Offshore Floating Production

Edited by Stuart Beadnall; Simon Moore; Max Lemanski

Document

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CHAPTER 7 FPSO offloading

Stuart Beadnall

A Introduction

7.1 We now come to the O. This stands for Offloading. Although it is an essential part of the vessel’s function, it is not an essential part of the vessel description. Without an export pipeline, a floating production unit by its very nature may continue operations only if offloading occurs. 7.2 It may be thought that the O would apply equally to the offtake operation, i.e. the procedure whereby the owners of the produced oil or gas arrange the sale of the product. Certainly, offloading and offtake go hand in hand. There is no point offloading the product if an offtake vessel is not available to receive it; few floating production units have access to an export pipeline. A key feature of continuous floating production is usually the ability to match the volume of production, the rate of offloading and the availability of offtake vessels to ensure that the risk of shut-in due to the storage tanks becoming full may be avoided. These risks are exacerbated if the production is for liquefied gas, sometimes requiring more than one type of offtake vessel to perform the offloading operations. 7.3 Methods of offloading and the technical difficulties that may arise are described in , Part (vii). considers potential liability of each party engaged in offloading operations if loss or damage is caused. This chapter considers the legal issues relevant to the FP Contractor’s offloading duties under a typical FPSO charter. These include the general capability of the FPSO to perform offloading operations as required. It is no use the FP Contractor focusing its maintenance and repair efforts on the continued ability to process hydrocarbons if it does not also ensure that the offloading capability remains as required. Failure or under-performance of the offloading system would sooner or later result in shut-in of production. The charter would usually impose a specific requirement to achieve a level of offloading capability. This should be sufficient to match the requirements of loading for the offtake vessel and to ensure the operation can be completed in a suitably short time (thus reducing exposure to risks of collision and adverse weather). 7.4 The FP Contractor is responsible also to ensure that the product is in a fit state for offloading, to avoid the risk of the offtake vessel rejecting its cargo and to maintain accurate records of the cargo volumes, as required by the Company and the local revenue collectors. Further, the FP Contractor will be responsible to manage the offloading process, taking into account the inherent risks of ship-to-ship transfer of hydrocarbon products at sea. 7.5

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The responsibility to schedule the offtake vessel to arrive ready for offloading at a date matching the production schedule would usually fall on the Company. As explained in Section D, if the FP Contractor takes this responsibility, it may be exposing itself to risks beyond its control.

B Offloading – the essentials

(i) Offloading capability

7.6 For obvious reasons, the full functioning of the offloading system is an essential characteristic of a successful floating production operation. The Company may wish to ensure that the offloading system and procedures are adequate before being willing to accept the FPSO into the charter service. As explained in the Company would normally wish to ensure that the full functioning of all the essential characteristics of the FPSO is proven before acceptance occurs. That said, if the successful demonstration of the full functioning of the offloading systems is included in the performance tests that must be satisfied before acceptance, a significant period of production may first be required, depending on the circumstances of the particular field and the design of the FPSO, before acceptance.1 This may be commercially unacceptable from the FP Contractor’s viewpoint, and a controversial topic during charter negotiations. 7.7 Often, the Company may be willing to accept that, provided the functioning of individual components of the offloading system have been adequately demonstrated prior to acceptance, the full functioning of the system may be demonstrated as a ‘condition subsequent’. In other words, the charter period would commence before this date, but the Company would have specific remedies which may be enforced if the offloading performance tests are not successfully achieved. For example, the charter may provide that a zero day rate applies if the tests are not passed, or it may impose accrual of liquidated damages, and may require rectification within a specified period on pain of termination if this is not achieved. 7.8 Given the importance of the continued full functioning of the offloading system to ensure continuous production from the field, the FP Contractor would wish to make certain that the maintenance and repair of the offloading equipment is central to its planned maintenance program. It would obviously also wish to ensure that work is performed at a time which would not lead to shutdown of operations, as far as could reasonably be avoided. Since offloading is a periodic rather than continuous activity, this is usually possible to arrange. Downtime allowances for maintenance are covered in more detail in .

