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By James Downie, Partner

Contractors who want to get a slice of the long-anticipated deluge of decommissioning work in the North Sea need to be aware their contracts should cater for unknowns which, if not addressed properly, could see their profits from these jobs suppressed or wiped out. A specialist contractor taking on work as part of a decommissioning project may discover discrepancies, from differences between information on paper – for example in platform design – and the reality offshore, to discovering material such as asbestos or NORM, which they weren’t told would be there.

Discrepancies and unknowns such as these can require time-consuming and costly intervention so their contracts need to protect them from the risk of cost over-runs and delays which may result. Oilfield service companies have found it difficult to establish exactly when they should tool up for decommissioning despite predictions of an imminent “wall of work”. With the exception of a couple of big projects, it is only in recent times that anything more than a trickle of tender opportunities has manifested.

In its activity survey 2015 Oil and Gas UK reported that there had been more than £1 billion spent on decommissioning in 2014 and that the average annual spend on decommissioning over the second half of this decade is likely to be in the region of £1.8 billion. OGUK’s Economic Report 2015 states that by 2018, more than 50 fields will be approaching or undertaking decommissioning. The “lower for longer” oil price environment might impact on these numbers. As far as appropriate contractual arrangements for decommissioning work are concerned, there are few case studies to consider. If a contractor is positioned to get a share of the expected decommissioning spend how can it protect itself from the unknowns which are inherent in a project? The operator’s invitation to tender will set out the scope of work but how good is the information provided by the operator given the potential age of the asset? The simple fact that the facilities may have been out there for decades means that a considerable list of unknowns potentially lie in wait, only to be encountered during the work itself. The operator may have been involved only for part of the field’s life and the “as-built” drawings lost or rendered largely outdated because of modifications over the years. If the operator asks for part of the job to be completed at a fixed price, how can the contractor offer a price when there are so many unknowns? Recognising the volume of risk in decommissioning and allocating responsibility between the operator / owners and the contractor is essential if resulting issues are to be handled appropriately, and adverse business impacts mitigated. How do you balance the fact that by law primary responsibility for decommissioning rests with the asset owners while also acknowledging that they don’t want to write a blank cheque to contractors for decommissioning work? One route is for the contractor to tender a price based on the operator’s information and effectively make the price subject to a set of assumptions included in the tender. For example, if no information is provided by the operator as to the existence of asbestos the contractor might add an assumption, “There is no asbestos present on the platform” and, if it transpires that the substance is present it leads into the variation procedure in the contract – allowing the contractor to increase the remuneration to take account of additional or specialist work required to deal with the issue. The operator can review the assumptions at the tender evaluation stage, establish what unknowns or risks the contractor is effectively willing to bear, and those which will trigger a price variation if their assumptions are incorrect.

Chambers UK 2106

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