Mobile Offshore Drilling Units and Floating Production Systems

Transcription

1 CORPORATE FINANCE FINANCIAL INSTITUTIONS ENERGY AND INFRASTRUCTURE TRANSPORT TECHNOLOGY Mobile Offshore Drilling Units and Floating Production Systems A basic introduction to the offshore sector. Neil Q. Miller Partner Energy Trade & Transport London Norton Rose LLP 29 April 2009

2 Basic Introduction to the Offshore sector Types of offshore vessels and operations; The legal status of floating production vessels and legislation which might apply to their use; Operation and contractual issues in the context of typical offshore contracts floating production vessels - valuable and good security for lenders?

3 Worldwide offshore fleet (2009) MODUs* FPSOs Worldwide US Gulf of Mexico South America Europe / Mediterranean West Africa Middle East Asia / Australia Other *Excludes 296 platform rigs deployed worldwide.

4 2009 ODS-Petrodata Inc.

5 Floating Production Systems Advantages of FPSO over Tension leg and/or semi submersibles Render deepwater/satellite fields commercial that are not otherwise developable due to infrastructure access or transport limitations Storage capability Depth of operations Decommissioning Can connect to a pipeline almost anywhere

6 Other vessels used offshore AHT/Ss - Anchor Handling Tug / Supply vessel OSVs Offshore Support Vessel DSVs Diving Support Vessel Dredgers Pile Driving Rigs Pipe and Cable Laying Vessel Crane / Offshore Construction Barges Seismic Research Vessels Flotels

7 MODUs and FPSOs - Are they ships? What is a ship? Which one is the ship? English law statutory definitions in the Merchant Shipping Act 1995, s.313(3): includes every description of vessel used in navigation NB s.311 Merchant Shipping Act 1995: The Secretary of State may, by order, provide that a thing designed or adapted for use at sea is or is not to be treated as a ship for the purposes of any provision

8 Legal definition of a ship case law Vessel Vessel is a word used to refer to craft larger than rowing boats, which includes every description of watercraft used or capable of being used as a means of transportation in water. Sheen J in Steedman v Schofield [1992] used in navigation We have concluded that those authorities which confine vessel used in navigation to vessels which are used to make ordered progression over the water from one place to another are correctly decided. Lord Phillips in R v Goodwin [2006]

9 Legal definition of a ship case law The real work test: hollow structure intended to be used in navigation, that is, intended to do its real work upon the seas or other waters, and which is capable of free and ordered movement from one place to another. The ability of a flying boat to navigate is merely incidental to the work for which it is really intended. Its real work is to fly that is its real work and what it is built for and its ability to float and navigate short distances is merely incidental to its real work Mr Justice Atkinson in Polpen Shipping v Commercial Union [1943]

10 What is an offshore installation? Defined by The Offshore Installations and Pipeline Works (MA) Regulations 1995, s.3 (1): a structure which is used while standing or stationed in relevant waters (a) for the exploitation or exploration of mineral resources; (b) for the storage or recovery of gas; (c) for the conveyance of things by means of a pipe; or (d) for the provision of accommodation

11 What is an offshore installation? Similar definition for offshore installation in the Petroleum Act 1998, s.44: any installation which is maintained in the water, or on the foreshore or other land intermittently covered with water, and is not connected with dry land by a permanent structure for the purposes of the following activities: (a) the exploitation or exploration of mineral resources (b) the storage or recovery of gas; (c) the conveyance of things by means of a pipe; and (d) the provision of accommodation

12 What is a floating production system? Floating Production: Floating Production Storage Off-loading Looks like a vessel but able to remain firmly in place for long periods of time and off take of product by tankers

13 FPSO - As a ship (the hull), they are required to be registered as ships, flagged, marked with a loadline, have a registered tonnage, radio call sign, equipment and radio officer, comply with international collision and lighting regulations, SOLAS regulations, have certified coxswains, and and are subject to annual survey as ships

14 But Jack-up rigs are ships! Clark (Inspector of Taxes) v Perks [2001] Concerned whether or not a jackup rig was a ship for the purposes of determining workers tax liability under the Income and Corporation Taxes Act 1988.

