Decom sector moves closer to standard contracts
One standard contract to suit all decommissioning projects is probably unattainable, but enough common ground exists between operators and contractors to come close, according to Paul Dean, a partner at international law firm Holman Fenwick Willan.
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A realistic goal would be the creation of a document the industry is “generally happy with” and which allows the parties to fill in the gaps according to their specific circumstances, he told the 8th Decommissioning & Abandonment Summit in Houston last month.
Contracts have been the root cause for a number of “inequitable balances of risk-reward for contractors”, Dean noted. He pointed out that separate bids were being made by Logic, an Oil & Gas UK subsidiary, and BIMCO, a trade association representing the owners of 65% of the world’s commercial fleet by tonnage, to create standard contracts.
Dean, a member of the panel advising BIMCO on standard contracts, explained that the industry has been largely making do with construction contracts and adapting them - and added his voice to the chorus of speakers who pointed out during the conference that construction and decommissioning are different processes that require different solutions. He said legal professionals advising contractors and oil companies need to understand the fundamentals of the work scope and the risks involved to be able to give sound legal advice as to what’s important in terms of the contract.
“There’s inevitably pushback between the parties. It comes down to cost – the cost of things like insurance, for example. Each party is trying to minimize their cost but they’re also trying to minimize their liabilities, so there’s an inevitable pushback when that happens," he said.
Understanding each party’s responsibilities
A key aspect to any decommissioning project is a likely lack of knowledge of the true state of the property, equipment and materials that are to be removed, plus a lack of knowledge of how they may behave or react during their removal and subsequent transportation, Dean noted.
Given the uncertain nature of decommissioning, the operator must remain responsible for the accuracy and sufficiency of the information they provide to the contractor. The contractor should review the information it receives, but should in no event be liable if that information contains errors, omissions or inaccuracies, he said.
It is generally considered fair for the operator to assume responsibility for the costs of wreck removal, even if the loss is caused by the contractor, he said. Referring to an earlier presentation at the Houston conference, he commented: “We heard that when you’ve got these three-legged [offshore] structures, that if you start to take things off – they can fall off. You need to have an allocation in the contract to deal with those assets which fall off. Now it’s considered fair that the company is best placed to assume that responsibility. And in [such] circumstances, the company should indemnify the contractor group for the costs of relating to the wreck removal.”
A key principle, in Dean’s view, is that each party should grant reciprocal and unlimited indemnities for costs related to loss and damage – irrespective of cause.
He explained: “What we’re talking about here is the industry practice of knock-for-knock’ which we all know very well. When I teach knock-for-knock, there’s a catchphrase I use, which is: your people, your property, your problem… If you’re seeking to exclude liability for negligence, you must expressly say so in your contract. If you don’t, courts don’t like it – they won’t let you exclude it. That’s really important.”
Enshrining basic principles
Another theme emphasized by Dean was the need to ensure the contractor is not left out of pocket.
In the event the contractor is prevented from carrying out its duties due to force majeure or suspension – Dean and several other conference speakers referred to the occupation of the Brent Spar oil-storage buoy in the North Sea in 1995 to illustrate various arguments – the contractor’s rights to compensation for time lost should be defined by the agreement, Dean said. He added that compensation should extend to cover money owed to sub-contractors.
Should the company terminate some or all of the decommissioning project, the contractor should be entitled to payment for all work performed, the costs of materials, vessels and equipment, and a termination fee to be agreed “on a case-by-case basis” as set out in the contract, he said.
As was the case in many of the speeches given in Houston, Dean went to great lengths to emphasize the importance of planning. When formulating a contract, he said, close attention needs to be paid to determining the value of “project works” and their definition and duration.
The parties should look to define what the end result of the project will be, in accordance with local regulations, he said, adding that they can then determine which installations and materials fall within it, the methodology and timeframe for the work and when the project will cease to exist.