(ii) Offloading performance

7.9 The FP Contractor will be required to make sure that the FPSO is capable of discharging product at a specified minimum rate and pressure at the main deck of the visiting tanker, so that the oil can be raised from a deep laden FPSO to a visiting tanker in light

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condition. It is important to distinguish here between a warranty of capability – i.e. what the FPSO is intended to achieve, and a warranty of performance – i.e. a promise of what the FPSO will achieve on each occasion.2 The capability warranty would be relevant to the FP Contractor’s maintenance and repair obligations, setting the standard which needs to be applied to obtain the Company’s approval. Clearly, if the FP Contractor fails to do that, there may be consequences. However, the performance warranty would be relevant to whether the FP Contractor is obliged to compensate the Company, or accept a reduction in day rate, on each occasion that the warranted level of performance is not achieved. 7.10 It is unlikely that offloading underperformance would, of itself, have a direct effect on continued production, unless, of course, there is a major failure. With large FPSOs, there would normally be a significant margin between the scheduled date of offloading and the expected date of the storage tanks being full. Not only is this margin helpful for the FP Contractor if there are unexpected difficulties with offloading, the margin is essential to allow for delays in the availability of the offtake vessel, as mentioned in more detail in Section C. 7.11 If the offtake vessel is available on time but is unable to commence offloading operations due to a failure of the FPSO system to achieve the offloading performance targets, additional costs will be incurred. These are usually levied by the owners of the offtake vessel as ‘demurrage’.3 The Company may wish to make the FP Contractor responsible to indemnify it for demurrage incurred if this is due to the FP Contractor’s system breakdown or failure to achieve the warranted offloading performance. If that indemnity is given, the FP Contractor would wish to stipulate that the indemnity is the limit of its liability for failure to meet the performance requirements, in addition to the imposition of any applicable reduction in day rate and possibly impose a cap on the daily demurrage figure which it is obliged to indemnify. 7.12 As an illustration of how demurrage may arise in relation to offtake operations, in Great Elephant Corporation v Trafigura Beheer BV (The Crudesky),4 the charterer of an offtake vessel was ordered to pay demurrage (and an additional war risk premium) arising from the detention of the vessel off Nigeria while waiting to receive offtake from the FPSO. This was in circumstances where loading clearance understood to have been given to the FPSO terminal operator, Total, was subsequently revoked by the Nigerian authorities, as a result of which the necessary cargo documentation was not completed until a “fine” was paid some six weeks later. The charterer, Trafigura Beheer BV, was the purchaser at the top of a chain of sale of condensate originating from Total and supplied to the charterer by Vitol S.A., which had in turn bought the cargo from China Offshore Oil (Singapore) International PTD Ltd. Trafigura claimed an indemnity from other parties in the chain of sale. 7.13 The legal issues here centred on the operation of force majeure provisions in the sale contracts and how the indemnity claim could be passed down the line. At first instance, the court held that liability could not be passed down because of a force majeure clause

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in the sale contract excluding liability for failure or delay in performance of obligations due to “an unforeseeable act or event which is beyond the reasonable control of either party”. The High Court found that the actions of the Nigerian authorities were unforeseeable and out of the control of Total and so also of the seller to the charterer, Vitol. As such, Vitol could rely on the force majeure provisions. In allowing the charterer’s appeal, the Court of Appeal looked at whether Total – as a complete entity and not merely the local office – had acted reasonably and questioned why it had not sought and waited for official clearance before permitting loading to commence and found that Total’s decision not to follow official channels was doing something within one’s control. In turn, it was foreseeable (under the sale contract) that if official channels were by-passed, then the vessel’s departure could be delayed. There could be no reliance on the force majeure clause unless the relevant events were beyond the control of the FPSO terminal operator, that being the entity ultimately discharging the responsibility of loading the vessel.

(iii) Offloading quality

7.14 The offtake vessel may be entitled to reject a cargo if it does not meet an agreed minimum specification. This may occur due to the terms of the charter under which the offtake vessel operates, which would allow a cargo to be rejected for safety concerns, and also the terms of the underlying contract for sale, which may allow the buyer the option to reject if the cargo does not meet a minimum quality standard. 7.15 A typical safety concern for the offtake vessel would be if the cargo vapour pressure is excessively high. This may cause difficulty during pumping operations and may lead to excessive vapour in the vessel tanks. If the cargo is liquefied gas, there may also be safety concerns if the temperature is excessive. In such circumstances, the master of the receiving vessel would be entitled to reject the cargo under the terms of that vessel charter. 7.16 A typical quality concern is excessive water content. The water may be expected to settle during the voyage, discharging to the receiver a smaller quantity than the volume loaded. This would entitle the buyer to reject the cargo under the terms of the sale contract at the point of shipment. 7.17 It should be noted that the FP Contractor would not owe any direct contractual obligation to either the offtake vessel or the cargo buyer in relation to the condition of the cargo; in both cases, it is likely the contractual obligations are owed by the Company under the vessel charter and sale contract.5 However, the question arises whether, and the extent to which, the FP Contractor is liable to indemnify the Company under the FPSO charter terms for the consequence of delivery of off-spec product under the vessel charter or sale contract. 7.18 On a point of detail, the FPSO specification will identify the quality of product the FP Contractor is required to achieve, and, for the purpose of ensuring compliance with the FPSO charter, that quality may be monitored at the conclusion of the processing, before storage, or some time before offloading occurs. For the purposes of the offtake vessel charter, the quality will be monitored immediately before offloading or once the product is received in the offtake vessel. The FPSO charter should be clear which of

