Floating production, storage, and offload-ing (FPSO) vessels are now an estab-lished means of achieving production offshore, proving to be a cost effective alternative to fixed production platforms. Therefore, it is perhaps not surprising that there are now nearly 70 such vessels in operation globally.
However, a concept that was developed for relatively low production levels in benign environments has been stretched, in a very short space of time, to use where high production is expected in increasingly harsher conditions in double quick time.
That time pressure, coupled with the relative imbalance in contract negotiations, has given rise to a number of problems, with many risks being assumed by parties least able to manage them.
The procurement of an FPSO is a unique project. There are no "off the shelf" vessels that can meet the exact needs of a particular operator for a particular field. The same is largely true of the component elements of an FPSO. Similarly, the skills and expertise of the participants in the process may vary significantly, as may their willingness or ability to accept the risk. There is no "off the shelf" contracting strategy or set of contract documentation that will work in every case. Thus, when considering contracts, one must consider issues such as:
- Nature of the project
- Identity and skills of the participants
- Location where the work will be carried out
- Technical requirements
- Workload of participants.
In any project, the key to success is identifying all determining factors and subsequent ly developing a strategy to fit those factors. Then, once the strategy has been selected, the next challenge is to reflect it accordingly in all project documentation and communicate it to the other project participants.
Priorities and Risks
Part and parcel of the contracting strategy is the identification of the priorities for the project and the potential risks associated with the procurement process. The priorities, risks, and the ability and/or willingness of the parties to deliver and manage them will be a key determining factor in the choice of strategy. Any strategy that identifies every aspect of the procurement process as a priority or that seeks to place all risks in the hands of one party, be it contractor or operator, is a sure fire plan for creating trouble.
For example, it would be illogical and inoperable to make the achievement of prescribed production levels a priority without first considering who should bear the risk of achieving those levels in the light of the design requirements and reservoir data available at tender stage.
Having identified the priorities and allocated the risks, the next task is translating these into the contract documentation. Here, one must bear in mind that the desire to offload risk, but at the same time, retain control over key aspects of the project, gives rise to significant problems, delays, and cost overruns during the construction stage and depressingly often, major disputes thereafter.
A further source of conflict regarding FPSOs is design. Hence, parties to a contract would be wise to consider the following:
- Will the design be carried out using a functional specification, a prescriptive specification, or a combination of the two?
- Will the contractor be required to warrant fitness for purpose (is this reasonable if the specification is prescriptive and in any event, can the contractor insure the risk)?
- How developed are the design and the specification? Is the contractor required to develop the design within prescribed parameters or alternatively, to carry out the design making changes to the specification as necessary?
- Does the contractor have the necessary skills in-house to carry out the design function ascribed to it, or will it sub-contract this task?
- Has the specification been coordinated? If not, when will this be done, by whom, and who bears the risk of any discrepancies, conflicts, or errors?
- Can the operator require changes to be made at all? What are the implications in relation to cost, schedule, and consequential changes?
- Are the variation and change control procedures drafted to reflect the choice of specification and level of design development? What impact do variations have on price, program, and consequential design issues?
- Is the contractor required to warrant the process or provide a performance bond which extends into the operation phase?
Modular or turnkey
A key factor in deciding whether to adopt a modular or turnkey strategy is interface management. FPSOs cannot be assembled from components purchased in isolation from a range of contractors and suppliers. To consider doing so ignores the complex inter-relationships between the vessel, process, mooring, and subsea systems.
The decision, therefore, depends on whether the operator proposes to carry out the interface management itself, appoint a contractor to do so, create an interface management team, or appoint a project manager to do so. Whatever is decided, the contract documents must clearly:
- Identify the interfaces
- Identify which party is responsible for co-ordinating which interfaces
- Give the party with that responsibility the tools and power it requires to enable it to do so (particularly where sub-assemblies are procured from around the world)
- Require the parties with a link to the identified interfaces to coordinate and cooperate with the interface manager
- Provide for "bottlenecks" and delays while awaiting critical information
In addition to interface management, the decision whether to opt for a modular or a turnkey project should also take into account, for example:
- Level of development of design at the time of tender
- Commercial factors
- Project timescale
- Level of operator involvement (interface) required/permitted
- Size and financial stability of the proposed contractor
- Skills and experience of the proposed contractor
- State of the market
- Price that the contractor will put on assuming single point responsibility
Alliancing
Alliancing arrangements between the owner/operator, shipyard, and contractors are increasingly common. There are clear advantages in having the shipyard on board, working with the contractors in an alliance in situations where the engineering and a resulting workscope are not adequately defined.
A common alliance structure is where the owner/operator contracts with each of the contractors and the shipbuilder under separate work contracts coupled with an overall alliance agreement between the parties (including the owner/ operator), which sets out, among other things, the "pain/gain" (risk and reward) mechanisms.
There is no single risk and reward sharing structure that is right for each and every FPSO project. There are a number of variants that will suit some projects, but not others. Many alliancing agreements provide for a target price made up of a management fee (to cover fixed profit and overheads), the estimated costs of the facilities, and a contingency allowance (for unforeseen events). Improvements or overruns on target price/target completion date will be shared among members of the alliance in pre-determined percentages, with a fixed capped maximum pain share.
Hence, great care needs to be exercised to ensure that the alliance model is the correct model for a particular project, and that the risks are carefully thought through and properly allocated.
These are some of the issues observed time and again on FPSO projects. Uncertainty is, more often than not, the underlying cause of disputes, and it is the role of the contract strategy, as reflected in the contract documents, to eliminate that uncertainty so that the parties know what is required of them in order to plan and price accordingly.
Author
Peter Cassidy is a partner with Masons, an international law firm based in London. The firm's energy group has been involved with a number of FPSO projects.
