Friday, September 29, 2023

Provision for marine loading of Guyana’s hydrocarbons

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Bobby Gossai, Jr.
Bobby Gossai, Jr.
Bobby Gossai, Jr. is currently pursuing the Degree of Doctor of Philosophy in Economics at the University of Aberdeen with a research focus on Fiscal Policies and Regulations for an Emerging Petroleum Producing Country. He completed his MSc (Econ) in Petroleum, Energy Economics and Finance from the same institution, and also holds an MSC in Economics from the University of the West Indies. Mr. Gossai, Jr.’s professional experiences include being the head of the Guyana Oil and Gas Association and senior policy analyst and advisor at the Ministry of Natural Resources and Environment.

Guyana must address the need for the investing parties to agree on the allocation of risk in relation to tanker loading, whether at an offshore platform, Floating Production Storage and Offloading (FPSO) facility or any future onshore jetty. In reality, even if the joint venture controls the relevant berth infrastructure, they will need to establish and publish terminal operating rules for tanker masters to follow.

These rules will establish the terms on which the terminal (for which the joint venture parties) will accept liability for demurrage in the event that a tanker is delayed in loading. Loading, particularly offshore, is a potentially hazardous activity and it is essential that every tanker accepted for loading meets the minimum safety standards and carries the required insurance so that the joint venture has adequate recourse in the event of a serious pollution incident and/or physical damage to their terminal infrastructure. The Lifting Agreement principles on the Vessel Nominations should set out a common list of such requirements which each acceptable tanker must meet as a precondition of being treated as a ‘Qualified Vessel’ and being allowed to load.

If the joint venture parties make use of a marine terminal which is shared with other users or in situations where only one tanker can be loaded at any one time, the ordinary incidences of bad weather or upstream production failures may fall unfairly on the party whose turn it is to load when the problem occurs. Typically, the parties will agree a regime whereby any delay in loading beyond the reasonable control of the party due to lifting will simply mean that the loading schedule is deferred for the length of the delay incurred – such that all parties are more or less equally impacted until the operator is able to resume normal scheduling.

Delivery Scheduling

There is an underlying pattern and logic to the agreed terms on the Disposition of Crude Oil that provides for regular forecasting of available production, and provides for the parties or lifters to confirm readiness to take their entitlements and for there to be a discussion on the procedures necessary to make the nominated quantities physically available for lifting at the delivery point. Normally, this would involve operational procedures describing how each lifter would provide a tanker or rail car fit for loading, how the measurement of quality and quantity of crude oil parcels will be managed and possibly the arrangements for customs and export documentation. Attention should also be given to clarifying the respective responsibilities of the operator and the lifters, not least with respect to operational safety at the terminal or point of loading.

The operator must have the right to schedule the availability of entitlements in parcels and at times that are physically and economically feasible. Each party must wait its turn to lift from the single terminal berth or rail car weighbridge where lifting physically takes place. Only in the case of deliveries into a trunk crude oil pipeline can the parties’ entitlements be delivered simultaneously, to a greater or lesser degree in line with the parties’ respective participating interests. In practice, the operator may need a very substantial ‘operational tolerance’ if, for example, crude oil is to be evacuated by fully loaded vessels. It may take several days for one party’s entitlement to be loaded, with the result that at the end of an offtake month, one party may be substantially overlifted compared to the others, simply because of the physical limitations of the lifting mechanism at the delivery point.

The Disposition of Production should address the need to ensure that the parties receive their respective entitlements of the different grades, gravities, and qualities of crude oil from each exploitation area. In many cases, the joint venture will only produce one specification of crude oil, with minimal processing between the wellhead and the delivery point, save for stabilization and water removal. Characteristics of the crude oil such as density and gravity may vary, particularly if the operator needs to vary the rate at which it uses various wells in the relevant exploitation area. Generally, the parties will accept that any such variation in quality will impact the parties equally over time and will avoid having to introduce extremely complicated procedures for compensation between joint venture parties arising from variations in the quality and accordingly value, of the crude oil they lift (Fowler 2018).