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these monitoring points should be used to verify compliance of the product with the FPSO contract specification. The FP Contractor needs to be alert also to ensuring that the specification to be complied with is that agreed in the FPSO charter, and not, insofar as it may differ, that agreed with the cargo buyer. 7.19 If the buyer rejects the cargo before it is loaded, it would obviously be left on board the FPSO, giving rise to shut-in of production due to storage tanks reaching their limit. If the reason for rejection relates to quality of the cargo, the first question would be whether remedial action could be taken to render it ready for shipment. For example, if the difficulty is excess water, it may be possible to remove water through settlement, or additional processing. That said, the owner of the offtake vessel may not be obliged to wait until that occurs, and a buyer may be entitled to cancel the offtake contract and claim its loss.6 7.20 If the cargo has been transferred to the receiving vessel before rejection, the difficulty of potential FPSO shutdown is avoided. Nevertheless, the question then is whether the FPSO is required to take back the rejected cargo, thereby reinstating the risk of imminent shut-in of production. Obviously, when these difficulties arise, there may be urgent negotiations between the parties involved, principally the buyer and seller of the cargo. Often, an agreement is reached to take delivery of the disputed cargo, without prejudice to rights of either party to recover its loss once the dispute is formally resolved. Either way, the important legal issue for the FP Contractor is to ensure that its responsibility under the FPSO charter for the condition of the cargo to be loaded should be limited to factors within its control. If, for example, in the case of excessive water content the FP Contractor is aware of the risk of the cargo being rejected, it may prefer to postpone offloading until the required condition is achieved through settlement or further processing. The FP Contractor may suffer consequences, but ideally these would be limited to those specified in the charter. For example, it may be necessary for the FP Contractor to accept a shortfall in reaching its production target, with a corresponding reduction in monthly remuneration. 7.21 The Company may be unwilling to allow postponement of the offloading, instead preferring to proceed with offloading the off-spec cargo. This may occur if the cargo buyer is willing to accept an off-spec cargo, whilst reserving its legal rights. If the cargo buyer should subsequently present a claim for its loss due to the off-spec cargo, including the right to reduce the purchase price, the question then arises whether the FP Contractor would be obliged to indemnify the Company for such claim or reduction in price. 7.22 The Company’s position would be straight forward; the loss was due directly to the cargo produced by the FP Contractor being off-spec. However, the FP Contractor would object on the grounds that the decision to proceed with loading an off-spec cargo was taken by the Company for its commercial purposes, and that the remedies for the consequences of an off-spec product being received by the cargo buyer should be limited to those expressly set out in the FPSO charter, for example a reduction in day rate. The answer would depend on the detail of the charter, and it may seem counter-intuitive for the Company to be indemnified for the consequences of its own decision. However, the FP Contractor would bear in mind that specified contractual remedies may not be

