We are starting to see the first standard contracts for decommissioning oil and gas projects
According to the latest Economic Report from Oil and Gas UK, around 475 fixed facilities, 10,000 kilometres of pipeline and 5,000 wells will have to be decommissioned on the UK’s continental shelf. Expenditure on decommissioning projects is forecast to remain in the region of £1.5bn to £2bn per year through to 2025.
It is estimated that around one-fifth of that will be spent on preparing, removing and dismantling the topsides of these structures – the demolition phase. Odd then that relatively few British building contractors with experience of large-scale demolition projects are involved in this sector.
Odd that relatively few British building contractors with experience of large-scale demolition are involved in this
There are some obvious reasons for the onshore contractors’ apparent lack of interest, such as the logistical challenges, and risks relating to the uncertainty about the state of a structure and the presence of hazardous materials.
But the onshore construction industry has plenty of experience to share with the decommissioning industry. Many measures have been put in place over the last 20 years to improve onshore project outcomes: reformed payment procedures; enhanced dispute resolution procedures; highly developed standard forms of contract; an increased focus on developing core client skills; the use of new methods of procurement; and fundamentally a deep understanding of how the risks of a construction project can be effectively balanced.
Two new forms
Moves are already afoot to produce the decommissioning industry’s first standard contract forms. When contracting, the oil and gas industry frequently uses the LOGIC forms. To date there has been no specific decommissioning form, but that is about to change. Oil and Gas UK’s decommissioning working group has produced a new LOGIC decommissioning contract with guidance notes.
The contract was released in December 2018. Now available, parties will be able to use it for the dismantling, removal and transport to shore of all types of offshore infrastructure.
The Baltic and International Maritime Council (BIMCO), a large international shipping industry association, is also currently producing a decommissioning contract for the benefit of its members.
Mindful of the uncertainties of this type of project, the new LOGIC standard form contains a place for the contractor to set out the assumptions upon which it has based its price, work methodology and allocation of resources. The client will be able to qualify those assumptions if it wants to or ask for provisional pricing. If the assumptions are later found to be incorrect due to inaccurate or insufficient technical information having been provided, the contractor will be entitled to a variation.
As the construction industry already knows, an efficient and effective dispute resolution procedure is also crucial to keep the project going. The Construction Act does not apply to the demolition of offshore installations because they are not structures forming or to form part of the land. Nevertheless, drawing on the positive experience of the construction industry, the new LOGIC decommissioning contract will be the first in the LOGIC suite to contain an adjudication clause. BIMCO is thought to be considering something similar.
Waste disposal is an important element of any decommissioning project but, since disposal normally takes place onshore, the parties will simply be subject to the existing onshore regime. The new LOGIC contract will allow the contractor, if it wishes, to take ownership of part of the structure to sell it on as scrap. That will be attractive to those contractors who can sell it on for profit. The parties will be able to specify in the contract what material will transfer and when.
Although a project of this nature may generally be thought to be less time critical, delays to completion can still lead to loss being suffered. For example, a heavy lift vessel may remain on standby to take the structure to shore. The new LOGIC standard form will therefore still contain a liquidated damages clause.
Beyond this, the contract remains to be adapted by the parties who wish to use it and there is no reason why the more familiar balance of risk in onshore construction contracts should not be adopted for future offshore projects.
The Oil and Gas Authority has set the decommissioning industry a target to reduce the costs of decommissioning oil and gas infrastructure over the next 40 years by at least 35%. So the decommissioning industry is looking for innovation and ideas to help reduce costs. Where better to find them than in the UK’s construction industry? There are many opportunities for UK contractors to diversify operations to enable them to compete successfully in this valuable offshore market.
Kirsti Olson is a partner in Dentons