However, if some of the joint venture parties elect to proceed with exclusive operations, by way of exclusive operations under the conditions for the Operations By Fewer Than All Parties, a subset of the parties may be entitled to crude oil from the relevant exploitation area in which the exclusive operation is conducted.

If the joint venture has already established production facilities and the delivery point for the evacuation of crude oil from reservoirs which are jointly exploited, the chances are that, for good economic reasons, those parties pursuing the exclusive operations will want to use, and the other parties will want to accept their use of, the existing jointly owned and managed facilities. It may be that the quality of the crude oil from the exploitation area in which the exclusive operation is conducted differs significantly from the quality of crude oil from existing production which is the subject of joint operations.

The crude oil from the area of exclusive operations will co-mingle with existing production and will need to be lifted as part of a common stream at the shared delivery point. If the respective qualities of the crude oil are sufficiently different, the parties conducting exclusive operations and the non-consenting parties who are entitled only to existing production will need to negotiate a mechanism to compensate for the difference in quality, either by making periodic payments in compensation for the difference in value (similar to a pipeline-quality bank agreement) or by adjusting the volume of commingled crude oil so that the parties’ respective entitlements are adjusted volumetrically to compensate those parties which contribute higher-quality crude oil to the mix.

Scheduling Adjustments for Logistical Constraints

This provision recognizes the fact that every physical mechanism of lifting crude oil imposes its own limitations on the allocation of entitlements between the parties in terms of volume and time. As discussed above, if the parties lift their entitlements by injecting crude oil into the same trunk pipeline simultaneously, and the parties each have sufficient capacity rights in such pipeline to flow the crude oil into the pipeline on an uninterrupted basis, there are limited circumstances in which one party may lift more or less than its entitlement compared to the others.

After all, if the pipeline suffers an event of force majeure causing it to accept less than the scheduled amount of crude oil from the joint venture, the lifting parties will be affected pro-rata and each entitlement will be reduced proportionately. However, in the circumstances, it would not be prudent to assume that underlifts and overlifts cannot arise; if one of such parties has its capacity rights in the pipeline curtailed, perhaps because of failure to pay tariffs or economic sanctions are imposed on it by reason of its country of incorporation, that party may find itself underlifting its crude oil entitlement until it is able to resume shipments in the pipeline, during which time the other parties will have continued to use the pipeline to lift their entitlements.

As discussed in relation to the nomination by the parties to the operator of acceptance of their entitlements for the succeeding period, the parties may take delivery of their entitlements by a marine oil tanker or rail tank car, sharing a single delivery point (such as a single berth, offshore loading point or rail weighbridge) and taking it in turns to tender a tanker or rail tank car for loading. The operator must, therefore, schedule each party’s entitlements to be lifted in a sequence which, as far as possible, ensures that each party has the opportunity to lift its entitlement within an offtake period, usually a month. The lifting agreement must contain a mechanism enabling the operator to reschedule the relevant lifting windows in the event the tanker is late, or the rail tank cars rejected for being unfit to load, or other such unexpected delays.

Even absent such unexpected delays, it is inevitable that the operator will be unable to schedule all parties’ entitlements exactly with the result that each party is scheduled fully to have lifted its entitlement in each period. Therefore, the lifting agreement will need to be able to identify and carry forward any underlift or overlift arising for such operational reasons, such that the parties’ Entitlements in the following lifting period can be adjusted, to eliminate the underlift or overlift within a reasonable period of time.

Operational underlifts and overlifts are likely to be insignificant and the operator will normally schedule the appropriate adjustments in the next month or the next following month. However, the scheduling procedure should have sufficient flexibility to be able to defer such adjustments for several months, if there has been a major disruption and the relevant underlift and overlift is more substantial; there is no point expecting a party to be ready to lift an extra tanker cargo early in the following month if it has no time in which to charter the corresponding vessel.

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