FPSO Contract Delicacies: A Comparative Study of Lease-Operate and Built-Ownership Agreements

In the dynamic world of offshore oil and gas production, Floating Production Storage and Offloading (FPSO) units have emerged as an important component. As these sophisticated vessels continue to evolve, so too do the contractual agreements that govern their use. This article embarks on a journey to explore and compare two prevalent types of FPSO contracts: Lease-Operate and Built-Ownership (BOOT). Each contract type carries its unique set of advantages, challenges, and implications for project financing. By delving into the intricacies of these contracts, we aim to provide valuable insights for stakeholders navigating the complex seas of FPSO project planning and execution. Let’s start with the definition of the two contracts,

·?????? FPSO Lease-Operate Contract: In this type of contract, the FPSO is owned by the contractor and leased to the oil company for a specified period. The contractor is responsible for operating the FPSO. An example of this type of contract is the lease-operate contract for the Petrojarl Cidade de Itajai FPSO in Brazil, where Teekay Offshore Partners L.P. leased the FPSO to Petrobras for an initial period of 9 years.

·?????? Built-Ownership Contract (Build-Own-Operate-Transfer, BOOT): In addition to the traditional EPC turnkey contract where Oil & Gas Company place the EPC contract with handover at the start-up, hybrid type of contract is born where the contractor builds and owns the FPSO during the project plus some specific operation period after. After the project period, the ownership of the FPSO is transferred to the oil company. An example of this type of contract is the BOOT contract for the Liza Phase 2 FPSO Unity, where ExxonMobil awarded a contract to SBM offshore to supply, charter, and operate the FPSO. After 2 years of operation, the ownership of the FPSO will be transferred to ExxonMobil.

Each contracts had their advantage and disadvantage. Author summarizes in high level the brief comparison of the contract in the perspective of financing and contractual implication as per the following table,?

At the present time, trends suggest that while lease-operate contracts are still widely used, there has been a noticeable shift towards built-ownership contracts, especially for larger projects as presented in Figure 1. However, the exact distribution between these two types of contracts can vary based on a range of factors, including market conditions, project requirements, and the specific strategies of the companies involved. It’s also important to note that these trends can change over time as the industry evolves. Regardless the contract type selection, the industry will face a crowded market in the upcoming years which can lead to bottleneck and unpredicted FPSO market price. Both Oil & Gas Company and Contractors need to think how to anticipate the situation for ensuring all the investment can smoothly progress in the benefit of both parties.

In conclusion, the choice between FPSO Lease-Operate contracts and Built-Ownership (BOOT) contracts is a strategic decision that can significantly impact the economics, risk profile, and success of an offshore oil and gas project. Each contract type carries its unique set of advantages and challenges, and the choice between them should be based on a comprehensive analysis of the project’s specific requirements, the prevailing market conditions, and the risk appetite of the stakeholders involved.

As we navigate the complex seas of FPSO contracts, it’s clear that there is no one-size-fits-all solution. The industry’s evolving landscape, coupled with the unique demands of each project, necessitates a flexible and nuanced approach to contract selection. Whether it’s the limited financial exposure of Lease-Operate contracts or the ownership advantages of BOOT contracts, the choice ultimately lies in aligning the contract model with the project’s strategic objectives. As we continue to explore and extract the world’s offshore oil and gas reserves, these contractual frameworks will undoubtedly play a pivotal role in shaping the future of the FPSO industry. As industry professionals, our role is to continue providing insights and guidance to help stakeholders make informed decisions in this dynamic and challenging environment. After all, in the world of FPSOs, the only constant is change.