CHAPTER 9 FABRICATION AND INSTALLATION OF PLATFORMS

• Jurisdiction: United States

Oil and Gas Development on the Outer Continental Shelf
(Oct 1998)
CHAPTER 9
FABRICATION AND INSTALLATION OF PLATFORMS
John T. Nesser, III, Esq. ^*
Nesser, King & LeBlone
New Orleans, Louisiana

Contracts for the design, fabrication and installation of platforms for oil and gas production on the outer continental shelf ("OCS") frequently involve total expenditures of hundreds of millions dollars. Because these projects involve significant risks in all phases of the Work, they must be carefully and thoughtfully negotiated and performed.

In order to minimize the potential impact of such risks, the oil company seeking to develop natural resources on the OCS (the "Company") and its contractor ("Contractor") should for each phase of the construction project:

1. Assess the risks attendant to the performance of that phase;

2. Allocate those risks amongst themselves in a detailed written agreement (the "Contract"); and,

3. Mitigate the potential harm posed by the risks by:

a. Establishing systems to inspect and monitor the performance of the work and thereby timely identify and address problems;

b. Communicating with each other in accordance with the Contract and as otherwise required to progress the Work; and,

c. Insuring risks where it is economically beneficial to do so.

This paper addresses the primary risks associated with Contracts for the design, fabrication and installation of offshore facilities, the law giving rise to such risks, and observations on addressing those risks. However, it must be emphasized that each situation is unique and the commentary herein is merely a starting point for determining the rights and obligations of a party or selecting a course of conduct.

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I. INTRODUCTION.

There are numerous background issues which impact construction Contracts, ranging from the technological developments that have made exploration of resources beneath 400 meters or more of water ("Deepwater") possible to the law relevant to contract performance.¹

A. Background.

1. Movement to Deepwater.

In 1994, only eight percent (8%) of bids at the annual Minerals Management Service ("MMS") Western Gulf of Mexico Lease Sale were for deepwater tracts.² This number jumped to thirty-nine percent (39%) in 1995, to sixty-four percent (64%) in 1996, and to a record high eighty-one percent (81%) in 1997. Even with the uncertainties surrounding the market at the 1998 MMS Lease Sale for the Western Gulf, sixty-nine percent (69%) of all bids were for deepwater tracts.³

2. Technological Developments Supporting Deepwater Development.

There are presently a number of technologies available to support deepwater development on the OCS. They can be grouped into two broad categories: "fixed OCS facilities" and "floating OCS facilities".

a. Fixed OCS Facilities.

A "fixed OCS facility" is a "bottom founded OCS facility permanently attached to the seabed or subsoil of the OCS, including platforms, guyed towers, articulated gravity platforms and other structures."⁴ As described by the MMS,⁵ those available for deepwater development include:

(1) Fixed Platform — a jacket fixed to the sea-bed with a deck placed on top, providing space for crew quarters, drilling rigs,

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and production facilities. The fixed platform is generally considered economically feasible for installation in water depths up to about 1,650 feet.

(2) Compliant Tower — a narrow, flexible tower and a piled foundation that can support a conventional deck for drilling and production operations. Unlike the fixed platform, the compliant tower withstands large lateral forces by sustaining significant lateral deflections. It is usually used in water depths between 1,500 and 3,000 feet.

b. Floating OCS Facilities.

A "floating OCS facility" is a "buoyant" structure "securely and substantially moored [to the OCS] so that it cannot be moved without special effort".⁶ They generally include the following facilities, which are by definition exclusive of mobile offshore drilling units and other more traditional vessels⁷ :

(1) SeaStar Tension Leg Platform (SStar) — a floating mini-tension leg platform of relatively low cost developed for production of smaller deepwater reserves which would be uneconomic to produce using more conventional deepwater production systems. It can also be used as a utility, satellite, or early production platform for larger deepwater discoveries. SeaStar platforms can be used in water depths ranging from 600 to 3,500 feet.

(2) Floating Production System (FPS) — a semi-submersible that is equipped with drilling and production equipment. It is anchored in place with wire rope and chain, or can be dynamically positioned using rotating thrusters. Wellheads are located on the ocean floor and are connected to the surface deck with production risers designed to accommodate platform motion. The FPS are suggested for use in water depths from 600 to 6,000 feet.

