Putting together a contract for a complex FPSO project requires complete understanding among the parties. (Photo courtesy of Curtis Davis Garrard)

The complex contracting and logistics chain requires careful integration.In order to take advantage of the technical and commercial advantages offered by a floating production, storage and offloading (FPSO) vessel, the oilfield operator must obviously acquire, or engage the use of, a suitable vessel to act as an operating platform and an integrated crude oil processing and storage system capable of meeting the requirements of the project in question. To achieve this normally requires the operator to enter into a range of complex contractual arrangements.

FPSO project phases
The first principal phase of the project is design and engineering, from the conceptual design and front-end engineering and design through to the more detailed engineering phase. This will often fall within the head contractor’s workscope. Next comes the construction of the hull or the conversion of an existing vessel. This is followed by the construction of the processing facilities. The “topsides” contract will define the contractual relationship between owner and processing contractor. This will either form part of the shipyard construction or conversion contract or will be a separate contract with a specialist contractor. Once the construction stage is completed, the FPSO unit will be towed or transported to the field location.

Following arrival at the field, the unit will be installed and hooked up with the subsea system, usually pursuant to a separate contract between the operator or head contractor and specialist subcontractors. The head contractor will then undertake commissioning of the unit. Finally, once the FPSO has been accepted by the operator, the unit will need to be operated and maintained throughout its life at the producing field until demobilization.

FPSO contract strategies

The “Turnkey” Strategy. The most commonly employed approach to FPSO contracting is for the operator to employ a single contractor, referred to here as the head contractor, to manage the project and to engage any subcontractors required for those elements of the project which the head contractor is not able or willing to undertake. As its name suggests, the operator is looking for an integrated, managed solution.

The “Modular” Strategy. The alternative approach is for the operator to contract separately for the component parts of the project, i.e. design, procurement, construction and installation. The operator may also decide to manage the marine and offshore operations of the FPSO itself. This is, however, relatively rare, given the scale and complexity of the tasks involved, and few operators are able to maintain the necessary expertise and “skill sets” needed to achieve this successfully. Most do not even attempt to do so.

Key contract issues
The contractual workscope. Assuming that a turnkey contracting strategy has been adopted, the most important issue in any FPSO project contract is defining and agreeing the contractual workscope. A key element in this context is the question of design responsibility between the operator, the head contractor and the subcontractors of each of them. The contractual workscope is normally set out in a technical specification. A number of factors render the agreement of the contractual workscope a complicated process.

First, many operators express their requirements for FPSO tonnage partly in functional rather than purely descriptive terms. This should in principle work well, except that shipyards are more accustomed to dealing with descriptive specifications. This is particularly problematic given that the FPSO’s functionality cannot normally be demonstrated before the unit undergoes acceptance tests at her first producing well. Problems can also arise where there are inconsistencies between the descriptive and functional parts of the specification.

Second, the complexity of the FPSO’s onboard processing systems means that these are frequently designed and engineered, in whole or in part, by a large number of third-party contractors, some of whom may be selected by, and in some cases employed by, the operator rather than the head contractor, the shipyard or the topsides contractor. This can often lead to serious questions of the delineation of their respective responsibilities and workscopes.

The third complicating factor relates primarily to FPSO conversions, where the head contractor and its subcontractor, the shipyard, will be required to incorporate new designs and materials within an existing structure to permit the new and the old to operate together as an integrated whole. Problems can arise at the “interface” between new and old, particularly where the old structure is unable to cope with additional demands placed upon it after the conversion. The contract must be clear as to which party is responsible for this interface.

Indemnities. Indemnities are another key contractual issue. The indemnity structure most commonly employed is the usual “knock for knock” approach under which the operator and the head contractor indemnify each other against property damage, personal injury and death sustained by members of their own groups and employees in the course of performance of the project irrespective of cause (i.e., regardless of whether the damage has been inflicted negligently or in breach of duty). Although the “knock for knock” structure was recently described by an English High Court judge as a “blunt and crude regime,” it is well established in the offshore sector and has the very great virtue of simplicity.

The indemnity is normally agreed to apply to damage or injury to the operator and contractor groups. A key issue in the indemnity structure will be whether the operator group is broadly or narrowly defined. If a broad approach is adopted, the operator group will include all of the operator’s other contractors working at the field. Alternatively, where a more narrow approach is adopted, the operator’s indemnity will not extend to the property and personnel of its other contractors.

An alternative solution is to use a stand-alone “field” mutual hold harmless agreement such as the one prepared by CRINE/Logic, under which each contractor assumes responsibility for its own property and personnel and indemnifies all other contractors against loss or damage to such property/personnel incurred working at that field.
Post-Delivery Defects. A third key issue is the question of post-delivery defects. This is one of the most difficult areas in which to harmonize the various project contracts, particularly in respect of defects that affect the FPSO’s operating status and therefore the income stream under the head contract. In the event of a defect affecting the FPSO’s operations, the operator will almost certainly insist on a reduction in the contractual day rates, sometimes to a zero level, while the problem is resolved. However, while most shipyards and topsides contractors are prepared to provide a contractual commitment to undertake the repair work, this is normally limited to a period of 12 or 24 months from the date of completion of their portion of the construction or conversion works. Further, they are almost universally unwilling to assume any responsibility for associated downtime. Although this can be addressed to some extent by loss of hire insurance coverage, this represents one of the largest exposures faced by the head contractor.

In summary, an FPSO project will usually involve a multiplicity of phases, parties and contractual arrangements.

It is essential that all of these elements are coordinated into an integrated contractual framework. Otherwise, disconnects between different phases or contracts can significantly add to a party’s project risks.