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the Company’s only remedies in the event of the FP Contractor’s breach, unless other remedies are expressly excluded. 7.23 One common method of expressly excluding other remedies, and limiting the FP Contractor’s exposure, is the imposition of liquidated damages. Payment of liquidated damages is an effective method of limiting the FP Contractor’s exposure, as they represent in all circumstances the limit of the Company’s claim for the relevant breach. However, they may be seen as imposing an onerous risk on the FP Contractor, insofar as they are payable for the consequences of off-spec product regardless of whether any loss has been incurred. That is the nature of liquidated damages. They represent a simplified form of claim, avoiding disputes about what loss may be caused by the breach, and are suitable for parties with a continuous commercial relationship. 7.24 Payment of liquidated damages for deficient product may become particularly onerous if the FPSO suffers from ongoing design or maintenance difficulties. The charter may provide a ratcheted mechanism for imposing liquidated damages for continuous off-spec cargoes – for each cargo the quantum of liquidated damages may be increased. If there are chronic deficiencies, the FP Contractor faces the risk of maximum liquidated damages being payable for each offloading, regardless of whether the deficiency has caused the Company any loss. Payment of liquidated damages in those circumstances may appear to be a penalty which the FP Contractor would argue is unenforceable. However, under English law, the liquidated damages would need to be wholly disproportionate to any foreseeable loss for there to be any prospect of the FP Contractor avoiding payment on the grounds of an unenforceable penalty.7 7.25 The question thus arises: where the FP Contractor has been unable to upgrade its production performance, is it obliged to accept the imposition of maximum liquidated damages for each cargo, perhaps for the entire charter period, rendering further performance uneconomic? 7.26 The starting point is that there is no principle of economic hardship under English law;8 if the charter has become uneconomic to perform, the FP Contractor is nevertheless bound to the existing terms. One slim possibility may be the reliance on the principle of prevention, which at its simplest prohibits the Company from enforcing its contractual remedies if the cause of loss is within the Company’s own contractual responsibility.9 7.27 For example, as mentioned earlier, if the Company insists on proceeding with offloading off-spec cargoes, without allowing the FP Contractor the opportunity to remove the deficiencies, it could be said that any loss is caused by the Company’s decision, not the existence of the deficiency. However, this does of course depend on whether the FP Contractor is able to remove the deficiencies, which may not be the case if there are ongoing design or maintenance problems. The Company’s consent is required before any substantial upgrade work is performed. The Company may prefer the current production to continue, despite the deficiencies, allowing it to deduct maximum liquidated damages on each occasion, and not consenting to any interruption in production to allow upgrade work to be performed. Questions would arise in those circumstances whether the Company’s loss which the liquidated damages is intended to compensate has been caused by

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deficiencies in the product or by the Company’s decision not to allow rectification work to be performed. In both these cases, the outcome may turn on how tightly the liquidated damages provisions are drawn, in particular, the precise circumstances in which liquidated damages are said to accrue. The FPSO charter may also include other remedies concerning continuous deficiencies in production, including termination.

(iv) Short-loading

7.28 Regarding the quantity of cargo to be loaded on the receiving vessel, it is usual for the ship owner to be obliged under the offtake vessel charter to load a full and complete cargo. The difficulty often experienced in FPSO offloading operations is that due to the stringent safety concerns and the effect of weather conditions on the offloading operation, it may be necessary to discontinue the process before a full cargo has been received. Also, it could be that the FPSO tank storage capacity is reduced for internal tank inspections or structural repairs, meaning that the specified offloading parcel size cannot be stored in advance of tanker arrival. 7.29 It may be that no party is at fault in these circumstances, and all instructions have been properly followed, but the consequence would nevertheless be that the ship owner has failed to discharge its obligation to load a full cargo at the FPSO site. This point was considered by the English High Court on appeal from an arbitrator.10 The charterer claimed its loss against the ship owner due to only two-thirds of the cargo having been loaded. The ship owner defended the claim on grounds that its obligation to load a full cargo is dependent on the charterer having made that full cargo available, which did not occur – even though there was a full cargo ready to be loaded, it was not made available to the ship owner due to the discontinuance of the offloading operations, which was not due to any fault on the part of the ship owner. The court agreed and found that the ship owner’s obligation was contingent upon and could not be performed without performance by the charterers of their obligation to ship or to tender for shipment a full and complete cargo. Thus, the court treated the short-loading due to discontinuance of the offloading process in the same way as short-loading due to interruption in the FPSO production, which prevented a full cargo being available.

C Offloading operations and responsibility

7.30 Ship-to-ship transfer from an FPSO to a seagoing vessel is easier said than done. The risks of spillage of oil are obvious. The risks of transhipment of liquefied gas products are even more inherently difficult. We explain the mechanics of offloading and transhipment operations in more detail in , Section (vii). In the performance of these operations, the relationship between the FPSO master, or Offshore Installation Manager, and the offtake vessel master is crucial. Both will be concerned to ensure that the operation is undertaken safely, that the cargo is transferred in the required quantity and condition, and any risk of pollution is avoided. 7.31

