Floating FLNG facilities: are they 'vessels' for purposes of liability limitations?

VInson & Elkins
Monday, July 21, 2014
Rendering of Shell's Prelude FLNG. Photo from Shell. 

Vinson & Elkins’ David Lang and Paul Greening discuss determining whether and FLNG facility can receive limitations of liability for maritime claims.

The oil and gas industry relies on a wide range of maritime infrastructure to undertake its offshore exploration and production activities. Shell and Texaco pioneered offshore drilling with the first barge-mounted drilling rig in 1947. Offshore production of oil and gas relied on infrastructure predominately fixed to the seabed until Shell deployed the first FPSO (the Castellion) in 1977. Today, more than 200 vessels are deployed worldwide as FPSOs. Offshore technology (as well as gas liquefaction technology) has evolved so that there are numerous floating LNG regasification facilities in operation and a number of floating LNG production facilities under development and construction.

As various concepts for floating facilities for production and regasification of LNG (FLNG) take shape, it is useful to evaluate certain maritime principles and their applicability to FLNG facilities. In particular, it is useful to consider whether liability limitations traditionally afforded to trading vessels will apply to FLNG facilities.

The question of whether FLNG facilities will be treated in a similar way to commercial trading ships, such as tankers, or whether they will be regulated as if they were permanent offshore installations, such as well head platforms, is a critical question from a legal and regulatory perspective. It determines not only which laws and regulations will apply to the operation of such facilities, but, crucially, whether their owners will be afforded limited liability with respect to third parties in the event of a serious incident.

Various international regimes generally allow the owners and charterers of traditional “vessels” or “ships” to limit their liability in the event of loss or injury to persons or things caused by or on board a ship. The key regimes include the following:

  • Limitation of Liability Convention 1957 and 1976 (as amended by the 1996 Protocol; 1957 LLMC and 1976 LLMC, respectively): entitles a “shipowner” (which includes a charterer, manager or operator) to limit its liability with respect to death, personal injury and property damage occurring on board or in direct connection with the operation of a ship to an amount calculated by reference to the ship’s gross tonnage.
  • International Convention on Civil Liability for Bunker Oil Pollution Damage (Bunker Convention): limits an owner’s liability for pollution and environmental damage caused outside the ship by contamination resulting from the escape or discharge of bunker oil from the ship.
  • International Convention on Liability and Compensation for Damage in Connection with the Carriage of Hazardous and Noxious Substances at Sea (HNS Convention): if ratified, will provide for a liability and compensation regime for environmental damage caused by spillages of hazardous and noxious substances (including LNG) by ships at sea.
  • Federal Limitation of Shipowners’ Liability Act in 1851 (US Limitation Act): Like the 1957 LLMC and 1976 LLMC (neither of which have been adopted by the United States), limits shipowner liability for damages to third parties arising out of the ship’s operation.
As the world's first FLNG project, Prelude has a production capacity of 3.6mtpa LNG. Photo from Shell. Photo from Shell. 

Applicability of shipowner liability limitation regimes to FLNG facilities Given the potentially enormous risk exposure that is now a reality of operating offshore, one might assume that it would be clearly established whether or not the owners, charterers and operators of any FLNG facility are entitled to limit their liability under conventions such as the 1957 LLMC, 1976 LLMC, the US Limitation Act, Bunker Convention and HNS Convention (once ratified). In reality, the scope of coverage of such conventions is a somewhat grey area. In order to benefit from the liability limits set by such conventions, the specific facility in question would need to fall within the scope of the definition of a “ship” (in the context of the LLMCs) or a “seagoing vessel” or “seaborne craft” (in the context of the Bunker Convention and HNS Convention (once ratified)) or a “vessel” (in the context of the US Limitation Act).

What constitutes a “ship” or a “vessel”? The provisions of the LLMCs clearly indicate that the convention is intended to apply to all “ships” other than “drill- ing ships or floating offshore platforms connected to the seabed.”

To determine the applicability of the LLMCs to an FLNG facility, we must therefore determine that the facility is a “ship” and that it is neither a “drilling ship” nor a “floating offshore platform connected to the seabed.” While there may be some interesting questions as to whether a particular FLNG facility might fall into the latter category, this article will focus on the question of what makes a facility a “ship” for purposes of the LLMCs. Unfortunately the word “ship” is not defined in the LLMCs, so we need to look to other conventions, sources of legislation and case law for guidance.

In the UK, the LLMC has been implemented domestically by the Merchant Shipping Act 1995, which defines a “ship” to include “every description of a vessel used in navigation.” The inclu- sion of a vessel “used in navigation” is an important practical refinement of the definition of what constitutes a “ship” but there is still significant room for interpretation of what it means to be a “vessel” and “used in navigation.”

Looking to recent case law in both the UK and the US provides a useful indication of how a court would go about defin- ing the key characteristics of a floating facility that must be present (or not present) in order for such floating facility to be regarded as a “ship” or a “vessel” for the purposes of attracting limited liability under the various international regimes.

A review of the relevant case law in the UK and the US suggests that it will be the satisfaction or non-satisfaction of certain criteria that will be critical in determining whether a particular FLNG facility can be regarded as a “ship” for the purposes of attracting limited liability under the various regimes.

