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LECTURE 8: PUL 821 LLM

FLOATING PRODUCTION, STORAGE AND OFFLOADING FACILITIES (FPSO)

Kato Gogo Kingston, PhD (Law, East London)

Associate Professor of Energy & Natural Resources Law: Oil and Gas

Faculty of Law, Rivers State University, Nigeria

MEANING OF FPSO

The abbreviation FPSO stands for Floating Production Storage and

Offloading (FPSO) facility.

It is a floating facility, generally made from converted ship hull which was

designed as an oil tanker. It is specially prepared and equipped with crude

oil processing equipment for the separation and treatment of water, crude

oil, and gases, directly extracted on board the hull from sub-sea oil wells

through the aid of flexible pipelines.

On board the cargo tank within the hull are fitted cargo tanks where the

treated crude oil is stored in the FPSO. Also, the treated natural gases are

used to power the FPSO power generation systems. The surplus gases

are often re-injected into the sub-sea reservoirs whilst some of the

surpluses are transported through pipelines to other waiting tankers and

to the shore.

The water and contaminated crude oil produced during production

processes are discharged into the sea from the FPSO. However, where

the regulatory regime is strict, there are maximum limits for the discharge

of the waste into the sea. Also, some form of regulatory frameworks does

require that the waste should be injected back into the seabed.

It is crucial to note that, the FPSO is a floating vessel hence, must be

anchored and allowed to rotate up to 360 degrees. The rotary and

anchoring system generally, use the Bluewater core technology known as

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the turret mooring system (metal anchors), usually fixed inside the

FPSO’s hull. The turret is fastened to the seabed with strong chains, wires

and anchors flexible enough to tolerate free and unobstructed 360°

rotation of the FPSO around the turret. This rotary allowance is called

“weathervaning”. There are spaces in the FPSO for the oil workers to

use as living quarters, including the machine, medical rooms, fire control

and mechanical control rooms. In some larger FPSOs there are spaces

for bars, restaurants, swimming pool and gymnasium.

The processing paraphernalia aboard the FPSO are the same as those

used on stationary rigs. However, the FPSO ship does have in-built

components, including: FPSO water separation, gas treatment, oil

processing, water injection and gas compression.

Crude oil stored on board is commonly transported to shuttle tankers and

ocean barges going to the shore, through extended loading hoses. This

loading process is known as tandem loading. Also, gases are usually

transported to shore through pipelines.

THE RATIONALE FOR FPSO

The cost of constructing and decommissioning stationary offshore Oil rigs

and platforms are huge. As of the early 1950s, when offshore production

of crude oil became popular, all the offshore oil rigs were fitting to the

seabeds. In about 1972 offshore crude oil exploration were being shifted

far into deep sea waters. The shifting were necessary because of the

discovery of crude oil reservoirs too far into the deep sea horizons. The

idea of the floating production systems came to prominence as a means

of eliminating the huge cost and improving efficient production.

As of April 2018, there are an estimated 276 FPSOs in the World. All

these came in the backdrop of the first FPSO (the ship) manufactured in

Spain in 1977. The technology of the FPSO enables the oil companies to

capture crude oil from the most remote offshore and deeper water, which

otherwise would have been very complicated to achieve with other

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available technology. Moreover, FPSOs have relatively reliable storage

capacity for the preservation of crude oil. They also make it easier to

offload and transfer the crude oil to sea tankers for shipment to various

refineries, instead of depending solely on pipeline transportation. One of

the advantages of the FPSO is that it can be detached from the

anchors and moved to another deepsea location such as a marginal

field.

TYPES OF FPSOs

• FSO, Floating Storage and Offloading

• FPSO, Floating Production, Storage and Offloading

• FDPSO, Floating, Drilling and Production, Storage and Offloading

• FSRU, Floating Storage Regasification Unit.