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The master of each vessel has responsibility for the safety and management of its own vessel as well as having the ultimate responsibility for the vessel’s crew, subject to the orders of the Company/charterer. For an FPSO offloading, the same entity will be the Company under the FPSO charter, the shipper under the product sale contract and possibly also the charterer under the offtake vessel charter. Given that the orders to discharge and the orders to receive cargo emanate from the same party, perhaps it may appear that the Company/charterer is responsible for overall control of the offloading operations; it is the party with the right to give orders which the FPSO master and vessel master must follow. To that extent, it may appear that each master is acting as agent of the Company. 7.32 However, the general nature of the FPSO charter follows that of the offtake vessel charter; although the master of each vessel is subject to and obliged to follow the orders of the Company/charterer, each respective master remains the servant of the owner/operator of the relevant vessel.11 Therefore, in each case, the master or OIM retains overall responsibility for operations of the vessel, insofar as this may affect safety, even though acting on the orders of the Company/charterer. In conventional maritime terminology, this is often described as a distinction between orders as to ‘employment’, which the ship owner is obliged to perform, and orders as to ‘navigation’, which rests always in the discretion of the master.12 A neat distinction provided from English case law is that matters of ‘employment’ embrace the economic aspect for the exploitation of the earning potential of the vessel, whilst ‘navigation’ embraces matters of seamanship. In other words, although the Company/charterer has the right to order what service is to be provided, it does not have the right to dictate how that service is provided. 7.33 The general position, as always, may be subject to the precise wording of the charter. For an FPSO charter, or O&M services agreement, it is more likely than for a conventional vessel charter that detailed provisions are included which give the Company the right to order how a service is to be provided. This is particularly so in relation to the Company’s standards for health and safety. The FPSO charter may also give the Company the right to appoint a berthing manager, to oversee the mooring procedures between the FPSO and the offtake vessel. This is a crucial responsibility (explained in more detail in , Section (vii)), as the close alignment of two vessels at sea is usually discouraged. It is a responsibility clearly falling within navigation, rather than employment, and thus may be seen as an exception to the usual limitation on the scope of the Company/charterer’s authority to give orders to the vessel master. Each master will be obliged to follow the instructions of the berthing manager. The matrix of responsibility attached to the FPSO charter (or O&M agreement) would usually set out which party is obliged to provide the berthing manager, or mooring master, and any additional support needed for the mooring and offloading operations. If the mooring master is provided by the FP Contractor, its orders would be deemed to be given for and on behalf of the FPSO master. If the mooring manager is provided by the Company, its orders would, for the purposes of performance of the FPSO charter, or O&M agreement, be deemed to be given for and on behalf of the Company. However, it should be noted that, under maritime law, the

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master of each vessel retains an overall right of intervention on matters of safety relating to his vessel. If an action is taken by a vessel master which is subsequently proven to be mistaken, there may be consequences for the vessel owner, as described in more detail in on liabilities. However, if faced with hazards that it perceives may threaten the safety of its vessel, the master may be entitled, or even obliged, to disobey orders from the berthing manager.13 7.34 The procedures to be followed for berthing and offloading are usually set out in a document described as terminal conditions or Conditions of Use (COU). These are provided by the Company and require the master of the offtake vessel to follow the directions of the FPSO master, or berthing manager, and to comply with all safety regulations relating to the FPSO location. Allocation of liability under a typical COU is described in , Section L. 7.35 To some extent, the obligation of the vessel master to comply with these conditions may override his authority over the safe operation of his own vessel. However, this does not prevent the vessel master from intervening if danger is apparent, or indeed absolve the vessel master of responsibility if he has failed to intervene. The legal position is the same as under any vessel charter – the master’s contractual obligation to follow orders does not override the master’s authority as to the safety of the vessel. 7.36 If the offtake vessel master fails to follow orders or comply with the terminal conditions, what are the consequences under the FPSO charter terms? There may be a question whether the vessel master was in his rights to intervene and to disobey orders: quite apart from allocation of liability under the vessel charter, the issue under the FPSO charter would be whether the disobeyed order was one which the vessel master should have obeyed. It may be an order that the FPSO master or berthing manager would be entitled to give under the COU, but it does not necessarily follow that the vessel master was obliged to follow that order if he was correct in his assessment that it would have been unsafe to do so. 7.37 As a side note, it may be thought that offloading operations are a form of ship-to-ship (STS) procedure, which would be subject to different rights and obligations from normal cargo discharge operations. However, technically, STS operations concern two seagoing vessels transferring cargo at a place that is not a designated cargo terminal. An FPSO is a designated cargo terminal. Although, under a typical STS charter clause, charterer’s right to order loading or discharge via STS transfer is subject to specified conditions, for example, the approval of the vessel master, it would be clear from both the FPSO charter (which by its very nature contemplates offloading by way of transfer to an offtake vessel) and also the offtake vessel charter (which would be for the purpose of loading at the FPSO), that the transfer of cargo from the FPSO to the offtake vessel is the essential charter service and thus approval may be implied. 7.38 Therefore, the contemplated offloading procedure requires each of the two masters to take responsibility for the safe operation of the cargo transfer. In such case, do both have equal responsibility? In particular, if either foresees a risk of safety being compromised, does it have the right to intervene, and suspend offloading operations? 7.39

