CHAPTER 10B SUBSEA PRODUCTION
| Jurisdiction | United States |
(Oct 1998)
SUBSEA PRODUCTION
Shell Oil Company
New Orleans, Louisiana
INTRODUCTION
The facts which have just been set out surrounding subsea production raise many legal issues. Resolution of some of these issues are driven by legal requirements while others, although involving legal positions, will be resolved in the negotiations between the parties based on their respective bargaining positions. In both instances, it is important to understand the legal issues in order to make well reasoned legal decisions and risk assumptions. This presentation will primarily focus on identification of legal issues.
I. THE SURFACE LOCATION
Subsea development by its very nature requires that a surface location be secured in order to provide for location of both well control facilities as well as production handling facilities. Key determinants are legal right to access the platform and availability of pipeline transportation to shore for the hydrocarbon production. In addition, concerns can arise over the impact on the quality of production which may result from commingling at the surface location. Each of these issues will be discussed in turn.
The use of "artificial islands", e.g. platforms, is a necessary part of Outer Continental Shelf development. Space on fixed platforms is generally carefully planned since for fixed structures, space is limited and size (number of legs) impacts cost factors such as the quality and amount of steel for deck space and derrick barge size and working time needed for lift and installation. For floating structures like Tension Leg Platforms (TLP), weight budgets are carefully maintained since weight increases require larger TLPs which means increase in costs. Each pound of weight on a TLP is directly related to size and therefore costs. Until recently, in OCS development, production handling itself was viewed primarily as a business accommodation rather than a major source of revenue. Therefore, platforms were not specifically designed and intended to accomodate other third party production much less subsea production. It was usually only when original production declines were experienced that owners became open to third party production handling in order to offset expense and generate added revenue on the downside slope of the production curve. Future development in the Gulf, especially in deep water, may change this attitude toward design and construction
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and may result in active solicitation to handle third party production.
There is presently no known legislative or regulatory requirement precedent which obligates a platform owner to involuntarily accomodate third party subsea production controls and production handling on its platform. There is no condemnation or expropriation right nor is there any other explicit or implied legal obligation to accomodate subsea production. It is unlikely and impractical to see any emerge. The physical and factual requirements for subsea handling would make exercise of this right complex and inappropriate. Among the legal risks involved would be: (1) allocation of liability for personal injury and death on the platform of employees and contractors of the subsea lessee and of the platform owner; (2) platform owner liability for damage or loss of the reservoir resulting from operation of the subsea wells controls; (3) oil spill and pollution liability under OPA 90;1 (4) since it is unlikely that there would be physical space on the platform for a second full set of production handling facilities, the serious issue of capacity allocation ordinarily referenced in the existing production handling facilities would need to be addressed; (5) problems related to quality improvement or impairment resulting from commingling of production prior to measurement arise; (6) terms and conditions and liability and responsibility for compliance with the terms and conditions of surface commingling approvals from the MMS would need to be addressed;2 (7) costs allocation for fuel used in production handling need to be addressed and if fuel use is unapproved in surface commingling, then business handling of royalty implications addressed; (8) for gas production, allocation and responsibility for costs and penalties for violation of tariff provisions, need to be addressed, e.g. imbalance penalties, operation flow orders.
In light of these complexities it would be impractical and complex to attempt to resolve these issues in any type of involuntary process. Timing is also critical in OCS development. The appeals, testimony and evidence needed to resolve these various issues render such process impractical even if it did exist. Therefore, the best solution is and continues to be market place negotiation between surface platform owner and subsea developer.
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II. TRANSPORTATION
Also critical to selection of a surface location is pipeline transportation capacity to shore. The requirement to lay pipeline infrastructure is a significant cost which impacts project economics. Therefore, a surface location which has ready access to pipeline transportation is the ideal candidate for subsea development in light of the cost of running subsea production from the subsea manifold to the surface location. The right balance of costs versus benefit generally dictates site selection. The Outer Continental Shelf Lands Act and the rights-of-way granted thereunder create access rights to both oil and gas transportation pipelines.3 Therefore, the subsea producer's legal rights to access to pipeline transportation are not a problem. However, the practical realities of costs, pipeline capacity restraints, quality impacts of new production (both plus and minus), and the timing of the process needed to resolve these issues through litigation will drive decisions on whether to build new or negotiate entry into existing lines.
III. QUALITY IMPACTS
Among the more interesting issues raised in subsea surface handling is that of quality impacts to subsea and surface production which may occur as a result of commingling prior to final measurement at a LACT unit. For example, production from oil wells is generally tested on a regular periodic basis since the components of gravity and sulphur content can vary over production life. Subsea production can be bested and measured for allocation purposes after passing through the flange connecting to the surface platform. Similarly, the platform owners production will also be tested prior to entry into the joint handling facilities. When both streams are subsequently commingled in the surface handing facilities, then either an impairment or an improvement may result. Since this occurs prior to LACT where the combined stream is measured, the subsea and surface production owners may find it necessary to establish quality banks or make quality adjustments to address their respective concerns. Both business and royalty implications, if any, of this arrangement should be addressed by the parties, both in commercial contract as well as in regulatory compliance.
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IV. HUB PLATFORMS
A likely result of subsea development will be the emergence of "Hub Platforms". For present purposes, a "Hub Platform" is defined as a platform which is specifically used or installed for the purpose of servicing subsea production from several different leases which may or may not have the same ownership interest as the Hub Platform owner itself. In some instances, there may be a specific plan of development based on common ownership of the subsea fields and Hub Platform. In other instances, the Hub Platform may be designed to handle the owner's subsea production and may "speculate" on the use of the Hub Platform by other subsea leases.
It is not absolutely necessary to own the lease in the lease block on which the Hub Platform is installed. The OCS Lands Act in Section 5(a)(6) (43 USC § 1334(a)(6)) provides for the grants of a right of use and easement for development. This provision is captured in 30 CFR 250.7 (1997) as follows:
"(a) In addition to the rights and privileges granted to a lessee under a lease issued or maintained under the Act, the Regional Supervisor may grant a lessee, subject to conditions prescribed by the Regional Supervisor, a right of use and easement on the OCS to construct and maintain off the lease platforms, artificial islands, and all installations and other devices which are permanently or temporarily attached to the seabed and which are used for conducting exploration, development, and production activities or other operations on or off the lease which are related to such activities. Rights of use and easement on the OCS shall be issued and exercised in accordance with the provisions of this section.
(b) A right of use and easement, if on an area subject to any lease issued or maintained under the Act, shall be granted only after the holder of the lease has been notified by the applicant and afforded an opportunity to comment on the application.
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(d) The right granted by a right of use and easement shall be exercised in accordance with the requirements placed upon lessees by the regulations in this part."
This provision should over time result in an increase of structures which remain in place by easement in lieu of lease for service of multiple lease subsea production fields. Although such approvals have been granted in the past, they have principally centered around platforms left in place after cessation of production which have been used for other purposes such as pipeline compression. It is to expected that permission to construct and install new platforms through easement will become more common...
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