FIG 1: Old Style FPSO

Source: google images

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Fig. 2: AN FPSO FITTED WITH FLEXIBLE PIPELINES

SOURCE: google images

FIG 3: FPSO CLEARLY FITTED WITH ANCHORS, FLEXIBLE PIPELINES ETC

SOURCE: google images

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FIG 4: REAL LIVE FPSO

Source: google images

LIST OF FSO AND FPSOs IN NIGERIA

• Yoho FPSO, Operator: Mobil Producing Lagos, Nigeria COMMENCED: 2006

• Usan, FPSO. Operators: Esso Exploration & Production Lagos, Nigeria Total

Courbevoie, France, Started: 2011

• Unity FSO, Elf Petroleum Lagos, Nigeria. Total Courbevoie, France 2002

• Sea Eagle FPSO, OPERATOR: SHELL. EA, Gulf of Guinea, 2003

• Myatras FPSO, Okono, Okpoho, 2004, Gulf of Guinea, Operator: Agip

• Armada Perkasa, FPSO, Okoro Setu, OPERATORS: Afren / AMNI, 2009

• Armada Perdana FPSO, 2010, OYO, OPERATORS: Allied Energy / Agip

• Akpo FPSO, Akpo, Gulf of Guinea, Total, 2009

• Agbami FPSO, Star Deep Water Petroleum Lagos, Nigeria, 2007

• Abo FPSO, Abo, Gulf of Guinea, AGIP 2002

• Bonga FPSO, Bonga, Gulf of Guinea, 2005, Shell

• ENGINA FPSO, Off The Coast Of Bonny/Andoni, Total, 2018

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NIGERIA’S LARGEST FLOATING CRUDE OIL PRODUCTION SYSTEMS

FPSO -BONGA FIELDS

Bonga is the first large deepwater project of the Shell Nigeria Exploration and

Production Company (SNEPCO) in Nigeria. The reservoir is located 120km

southwest of the Niger Delta, in a water depth of more than of 4,160 metres and

situated within the 60 square kilometres field. The drilling started in 1993 and

continued to 1996 with oil prospecting license (OPL) 212 and new deepwater

development in OML118. The first Bonga discovery well was drilled between

September 1995 and January 1996. The reservoir is estimated to hold about 600

million barrels of oil. The FPSO produces 200,000 barrels of crude oil and 150

million standard cubic feet of natural gas per day.

The FPSO was constructed in Asia in 2002, the compartments have a hull of

300,000 tonnes capacity.

Bonga is operated by SNEPCO under a production sharing contract for the partners,

namely: The Nigerian National Petroleum Corporation (NNPC) (55%), Esso (20%),

Agip (12.5%), Elf Petroleum Nigeria Limited (12.5%).

Gas from the Bonga is conveyed to the Nigeria Liquefied Natural Gas (NLNG) plant

at Bonny via pipelines. LNG is exported to Atlantic and European markets via

tankers. Prior to direct offloading, the oil is stored on-board the production facilities.

The cost of the full field development of the FPSO is $3.6bn.

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ENGINA FPSO

Sailed into Nigeria on 23 January 2018. Located some 130 km off the coast of the

Niger Delta at water depths of more than 1,500 metres

Project type: Ultra-deep offshore

Operator: Total (24%)

Partners: NNPC, Total, CNOOC, Petrobras Sapetro

Start date: January 2018

Estimated Production Capacity: 200,000 barrels/day

Number of Well: 44 subsea oil wells

Hull Capacity: 2.3 million barrels of oil.

FIG 5: Photo of Engina FPSO

Source: google images

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LEGAL AND PRACTICAL CHALLENGES OF FPSO PROJECTS

The legal issues that usually arise from FPSOs are:

a) CONTRACTUAL STRUCTURE ISSUES

FPSO contracts must never forget to define the following elements:

• the technical requirements and performance criteria;

• the hire structure; and

• the scope of the owner's rights and obligations towards the

FPSO client.

In addition to the vital elements of the contracts, the prevalent

contractual issues involve the analysis of the entire certification

concerning the projects including:

• The concession licences,

• Manufacturing of the FPSO,

• Funding agreements,

• Marketing of the crude oil sales, and

• Allocation of profits and liabilities.

• Ownership, including financing and mortgages

• Registration and flag

• Maritime liens and rights of civil arrest

• Civil jurisdiction

• Penal jurisdiction

• Salvage

• Limitation of liability

• Liability for pollution

• Removal of decommissioned structures and wrecks

• conversion contracts with shipyards;

• procurement contracts concerning main components or

equipment;

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• design and engineering contracts; and

• consultancy and pre-delivery management agreements.

• Contracts regulating the operation period (ie, mainly

management and support contracts) are at the bottom of the

pyramid.

b) ALLOCATION OF FPSO CLAIMS ISSUES

One of the very complex legal concerns regarding offshore oil and gas

projects, is how courts and regulatory institutions classify the various

types of floating exploration, production, storage, and offloading ships.