15 Clark (Inspector of Taxes) v Perks [2001] Held: MSA definition of ship is not exhaustive; The real work test is not the definitive test, i.e. what is the real purpose and use of the structure, what is it designed to do, what is its real work ; So long as navigation is a significant part of the function of the structure in question, the mere fact that it is incidental to some more specialised function, does not take it outside the definition; Consequently, a Jack-up rig was a ship under the Income and Corporation Taxes Act 1988!

16 Ship or Offshore Installation? Ship or Offshore Installation? A FPSOs B FSUs C Semi Submersible Production Unit D Jack Up Rigs E Drilling Vessels F AHT/Ss G OSVs H DSVs I Dredgers J Pile Driving Rig K Pipe and Cable Laying Vessels L Seismic Research Vessels M Crane Barges and Offshore Construction Barges N Flotels (Floating Accommodation Units)

17 The current position: Income Tax Act 2007 Seafarers Earnings Deduction Definition provided by s.1001 ITA 2007 for offshore installation a structure (including a ship or vessel) which is put to a relevant use while standing in or stationed in any waters Relevant use same as listed activities in The Offshore Installations and Pipeline Works (MA) Regulations 1995 and the Petroleum Act 1998

18 Income Tax Act 2007 Seafarers Earnings Deduction s.1001(2) ITA 2007 provides that a structure is not an offshore installation if It has ceased permanently to be put to a relevant use; It is not, and is not to be, put to any other relevant use; and Since ceasing permanently to be put to a relevant use, it has been put to a use which is not relevant.

19 Income Tax Act 2007 The meaning of standing or stationed in any waters: Anchored or secured Can also satisfy this requirement by dynamic positioning (DP) Torr and Others v CIR [2008] For how long does a vessel need to be standing or stationed? Rule of thumb 5 days or more

20 Income Tax Act 2007 The following are not accepted as ships for the purposes of SED: Floating production platforms FPSOs FSUs Mobile offshore drilling units (MODS) including drillships, semisubmersible and jack-up rigs Flotels

21 Income Tax Act 2007 The following may be accepted as ships for the purposes of SED: Anchor handling vessels DSVs Heavy lifting vessels Pipe laying barges Platform support vessels Safety standby vessels Seismic survey vessels Shuttle tankers Well service vessels

22 Legislation Interrelationship HASAWA MHSWR PUWER MAR DCR S/C PFEER LOLER, DIVING,

23 Floating Production Systems Coverage areas/ disputes Liability for construction and delay EPIC disputes; Liabilities in respect of damage/operational defects/ death/injury to crew; Collision with and damage to fixed and floating objects/ Loss of or damage to Property (caused by the vessel); Advice on contracts/clauses; Pollution liability;

24 Floating Production Systems P&I Coverage areas Liabilities in respect of death/injury to crew (and persons other than crew); Collision with and damage to fixed and floating objects; Loss of or damage to Property (caused by the vessel); Liability for obstruction and wreck removal; Pollution liability.

25 Offshore Risks - P&I Cover Principal Exclusions from standard P&I cover: Specialist Operations Submarine/Sub-sea Drill/Production Ships

26 Offshore risks - P&I Cover Two stage test: did the incident arise during the course of specialist operations? Has the claim arisen as a result of the specialist operation? Not the type of ship that is important but the nature of the activity!

27 FPSOs - pollution risk? risk analysis of FPSO type spills shows that: 5% FPSO - unique spill risks 53.6% would be lost from shuttle tankers near port 39.0% would be lost from shuttle tankers in transit to port 1.8% of crude volumes lost during all phases of FPSO operations would take place during transfer of the oil from the vessel to the shuttle tanker, and 1.2% would involve collisions between FPSO s and passing merchant vessels.

