycled. Much of the main structure was used in new harbour facilities, a roll-on/roll-off ferry quay, at Mekjarvik near Stavanger, Norway. 12.32 Shell have acknowledged that “Brent Spar was damaging to [their] reputation” and stated that “despite the support of independent scientists for our proposals, we did not win public acceptance. We recognised that we needed to change our approach – not just to offshore decommissioning in the UK, but to how we conduct our operations everywhere”.11 12.33 The Brent Spar dispute occurred before the coming into force of the Petroleum Act 1998. In the UK, OPRED has now adopted the practice of recommending that nongovernmental organisations (NGOs) are widely consulted before any decommissioning programme is approved. Further, all decommissioning plans are published on the government’s website and OPRED aims to be transparent in its consideration of decommissioning programmes. As a result, OPRED invites members of the public, NGOs, other organisations, and other government departments and agencies to submit comments on proposals set out in decommissioning plans. The increased transparency and greater consultation at an early stage helps mitigate the risk of similar incidents. 12.34 The international, EU and UK legislation and regulations relevant to decommissioning are set out in Sections D, E and F later in this chapter, together with commentary.

D International obligations relevant to the decommissioning of offshore installations

(i) United Nations Convention on the Law of the Sea (UNCLOS)

12.35 UNCLOS was adopted in 198212 and provides that offshore installations which are abandoned or disused shall be removed. Article 60(3) states:

Any installations or structures which are abandoned or disused shall be removed to ensure safety of navigation, taking into account any generally accepted international standards established in this regard by the competent international organisation. Such removal shall also have due regard to fishing, the protection of the marine environment and the rights and duties of

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other States. Appropriate publicity shall be given to the depth, position and dimensions of any installations or structures not entirely removed.

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Offshore Floating Production

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CHAPTER 12

Decommissioning

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