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The answer is usually found in the COU which the visiting vessel master will be required to agree before operations may commence. This may be a condition of the offtake vessel charter, whereby the Company requires the ship owner to agree in advance to a specified form of COU, or it may be required to agree a form to be produced by the FPSO master. 7.40 We consider in more detail in the liability if the operations fail, or one party intervenes causing loss, damage or pollution. Our primary concern here is the consequences of one of the masters intervening, or failing to perform his obligations, with the consequence of delay or termination of the offloading procedure. The consequences under the FPSO charter are considered earlier in this chapter. The relevant question here is whether those consequences will give rise to a different outcome if the reason for the suspension of termination rests with the offtake vessel. For example, if the vessel master failed to follow the requirements of the agreed COU, or the offtake vessel was, in the opinion of the FPSO master, unfit for safe operations.

(a) Illustration 1

7.41 The scenario: The two vessels are connected for offloading operations, and cargo transfer commences. The offtake DP14 system and vessel thrusters are not fully effective, causing the offtake vessel to drift closer to the FPSO than the minimum distance required in the COU. The FPSO master/OIM suspends operations until the required distance can be achieved. The offtake vessel fails to maintain the required distance a second time, following which the FPSO master/OIM insists on terminating the operation, and requiring the offtake vessel to leave with a part cargo. A replacement offtake vessel cannot be scheduled to arrive ready for offloading before the FPSO production is shut down due to the storage tanks being full. 7.42 The issues: Would the FP Contactor be obliged to accept a zero day rate during this period of suspension before production may recommence, due to its decision to terminate the offloading operation? 7.43 Arguments that might arise: As always, the outcome will depend on the precise wording of the charter day rate provisions, but the FP Contractor would argue: first, it is at all times providing the service required by the Company, and by terminating potentially unsafe operations, it is exercising the duty of due diligence required of it. Therefore, the full day rate should be payable (see further on compensation). Second, the FP Contractor would argue that suspension has been due to an act or omission of the offtake vessel, chartered directly or indirectly by the Company, and therefore to that extent is a default caused by a member of Company group. Therefore, at least the standby rate should apply. 7.44 The Company, which may not have been directly involved in the offloading operation, may complain that the FPSO master/OIM has acted unnecessarily strictly, and has failed to take into account the commercial consequences of his decision to terminate operations when no actual loss or damage had occurred. Thus, this is a decision for which the FP Contractor should take the responsibility. However, if such argument were presented on behalf of the Company in London arbitration, it is doubtful that, where the

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master has genuinely acted in good faith in the face of perceived danger, the Company’s argument would be heard with much sympathy.

D Offtake vessel scheduling

7.45 One of the few certainties of maritime trade is that ships are not always in the right place at the right time. Whole books are written on the consequences of ships not being ready for loading cargo. The consequences of lateness in loading cargo to an off-take vessel from an FPSO are illustrated in paragraphs 7.12 and 7.13. Therefore, timely scheduling and monitoring the availability of offtake vessels, and mitigating the effects of delay, are crucial to successful FPSO operations. This is doubly, or even triply, so for FLNG operations, where different types of carrying vessels may be needed, each at different loading times.

(i) Scheduling by the FP Contractor

7.46 As explained in paragraph 7.5 responsibility for offtake vessel scheduling usually rests with the Company under an FPSO charter. The danger for an FP Contractor accepting this responsibility on behalf of the Company under the FPSO charter terms is demonstrated by a dispute concerning discharge locations.

(a) Illustration 2

7.47 The scenario: The FP Contractor was required to charter shuttle tankers and to schedule arrival at the FPSO before full storage capacity was reached, allowing sufficient margin for weather loading downtime. The Company had the right to nominate discharge locations within a nominated range, the expectation being that the Company would choose within that range the closest refinery. However, the Company’s downstream priorities changed, and it ordered discharge at the most remote refinery within the discharge range. As a result, shuttle tankers dedicated to offloading at the FPSO were not always able to do so in time, due to the additional time required to reach the furthest discharge location. 7.48 The issues arising: The FP Contractor objected on the grounds that, although the discharge orders were to refineries within the permitted range, and therefore legitimate, the Company had to accept the consequences of those orders insofar as they caused offloading delays. The Company nevertheless persisted in giving those discharge orders on the grounds that responsibility for ensuring vessels were available to load when required rested with the Contractor, even to the extent of chartering in substitute vessels in place of those performing a dedicated shuttle service.