28 Knock-for-knock regime Overview Offshore contracts = extensive potential liability KNOCK FOR KNOCK Industry standard contacts BIMCO Heavycon Towcon Supplytime 2005 EFFECTIVE APPORTIONMENT REGIME OPERATES Affordable insurance cover

29 Knock-for-knock regime Key cases Piper Alpha (1994) EEC Caledonia Ltd v Orbit Valve Co Europe (1994)(CA) Issue: Whether indemnity clause applied to the consequences of negligence of one of the parties Each party to indemnify the other against; any claim or liability arising by reason of death of an employee of the indemnifying party Held: Clause operated as an allocation of risk, each party contractually bound to bear the risk of his own negligence.

30 PIPER ALPHA (1994) Judges noted that the contract was drafted by a lawyer - relevant to construction General approach: Prima facie implausible that the parties would wish to release their contractual partner from liabilities for negligence or assume liability for their own negligence.

31 PIPER ALPHA (1999) Change in approach - Knock for Knock was a pragmatic solution for losses as it minimised the likelihood of protracted litigation. Questioned the basis of the contra proferentem rule. Operators could recover under the indemnity. Gross negligence / wilful misconduct

32 Smit International GmbH vs Joseph Mobius (2001) Mr Justice Morison: Introducing arguments about unseaworthiness into this blunt and crude regime would lessen the effectiveness of the Knock for Knock agreement.

33 Court is more tolerant of the Knock for Knock concept. Beware Limitations to the clauses (not a blanket exemption) Rogue Clauses

34 Knock-for-knock Essential contracts Supplytime 2005 Clause 14(b)(i): the Charterers shall not be responsible for loss of or damage to the property of any member of the Owners Group arising out of or in any way connected with the performance of this Charter Party, even if such loss, damage, injury or death is caused wholly or partially by the act, neglect, or default of the Charterers Group, and even if such loss, damage, injury or death is caused wholly or partially by unseaworthiness of any vessel; and the owners shall indemnify, protect, defend and hold harmless the Charterers from any against all claims, costs, expenses, actions, proceedings, suits, demands and liabilities whatsoever arising out of or in connection with such loss, damage, personal injury or death.

35 Knock-for-knock Essential contracts Supplytime 2005 Clause 14(b)(ii): the Owners shall not be responsible for loss of, damage to, or any liability arising out of anything towed by the Vessel, any cargo laden upon or carried by the Vessel or her tow, the property of any member of the Charterers Group, whether owned or chartered, including their Offshore Units, or for personal injury or death of any member of the Charterers Group or of anyone on board anything towed by the Vessel, arising out of or in any way connected with the performance of this Charter Party, even if such loss, damage, liability, injury or death is caused wholly or partially by the act, neglect or default of the Owners Group, and even if such loss, damage, liability, injury or death is caused wholly or partially by the unseaworthiness of any vessel; and the Charterers shall indemnify, protect, defend and hold harmless the Owners from any and against all claims, costs, expenses, actions, proceedings, suits, demands, and liabilities whatsoever arising out of or in connection with such loss, damage, liability, personal injury or death.

36 TOWHIRE - Cl. 18(2)(a) 2 (a) The following shall be for the sole account of the Tugowner without any recourse to the Hirer, his servants, or agents, whether or not the same is due to breach of contract, negligence or any other fault on the part of the Hirer, his servants or agents: (i) (ii) Loss or damage of whatsoever nature, howsoever caused to or sustained by the Tug or any property on board the Tug; Loss or damage of whatsoever nature caused to or suffered by third parties or their property by reason of contact with the Tug or obstruction created by the presence of the Tug. (iii) Loss or damage of whatsoever nature suffered by the Tugowner or by third parties in consequence of the loss or damage referred to in (i) and (ii) above. (iv) Any liability in respect of wreck removal or in respect of the expense of moving or lighting or buoying the Tug or in respect of preventing or abating pollution originating from the Tug. The Tugowner will indemnify the Hirer in respect of any liability adjudged due to a third party or any claim by a third party reasonably compromised arising out of any such loss or damage. The Tugowner shall not in any circumstances be liable for any loss or damage suffered by the Hirer or caused to or sustained by the Tow in consequence of loss or damage howsoever caused to or sustained by the Tug or any property on board the Tug.

