Dismantling of offshore units

The number of offshore drilling and production units due to retire has grown substantially as a result of the reduction in drilling activity and the challenge of dismantling offshore units has become increasingly relevant for owners and operators. Cost, liability, selection of a recycling or scrapping yard, as well as corporate social responsibility, are just some of the considerations an owner needs to bear in mind when considering scrapping offshore units.

It is estimated that there are more than 380 offshore units of ­various descriptions that have been stacked in warm or cold lay-up, and, with the majority of these units being older than 30 years, their long-term fate is likely to be a decision to dismantle and recycle them. Owners however are often reluctant to dismantle units, mainly i because of the general challenges that are likely to be faced and the costs associated with transporting and handling offshore units to their final resting place.

A key consideration for owners is the cost of transportation of the unit as against the current steel price. If the cost outweighs the steel price achievable then scrapping is unlikely to be profitable for owners. Accordingly, one consideration for owners is whether or not to fix the steel price with the potential scrapyard at the time of signing the contract, or at the time of delivery of the unit. Yards and breaking firms are becoming much more cautious about fixing steel prices upon delivery and several buyers and yards have recently found themselves in financial difficulties when units have been delivered at the yards during short-lived peaks in steel prices.

Transportation, Delivery  and Potential Delay

There is an extensive framework of global, regional and national regulations which ensure that the vast majority of units will be brought ashore for recycling or ­scrapping. Yards that purchase units for scrapping often require the seller to deliver the unit at the scrapyard, as the yards are unwilling to take on the risks associated with transportation. Therefore, owners will need to enter into transportation agreements and obtain adequate insurance cover for the voyage.

A detailed technical analysis of unit being dismantled will need to be carried out at the preparation stage of the project in order to have a sound basis for describing the condition of the unit in transportation agreements, insurances and ultimately the contract of sale with the buyer or scrapyard. 
In general, the owners’ obligations will be satisfied when the unit is delivered to the scrapyard. All expenses incurred prior to this point are for the owners’ account and all expenses incurred after delivery, if any, are for the scrapyard’s account. Consequently, ownes will need to ensure that the risk of delay in delivery is adequately addressed in the contract of sale, so that owners can either (i) deliver the unit to the scrapyard irrespective of any delay without any liability arising, or (ii) propose a new delivery date in case of delay, and have the option of cancelling the contract of sale without any liability arising, should the scrapyard not accept the new delivery date. 

Residual Liability

The dismantling process is somewhat similar to that of a construction project in reverse in the sense that there will be many contractors involved in the project, all with different roles and contractual obligations. An issue of significant importance to an owner will be to ensure that the ultimate buyer actually dismantles the unit and fulfils its obligations under the contract of sale. In order to minimise any risk of residual liability to the original owner, it is important that the contract of sale includes reporting mechanisms as regards progress and execution, as well as adequate inspection, due diligence and monitoring rights for the original owner. To ensure that the mechanisms are sufficiently robust, an owner would be wise to obtain comprehensive legal advice in the countries of export and import, and potentially also in any transiting states.

Selection of the Yard

The environmental aspects of dismantling offshore units is a pressing issue for the industry and it is becoming increasingly important for owners to select a ­scrapping yard which addresses the social, ­corporate and environmental aspects associated with dismantling. The Hong Kong International Convention for the Safe and Environmentally Sound Recycling of Ships 2009 (“the Convention”) is intended to address many of the issues around scrapping, including the fact that units sold may contain environmentally hazardous substances. The Convention also addresses concerns raised about the working and environmental conditions at many of the world’s scrapping yards and sets out minimum environmental and working standards, which a yard must comply with.

Although the Convention is not yet in force, it is evident that a number of owners are already seeking scrapping yards with “green” credentials so that they can be assured that their units can be dismantled in an environmentally safe manner. This is in part due to these owners own sense of social responsibility, but it may also be a reflection of the fact that ­environmental campaign groups and local prosecutors are taking an increasingly aggressive stance on environmental compliance. Against a background of recent accidents and “bad press” owners and buyers of ­offshore units are well advised to undertake a dismantling project with a high degree of due diligence.