Contracting in the marine renewables industry
Contracts within the marine renewables industry often offer interesting opportunities for owners of offshore and installation vessels traditionally operating within the offshore oil and gas space.
The limited tenders for oil and gas work as compared with the anticipated influx of projects relating offshore wind and other marine renewables has recently increased the interest for the latter. For contractors typically used to negotiations with oil companies, there are some important structural differences between the markets that need to be taken into account when negotiating contracts within the marine renewables industry.
The approach to contract structures and forms will depend on the complexity of the services to be provided and the counterparties involved. In the development of e.g. an offshore wind farm the developer usually prefer (1) a multi-contract strategy or (2) an engineering, procurement, construction, and installation (EPCI) strategy:
In the multi-contract strategy the developer will typically award separate contracts for the key elements of the wind farm (for example turbine supply, foundation supply, turbine installation, cable installation and foundation installation). Multi-contracting require the developer to pay close attention to interface risk and coordination between the various deliverables from the contractors. It is therefore often more suitable and preferred by large utilities, such as DONG, Statoil and Vattenfall. Where the developer as part of this strategy contracts a vessel for a specified term to transport of personnel, goods and equipment from shore, the charter may well be very similar to what might be seen for supply of similar services on the oil and gas side.
In the EPCI strategy there will be fewer contracts covering larger scopes of work (for example the supply/installation/operation of turbines under one contract and supply/installation of foundations and cables under another). An essential part of the EPCI strategy is the requirement for “turnkey” deliverables of the entire contractual scope, which would typically mean that the contractor takes on the interface risk and coordination with sub-contractors. The increased scope and interface issues require the contractor to consider whether they are adequately compensated for the added risk and/or if such added risk is acceptable. From the developers perspective the risk profile under an EPCI contract may however be preferable, particularly when dealing with independent developers, less experienced utilities and/or their investors/financiers.
A complicating factor in respect of the above is that whilst the offshore oil and gas industry follow a well-established division of work scope between the oil companies and the contractors (for example in relation to drilling operations), investors, financiers, developers and energy companies involved in offshore renewable projects may have different expectations as to what constitutes a reasonable division of risk and reward.
From onshore to offshore
Companies developing and operating solar, wind, hydro and other renewable energy projects often work onshore. The contracting structures and forms used in such projects are very similar to other onshore infrastructure projects. Contract forms for onshore projects, such as the FIDIC-forms do not necessarily take into account the specific risks and challenges of operating in a marine environment. Notwithstanding this, developers and operators who are familiar with such forms may still prefer to use them. When this happens contractors will need to take care to ensure that the contract terms are suitably amended to reflect the marine tasks and risks being undertaken. Specific challenges that arise when using FIDIC in an offshore environment is outlined in the article on page 14.
A significant example of the challenges contractors may be faced with is that offshore wind developers may require longer warranty periods then what is customary in the oil and gas space. The need for contractors to have a cautious approach to such requirements is illustrated by the recent English court cases addressed in the article on page 22.
Limited standard contracts
Given that the marine renewable industry is still relatively young there are very few standard contracts in use covering services such as the marine spread for installation, operation and maintenance of for example offshore wind parks. BIMCO has developed the time charter form WINDTIME, but its intended use is for the chartering of small support vessels for transfer of personnel and equipment to and from windfarms. Apart from this charter there are no standard contracts developed specifically for the marine renewable industry. WINDTIME is considered in further detail in the article on page 16.
This lack of standard contracts is challenging in two respects. First, in view of the absence of alternatives the standard documents developed by industry organisations and oil companies for offshore oil and gas operations often provide the natural starting point when negotiating contracts within the marine renewable industry. This is not an ideal solution as there will be a number of provisions that are simply not relevant to a renewable project whilst the contracts will lack specific clauses required in this space. Pollution liability is for example one of the most important regulations in an offshore oil and gas contract due to the potentially catastrophic consequences of blow-out of petroleum from a reservoir – whilst the potential pollution liability connected installation of an offshore wind farm is less critical (or at least different). Similarly, as the purpose of marine renewables is to generate electricity by exploiting forces of nature, the weather window for installation of an offshore wind turbine may be narrower than for example drilling or other operations carried out below sea level. Such similarities and differences require careful drafting of contracts combined with an appropriate understanding of the operations in question.
Secondly, even though oil companies tend to prefer their own standard contracts over forms prepared by industry organisations, the terms and conditions in offshore contracts are broadly speaking similar. Having such industry practice as a reference point can be useful for the parties negotiating a contract, and in turn when such contract is scrutinised by the party’s investors, financiers and insurers. The “knock for knock” principle is a good example of a regime which is generally accepted in the offshore oil and gas industry (with various forms of implementation) – and which also could be suitable where several units are operating at a congested field for installation of wind turbines. However, for parties not familiar with the concept it may be difficult to understand the rationale behind such clauses. The lack of such a common reference point is one of the reasons why contracts within the marine renewable industry may take more time to negotiate than similar contracts within the offshore oil and gas industry.
The marine renewables industry provides interesting opportunities for offshore contractors to explore but significant time and resources may need to be invested in order to obtain a contract acceptable to both parties that will support the success of a new venture. The industry as a whole would benefit from a more unified approach to contractual structures and forms, and this is likely to be an important measure to meet the key challenge of driving down the levelised cost of energy for marine renewable projects. Some industry initiatives have already been taken, and we expect others to emerge in the near future. In the meantime where non-standard contracts are used particular attention needs to be paid to the division of the scope of work and the specific marine risks associated with the project.