From a legal and regulatory standpoint, there seems to be some

confusion as to whether FPSOs should be regarded as transportation

ships or as oil tankers. Also, whether the FPSOs should be regulated

as permanent offshore E&P installations such as well-head rigs.

In reality, however, two significant issues often arise. First, not all

aspects of FPSO operations can be divided precisely into either

“ship-related” or “E&P-related” and regulated independently.

Second, conflicts can arise between certain “shipping” and “offshore”

laws and regulations, meaning that it may not be possible for an

FPSO to comply fully with both regimes at the same time. This means

that, in the event of a cause of action arising, only one route should be

pursued. ASK YOUR LECTURER TO CLARIFY.

These practical considerations lead to the common sense conclusion

that, in any given place, there should be a single and consistent body

of laws and regulations for FPSOs. Furthermore, given the diversity of

location of many FPSO projects, the fact that some FPSOs can be

deployed in more than one place, and the increasingly transnational

nature of the offshore oil and gas industry, there should be

consistency - if not close harmonization - between the applicable laws

and regulations of producing states.

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An authoritative and internationally recognized determination on the

legal and regulatory treatment of FPSOs - as ships or as offshore

installations. There is, of course, an enormous range of relevant laws

and regulations, which differ from country to country. They may

extend to matters of health and safety, structural integrity,

licensing and permits, pollution and environment, and civil

liability, to name just a few.

LIMITATION OF LIABILITY

Many countries permit ship owners, and sometimes other parties, to

limit their liability for third-party claims for loss or damage relating to

the operation of a ship. The widespread adoption of international

conventions on civil liability in the marine industry means that a ship

owner’s entitlement to limit liability is today recognized with

reasonable consistency across many trading states.

Two main international conventions permit ship owners to limit their

liability, namely:

(a) The International Convention on Limitation of Liability for

Maritime Claims, 1976 (The LLMC Convention)

The International Convention on Limitation of Liability for Maritime

Claims (LLMC) deals with a range of claim types, including claims

relating to death, personal injury, and property damage “occurring on

board or in direct connection with the operation of a ship.” The LLMC

entitles a “ship owner” (which also includes a charterer, manager, or

operator) to limit its liability with respect to such claims, and the level

of limitation is calculated by reference to the ship’s gross tonnage.

(b) International Convention on Civil Liability for Oil Pollution

Damage (commonly called the Civil Liability Convention or

CLC), 1969, renewed in 1992 (The CLC Convention)

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The International Convention on Civil Liability for Oil Pollution

Damage (commonly called the Civil Liability Convention or CLC)

deals specifically with claims arising from loss or damage caused

by the escape or discharge of oil from a ship. The owner of a

ship is deemed to be strictly liable for such loss or damage, but is

entitled to limit its liability at a level calculated again by reference to

the ship’s gross tonnage.1

VITAL CLAUSES FOR FPSO CONTRACTS

BACK-TO-BACK CLAUSE

Ideally, the terms of all capex and opex-related contracts should

be 'back to back' with the related terms of the FPSO contract, so

that all risk of cost overrun and unforeseen developments is

passed on to the FPSO client (which may pass it on to the

government under the production licence or the production

sharing agreement).

However, this is unrealistic in practice for the following reasons.

First, the market for offshore suppliers is currently so good that

suppliers are not necessarily willing to accept contract terms that

are as strict as those accepted by the owner in order to win the

FPSO contract. Second, many FPSO tenders are on 'take it or

leave it' terms and bidders may be disqualified if they make too

many amendments in order to mirror the terms of the suppliers’

contract.

Examples of the importance of back-to-back terms are force

majeure clauses and the risk of facing liquidated damages for late

delivery of the FPSO. This risk will be reduced if events involving

shipyards and suppliers qualify as force majeure under the FPSO

contract. Further, all technical and functional requirements under 1Paul Dean, Global Head of Oil and Gas Partner, London and Robert Follie, Global Head of Energy Partner, Paris.

Legal and regulatory treatment of floating oil and gas vessels needs clarification, 2012.

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the FPSO contract must be similar to those included in the

contracts between owners and suppliers, and guarantee periods

should be of similar duration.