(ii) Scheduling by the Company

7.49 As mentioned, it is more common for the Company to take responsibility for scheduling offtake vessels. This fits the commercial context, as the Company is the owner of the cargo to be carried, or at least acts on behalf of the cargo owners, as operator of the oilfield.15 7.50

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There are various options for the Company to control the operation of offtake tankers: directly owning the vessels, chartering on bareboat terms, chartering on long-term time charters, spot charters (either on time charter or voyage charter terms), contracts of affreightment, or selling the cargo on FOB terms which require the buyer to provide the carrying vessel, and a combination of the foregoing.16 These chartering arrangements are considered in paragraphs 7.53 to 7.60. 7.51 The important, and obvious, point as far as performance of the FPSO charter is concerned is that, whichever form of offtake vessel transportation the Company employs, the responsibility to ensure the performing vessel arrives ready to load in accordance with the FPSO offloading schedule rests entirely with the Company, regardless of default by a third-party ship owner. 7.52 As explained later in this chapter, the risk of a vessel not being available on time increases with the greater degree of flexibility in the chartering operations. That is a risk for the Company to consider when choosing its vessel programme. At one end of the scale would be a fleet of owned shuttle tankers with sufficient capacity for all FPSO production; at the other would be chartering-in on a spot basis, relying on sufficient capacity being available when needed. For liquid gas offloading, available capacity for both LNG and LPG/condensate cargo may be needed, for which dedicated tonnage may be preferable. If offloading cannot occur due to unavailability of an offtake vessel, the FP Contractor would usually expect to continue to be paid the full day rate, even though it may be necessary for production to cease or to be reduced. The Company may wish to negotiate a limitation of its exposure by being entitled to suspend FPSO operations and pay only the standby rate. However, unless this right is expressly included in the FPSO charter terms, the normal position would be that, as far as the FPSO remains ready, able and willing to perform its services, the FP Contractor will be entitled to full payment if the reason for cessation of operations is the unavailability of an offtake tanker. Bearing this in mind, whichever form of offtake vessel programme is adopted by the Company, contingencies are required. Thus, if the Company is employing dedicated vessels on a shuttle basis but suffers a substantial delay to one of those vessels, it may be necessary to charter in a substitute vessel on a spot fixture basis. In this respect, there may be a significant increase in the risk of offtake performance from an FLNG facility. Obtaining a spot fixture for arrival at the loading site on time may not be so easy to achieve if an LNG carrier is required. The number of available and suitable vessels may be substantially less than for conventional tankers, and accordingly a company requiring LNG carriers may take a conservative approach, building a margin for redundancy in its carrier capacity, despite the substantial increase in costs.

(iii) Dedicated offtake vessels

7.53 The most certain method for the Company to control its shipping, in order to minimise the risk of tankers not being available on time, is to have at least one dedicated

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offtake vessel, with additional vessels to match the volume of production and required shuttle time for voyages to delivery ports. Whether the Company is the registered owner of the vessel or a bareboat owner makes no difference from an operational viewpoint. In each case, the Company, as owner or bareboat charterer, takes responsibility for the performance of the vessel, and is required to provide management services, either through its internal resources or outsourcing to a third-party ship manager.17 7.54 Whilst having dedicated vessels reduces the risk of downtime due to vessel unavailability, the Company would need to factor in the cost of periods of downtime or low production when the shuttle tankers would be idle. The same risk occurs if vessels are employed on a time charter basis, as the time charterer gives the same take or pay commitment. The more significant risk for the Company in employing tonnage on a long-term dedicated basis is the uncertainty of the FPSO production period. If the Company is the registered owner of the vessel, it would need to factor in the need to redeploy the vessel once the FPSO production ceases. The same consideration arises for a vessel on a long-term charter, where there may be a risk of production ending before the end of the vessel charter period, although the consequences may be mitigated by matching the initial charter period to the FPSO term, with options to extend if the FPSO charter is extended. Alternatively, the Company may wish to include a right to terminate the vessel charter if FPSO production ends.