(3) Tension Leg Platform (TLP) — a floating structure held in place by vertical, tensioned tendons connected to the sea floor by pile-secured templates. Tensioned tendons provide for use of the

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TLP in a broad water depth range and for limited vertical motion. TLP's can be used in water depths up to about 6,000 feet.

(4) SPAR Platform (SPAR) consists of a large diameter single vertical cylinder supporting a deck. It has a typical fixed platform topside (surface deck with drilling and production equipment), three types of risers (production, drilling and export), and a hull that is moored using a taut caternary system of six to twenty lines anchored into the seafloor. SPARs are presently used in water depths up to 3,000 feet, although existing technology may extend this to about 10,000 feet.

c. Subseas Systems.

In addition to fixed platforms and floating OCS facilities, subseas systems are also available to exploit natural resources in deepwater. These systems, which likely would be considered fixed OCS facilities, range from single subsea wells producing to a nearby platform, FPS, or TLP, to multiple wells producing through a manifold and pipeline system to a distant production facility. These systems are now used in water depths of 7,000 feet or more.

B. What is the OCS?

The Outer Continental Shelf Lands Act ("OCSLA") was enacted in 1953 to control mineral exploration and development on the OCS.⁸ It defines the OCS to mean "all submerged lands lying seaward and outside of the area of lands beneath navigable waters as defined in [43 U.S.C. § 1301 ] and of which the subsoil and seabed appertain to the United States and are subject to its jurisdiction and control."⁹ The question thus becomes to what extent does the United States purport to control the territory seaward from its various states?

1. Existing Executive Order.

At the time of the enactment of OCSLA, there was an existing Executive Order asserting the United State's "jurisdiction and control" over the OCS indicating the OCS was the area covered by no more than 100 fathoms (600 feet or 200 meters) of water.¹⁰

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2. 1958 Convention on Continental Shelf.

In 1964, the 1958 Convention on the Continental Shelf entered into force after ratification by the United States. It defines "continental shelf" in a flexible manner tied to a physical ability to explore for oil:

For the purpose of these articles, the term "continental shelf" is used as referring: (a) to the seabed and subsoil of the submarine areas adjacent to the coast but outside the area of the territorial sea, to a depth of 200 meters or, beyond that limit, to where the depth of the superadjacent waters admits of the exploitation of the natural resources of the said areas; (b) to the seabed and subsoil of similar submarine areas adjacent to the coast of islands.¹¹

3. Minerals Management Service.

Since 1982, the MMS has been responsible for leasing, developing, and supervising recovery of natural resources on the OCS.¹² According to the MMS, and somewhat different from the 1958 Convention, the OCS "consists of the submerged lands lying between the seaward extent of the various States'jurisdiction¹³ and the seaward extent of Federal jurisdiction.¹⁴ The seaward limit of Federal jurisdiction

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is, in turn, defined by the MMS "under accepted principles of international law"¹⁵ as follows:

the farthest of 200 nautical miles seaward of the baseline from which the breadth of the territorial sea is measured or, if the continental shelf can be shown to exceed 200 nautical miles, a distance not greater than a line 100 nautical miles from the 2,500 meter isobath or a line 350 nautical miles from the baseline.

Outer Continental Shelf limits greater than 200 nautical miles but less than either the 2,500 meter isobath plus 100 nautical miles or 350 nautical miles are defined by a line 60 nautical miles seaward of the foot of the continental slope or by a line seaward of the foot of the continental slope connecting points where the sediment thickness divided by the distance to the foot of the slope equals 0.01, whichever is farthest.¹⁶

What exactly this definition means is, thankfully, beyond the scope of this paper. Suffice it to say that to the extent the Company obtains lease rights from the MMS, and no matter the depth of the water above the tract, those rights will be on the OCS of the United States, as that is the limit of the MMS's responsibility.

II. RISK IDENTIFICATION.

The risks to be addressed and the parties' ability to contractually allocate these risks are a function of the applicable law. As such, it is imperative to know at the outset of each contracting exercise: (i) the law which will control; (ii) what that law provides concerning the rights and obligations of parties to a contract; and, (iii) whether that law will enforce the selection by the parties of another substantive body of law.

A. What Law Applies to Contracts to Construct OCS Facilities?

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