RISKS ALLOCATION CLAUSES

According to Bhinder,2

“FPSO construction is inherently challenging. Such projects

require the integration of distinct components: the hull, topsides

and modules, plus the subsea mooring and riser systems,

which require hook-up to subsea equipment, and

commissioning of the vessel in the field. The unique design

requirements of the business, the incorporation of new and old

equipment, the integration of owner provided equipment, and

the use of multiple contractors provide the ingredients for

potential delay problems. The interdependent nature of various

aspects of FPSO construction means that risk allocation of

delay events, in particular, the extension of time and liquidated

damages regime, needs to be carefully understood, assessed,

and applied.”

The following risks must be considered when negotiating FPSO

contracts:

a) The credit risk for FPSO clients and the need for parent bank

guarantees are often underestimated; the contract must clarify

whether the oil company is acting on its own account or on

behalf of a licensed group with pro rata liability between the

participants (if so, the contract must identify the participants);

2 See: Baldev Bhinder, Legal insight informs risk allocation in FPSO construction contracts, Ashurst

LLP, 2014 online at: https://www.offshore-mag.com/articles/print/volume-74/issue-11/productions-

operations/legal-insight-informs-risk-allocation-in-fpso-construction-contracts-p1.html

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b) Liquidated damages and the penalty structure for late delivery

must be specified; the procedure for acceptance of the FPSO

vessel under the FPSO contract often involves integration

risks that should be placed with the FPSO client;

c) The owner should not suffer financially if undersea installation

is delayed or the FPSO client is not ready;

d) A performance-based hire structure may be complicated and

may depend on integration and interfacing with other parties or

on reservoir management that is out of the control of the

owner;

e) Subjective termination rights should be avoided;

f) The early termination fee should cover the net present value of

the contract;

g) The owner should never accept reservoir-related risks;

h) Exceptions from the 'knock-for-knock' principle in liability

provisions must be identified and preferably clarified with the

insurers;

i) Net earnings after deduction of local and central taxes

(including withholding taxes) must be stated; it may be an

advantage (and often a requirement) to operate through a

company located in the jurisdiction of operation;

j) Local content requirements may be difficult to satisfy due to

the unavailability of competitive and qualified local resources;

and

k) Risks of political or legal changes should be borne by the

FPSO clients.

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A typical construction contract delineates various delay events

according to the risk assumed by the respective parties:

• Owner's risk events, such as requests for additional works, are

typically termed "Relevant Event(s)" with a corresponding right for a

contractor to seek, among other things, an extension of time to the

completion date on account of the Relevant Event;

• Neutral events such as those arising from inclement weather (or

other force majeure events) are typically termed "Permissible

Delay" and also will provide the contractor with a right for an

extension of time; and,

• Contractor's risk events, such as labour shortages, are naturally at

the risk of the contractor and will not entitle the contractor to an

extension of time, thereby exposing it to liquidated damages for any

delay beyond the completion date.

EXTENSION OF TIME CLAUSES

Risk allocation for delay events must start with a proper understanding of

extension of time (EOT) clauses. The common perception of EOT clauses

is that it is intended to benefit the contractor because it extends the date

for completion of the works for delay events, thereby reducing the period

from which an owner can seek liquidated damages. Owners, therefore,

typically view such clauses with considerable suspicion, and seek to limit

its scope and application, with the belief that the fewer opportunities a

contractor has to rely on an EOT clause, the greater the owner's chances

to claim more liquidated damages. Such a belief is misplaced.

The reality is that EOT clauses operate for the benefit of the owner as

well, as such clauses avoid the operation of what is known as the

"prevention principle." The prevention principle is not a novel concept,

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having been established as far back as 1893. In essence, the prevention

principle operates to preclude an owner from claiming any liquidated

damages if some of the delay is due to its own, employees', or agents'

default. In practical terms, this means that when the principle applies, time

for completion of the works is set "at large." The contractor is no longer

obliged to complete the works by the completion date but instead has to

do so within a reasonable time. Flowing from that, the owner can no

longer seek to claim liquidated damages from the contractor but, to the

extent that the contractor has exceeded a reasonable time to complete

the works, the owner has to prove its losses as general damages.

Most extension of time (EOT) clauses provide for a timeframe from which

a contractor is to apply for an extension of time. Whether any timeframe

stipulated for the notification of an extension of time should operate as a

condition precedent to the operation of the clause depends on the wording

of the EOT clause. Can a contractor who fails to notify the owner of a

Relevant Event or does not do so within the stipulated time, then assert

that it has been prevented by the acts of the owner, resulting in the

disabling of the liquidated damages sanction?