37 TOWHIRE - Cl. 18(2)(b) 2 (b) The following shall be for the sole account of the Hirer without any recourse to the Tugowner, his servants or agents, whether or not the same is due to breach of contract, negligence or any fault on the part of the Tugowner, his servants or agents: (i) (ii) Loss or damage of whatsoever nature, howsoever caused to or sustained by the Tow. Loss or damage of whatsoever nature caused to or suffered by third parties or their property by reason of contact with the Tow or obstruction created by the presence of the Tow. (iii) Loss or damage of whatsoever nature suffered by the Hirer or by third parties in consequence of the loss or damage referred to in (i) and (ii) above. (iv) Any liability in respect of wreck removal or in respect of the expense of moving or lighting or buoying the Tow or in respect of preventing or abating pollution originating from the Tow. The Hirer will indemnify the Tugowner in respect of any liability adjudged due to a third party or any claim by a third party reasonably compromised arising out of any such loss or damage but the Hirer shall not in any circumstances be liable for any loss or damage suffered by the Tugowner or caused to or sustained by the Tug in consequence of loss or damage, howsoever caused to or sustained by the Tow.

38 Floating Production Systems Good Security? The usual suspects Mortgage (registered) SPC share pledge Full insurance and MII Loss of earnings insurance (possibly) Pledge of accounts Sponsor recourse Assignment of earnings

39 Floating Production Systems - Security The mortgage- an unusual case Consider those traits that give assets value in terms of traditional mortgage security: 1. MOVEABLE 2. ACCESSIBLE 3. RE-MARKETABLE

40 Consider : OFFSHORE INSTALLATIONS FEATURES Offshore, inaccessible Difficult or impossible to mobilise Bespoke, technically complex, tailored to a specific field

41 Floating production systems - Security Conclusions Floating production systems are not to be regarded as ships = not moveable, not accessible, not re-marketable. Complex in terms of security - consider in terms of project rather than asset finance? Sponsor recourse as vital but extent of this uncertain - always heavily negotiated Mortgage as necessary- a shield through priority it affordsbut might be unenforceable on terms or due to location. Control of earnings crucial - the sword in the security armoury. Beware that seeking to enforce mortgage may undermine this.

42 Our international practice

43 Presentation 1 No individual who is a member, partner, shareholder, employee or consultant of, in or to any constituent part of Norton Rose Group (whether or not such individual is described as a partner ) accepts or assumes responsibility, or has any liability, to any person in respect of this presentation. 2 Any reference to a partner means a member of Norton Rose LLP or a consultant or employee of Norton Rose LLP or one of its affiliates with equivalent standing and qualifications. 3 This presentation contains information confidential to Norton Rose Group. Copyright in the materials is owned by Norton Rose Group and the materials should not be copied or disclosed to any other person without the express authorisation of Norton Rose. 4 This presentation is not intended to give legal advice and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and practice in this area. Readers must take specific legal advice on any particular matter which concerns them. If you require any advice or information, please speak to your usual contact at Norton Rose Group.

44 CORPORATE FINANCE FINANCIAL INSTITUTIONS ENERGY AND INFRASTRUCTURE TRANSPORT TECHNOLOGY Neil Q Miller Partner Norton Rose Dispute Resolution +44 (0) (0) neil.miller@nortonrose.com DRD _v1

45 CORPORATE FINANCE FINANCIAL INSTITUTIONS ENERGY AND INFRASTRUCTURE TRANSPORT TECHNOLOGY