(iv) Long-term time charters

7.55 A bareboat charter is a form of time charter – i.e. the charter of a vessel by reference to a period of time. This is apt to cause confusion, as the shipping industry reserves the expression ‘time charter’ for a contract for the provision of services of a vessel for an agreed period, i.e. not just the bareboat, but the vessel plus the services of the master and crew. The key feature of a time charter for services is the ship owner’s obligation to perform in accordance with charterer’s orders. Hire, or day rate, is payable for each day of the charter period other than for lost time when service is suspended. Thus, if a vessel is chartered in for a long period to perform a dedicated service, the charterer takes the commercial risk of idle time, as it would do if the vessel is operated under bareboat charter terms. However, as the Company, as charterer, dictates where and when the vessel is required to discharge cargo, it has control over the expected date of the vessel’s return to the FPSO for loading. 7.56 Again, as with bareboat charters, the Company would wish to match the long-term time charter period with the FPSO production period, with options to extend as required.

(v) Short-term charters

7.57 Time charters may also be used for short periods, even a single voyage. The period may in fact be the expected length of the voyage, e.g. from the FPSO to the refinery, in which case, it is described as being a trip charter, and, under English law, is treated as a form of time charter. 7.58

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The advantage of a single voyage time charter may be that the Company can match the timing of the charter to the schedule for the FPSO production, without risking periods of idle time as may occur in the performance of a long-term charter. However, it should be noted that the charter is usually agreed, or fixed, when the vessel is performing a voyage under the orders of an earlier charterer. There are complex legal cases concerning liability for arrival of vessels performing third-party obligations.18 Suffice to say here that there are obvious uncertainties in the timely performance of orders by a vessel which is currently performing orders under a third-party charter, in addition to the usual risks of delay inherent in shipping.

(vi) Voyage charters/COAs 19

7.59 Where a vessel is required to perform only one voyage, it is more common for this to be done on voyage charter terms; i.e. a contract for the performance of a specified voyage rather than for performance over a period of time.20 The significant difference between a voyage charter and a time charter is that the risk of delay during the voyage rests with the owner, who receives only the agreed lump sum or freight based on cargo volume, no matter how long the voyage takes. If the vessel is delayed at the loading or discharging location, the charterer will be obliged to compensate the ship owner by way of payment of daily demurrage. It should be noted that the availability of vessels to perform single voyages as and when needed is subject also to commercial pressures; the shipping market may turn quickly. This may create difficulties in obtaining a suitable vessel on time at a suitable price. To manage these fluctuations, the Company may wish to commit a ship owner to providing offtake vessels on a contract of affreightment, or COA, basis. This is particularly suitable for shipments from a place of production. A company will know the likely volume of oil or gas to be produced each year, within a range, the frequency of required shipments and the size of the vessels. The ship owner would manage a fleet of suitable vessels, either owned or chartered in, and be obliged to make one available as and when needed, following a detailed scheduling procedure.

(vii) FOB 21/CFR22sales

7.60 If the cargo is being sold CFR the Company would be required to provide the carrying vessel.23 Although a voyage charter in this context may be suitable, matching

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the sale contract terms for the carriage of the particular cargo, the Company is not bound to a particular form of charter, provided the vessel is acceptable to the cargo buyers. The contractual commitment between the operator of the ship and the cargo receiver is made through the function of a bill of lading, signed by the vessel’s master, and transferrable, if the cargo is sold before discharge. In short, the CFR sale is a common and convenient form of a cargo being made available for trading. However, the Company’s priority may be to ensure safe and timely offloading, without being directly involved in the scheduling of vessels and the delivery of product to market. Its preference may be FOB sales, whereby the cargo buyer is responsible to provide a suitable vessel, acceptable to the Company seller.24 As a consequence, the vessel scheduled to present at the FPSO location for loading will not be one over which the Company has direct control. The requirement for the vessel to be suitable for loading at the FPSO will of course be included in the sale contract terms, but the risk of a vessel arriving in an unsuitable condition is increased. This emphasises the importance of the conditions of use or terminal regulations which any loading vessel is required to be agreed before commencement of loading.

(viii) DES sales

7.61 Although oil is generally sold on FOB or CFR terms, LNG is sold FOB or DES,25 and hardly ever on CFR terms. The reason for this is principally that LNG is not suitable for being sold in transit, as the volume of LNG inevitably reduces during the laden voyage due to requirements of natural boil off. If the cargo is delivered DES, the receiver will pay only for the quantity received at the discharge port, and the Company acting as seller may be required to ensure the carrying vessel arrives ready for discharge within a specified delivery window. However, this would be of no concern to an FP Contractor under FPSO charter terms. Provided the cargo is loaded in accordance with the FPSO charter requirements, any following commitment in relation to delivery of the cargo would be a concern only between the Company and its buyer.

1 For an FLNG, offloading of more than one production stream may be required.

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