The weight of the authorities seem to suggest it would inequitable to allow

a contractor to be "better off by deliberately failing to comply with a notice

condition than by complying with it" and that the contractor should not be

able to "rely upon preventing the conduct of the other party where it failed

to exercise a contractual right which would have negated the effect of that

preventing conduct."

THE DOCTRINE OF QUIET ENJOYMENT

FPSO clients often demand a 'quiet enjoyment' letter providing that the

banks shall not be entitled to enforce a mortgage against the vessel (if it

jeopardizes operations) as long as hire payment is made under the FPSO

contract. There is no standard quiet enjoyment letter; therefore, banks can

strengthen their position towards the FPSO client in a default situation by

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negotiating the terms of the letter. The terms of the letter may be linked to

the assignment of the FPSO contract to the banks. Quiet enjoyment

letters may include:

a) an acknowledgement of the assignment;

b) the duty of the FPSO client to notify the bank of any default under

the FPSO contract;

c) the right of the bank to remedy such default; and the right of the

bank to sell the vessel and the FPSO contract (in which case the

FPSO client must cooperate).

LAWYERS’ ASSESSMENT OF PROJECT FINANCING

If your client is the bank or any other financial institution giving loans for any aspect

of FPSO project, you must establish the following:

a) Which asset the borrower owns and which it merely has a right to use under a

lease/licence;

b) What asset of the borrower can a fixed charge/security be created;

c) Whether floating charges can be created over the borrower’s asset;

d) Whether security can be created over future assets i.e. assets to be acquired

by the borrower after the creation of the charge;

e) Whether security can be created over movable assets without the physical

transfer of those assets to the mortgagee or pledgee;

f) What degree of control the chargee must exercise over the asset to constitute

a fixed as opposed to a floating charge;

g) Whether there are restrictions on foreigners taking security over land;

h) What creditors, will by law, be preferred over secured creditors;

i) Whether third parties or liquidator can interfere with the grant of security or

with its enforcement;

j) Whether, on a default, the lenders will be able to appoint a receiver over the

assets;

k) Whether the bank/lenders will be responsible for the receiver’s action or

whether a receiver can be appointed an agent for the borrower.

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MISCELLANEOUS INTERNATIONAL LAW PERSPECTIVES

Nigeria ratified the core International Maritime Organization (IMO) conventions

governing the maritime safety, that are relevant to offshore FPSOs.

MARPOL CONVENTION

Adopted in 1973 (Convention), 1978 (1978 Protocol), 1997 (Protocol -

Annex VI); Entry into force: 2 October 1983 (Annexes I and II).

This is the International Convention for the Prevention of Pollution from Ships. It is

the main international convention covering prevention of pollution of the marine

environment by ships from operational or accidental causes.

The Convention includes regulations aimed at preventing and minimizing pollution

from ships - both accidental pollution and that from routine operations - and

currently includes six technical Annexes. Special Areas with strict controls on

operational discharges are included in most Annexes.

There are other international instruments as follows:

a) The International Convention for the Safety of Life at Sea, 1974 (SOLAS PROT

1988);

b) The International Convention on Load Lines, 1966 (LL PROT 1988);

c) The Suppression of Unlawful Acts against the Safety of Fixed Platforms Located

on the Continental Shelf, 1988 (SUA PROT 1988);

d) The Convention for the Suppression of Unlawful Acts against the Safety of

Maritime Navigation (SUA 2005).

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ACKNOWLEDGEMENTS

1. Finn Bjørnstad; Gaute Gjelsten ; and Trond Eilertsen , Wikborg, Rein & Co

Oil and Gas Law Practice, Oslo, Norway

2. YINKA AGIDEE, LEGAL ISSUES IN FINANCING OF THE ACQUISITION OF FPSOs, THE ROCK AND PARTNERS, Lagos, 2018. Online at www. trp-ng.com

19 March 2018

2. www.rigzone.com retrieved 19 March 2018

3. www.total.com/en/energy-expertise/projects/oil-gas/deep-offshore/egina-nigeria retrieved 19 March 2018

4. https://www.offshore-technology.com/projects/bonga/ retrieved 19 March 2018

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