United Kingdom

1. Use of the ship in navigation

2. In 2005, in R v. Goodwin, the English Court of Appeal considered the practical meaning of the phrase “used in naviga- tion” and concluded that a “ship” for the purposes of the Merchant Shipping Act will not include craft that are simply used for having fun on the water without the and, as a result, the own- ers, manager, charterers and operators of such FLNG facility would be afforded the benefit of the limitation of liability regime. Although the issue has never been tested before the courts, the question of how frequently a particular FLNG facility relo- cates (and by what method) could well be a secondary consideration of the court in determining whether such facility should be regarded as a “ship.”

3. Purpose of the ship

4. In 1945, the English Court of Appeal was asked, in Polpen Shipping Company Limited v. Commercial Union Assurance Company Limited, to determine whether a seaplane should be regarded as a “ship” for the purposes of the Merchant Shipping Act (as in force at the time). The court stated that in order to deter- mine whether a craft should be regarded as a “ship” for the purposes of the Merchant Shipping Act, a court should look to a craft’s “purpose” and stated that a “ship” requires a “hollow structure intended to be used in navigation (i.e. intended to do its real work on the seas or other waters, and capable of free and ordered movement thereon from one place to another).” In applying this rule to the facts of case, the court determined that a seaplane’s real work is to fly as it was constructed for that purpose, and its ability to float and navigate short distances is merely incidental to that work.

Applying the same logic, it could be argued that an FLNG facility’s main function is the production, storage and offloading of LNG or the receipt, storage and regasification of LNG and thus, although it may be capable of free and ordered movement across waters, the FLNG facility is not a “ship” because its navigational function is merely incidental to its main function.

United States

Although the US has not acceded to the IMO conventions described above, recent US case law has considered what characteristics must be met for a craft to satisfy the meaning of the term “vessel.” The term “vessel” is defined by the US Rules of Construction Act, 1 U.S.C. §3 as “every description of watercraft or other artificial contrivance used, or capable of being used, as a means of transportation on water.”

In a recent 2013 case, Lozman v. City of Riviera Beach, Florida, the US Supreme Court considered whether the owner of a floating home was subject to maritime law on the basis that such watercraft was “capable of being used, as a means of transportation on water.” In interpreting this language, the Supreme Court held that such phrase should encompass “practical” possibilities, not merely “theoretical” ones.

In other words, “a reasonable observer” must, when looking at any floating structure’s “physical characteristics and activities ... consider it [to be] designed to a practical degree for carrying people or things over water.” The “floating home” in question had no self-propulsion but this, of itself, was not deemed to be conclusive evidence of “non-vessel” status. Additional facts such as a lack of rudder or other steering mechanism, unraked hull, a rectangular bottom 10in. below water level, no special capacity to generate or store electricity unless from land, rooms designed in a non-maritime style, and the fact that its windows were ordinary French windows were also considered by the US Supreme Court before ruling that the floating home did not meet the criteria to fall within the definition of “vessel” under the Rules of Construction Act.

In reaching its decision in the 2013 Lozman case, the US Supreme Court considered a number of earlier US maritime cases. Of particular note is a 2005 case, Stewart v. Dutra Construction Co., where the Supreme Court considered whether a dredge (in this case a massive floating platform used for silt dredging that moved using a towing system of anchors and cables) was found to serve a waterborne transportation function. The Supreme Court found that the dredge in question did meet the requirements to categories as a “vessel” and in so doing, acknowledged the following as important factors to consider in determining “vessel” status:

  • water transportation need not be the “primary purpose” of the structure in question; and
  • watercraft need not be in motion to qualify as a vessel so long as the structure is not “permanently attached” to the ocean floor or land (although exactly how long the facility would need to stay in one position to be classed as “permanently attached” was not ruled on in this case).

What constitutes a “seagoing vessel” or “seaborne craft” under the Bunker Convention/HNS Convention?

The Bunker Convention and HNS Convention define a “ship” to mean “any seagoing vessel and seaborne craft, of any type whatsoever.” This definition appears all-encompassing but there is still significant scope to argue that certain FLNG facilities would fail to meet this requirement.

The meaning of “any seagoing vesseland seaborne craft” has not been judicially determined. Based on the Oxford English Dictionary meanings of the terms, the term “craft” is a generic term for a “boat or a ship.” This simply leads us back to a requirement for movement on water as an essential criterion in order to fall within the meaning of either “seagoing vessel” or “seaborne craft.”

Prelude's hull launch from Geoje, South Korea in 2013. Photo from Shell. 

Conclusion

FLNG facilities are an example of floating offshore craft that are often neither “ships” in the conventional sense of the word nor are they easily categorized as fixed offshore facilities in the same way as drilling rigs and various types of other offshore floating platforms. As this article demonstrates there is clear difficulty in defining the legal category into which FLNG facilities should fit.

A number of large-scale FLNG projects are currently either under construction or being proposed which (simply because of their scale) are more likely to exist solely as permanent facilities until final decommissioning. This can be contrasted with FPSOs converted from existing oil tankers and certain small- and mid-scale FLNG facilities converted from existing LNG tankers which, although stationary for extended periods, are (by their nature) designed to sail or navigate from place to place once production, regasification or offloading operations in a given area is complete. Although it is clearly more likely that an FLNG facility converted from existing tankers would be treated as a “vessel,” consideration must be given to the specific modifications that have been made to the tanker on conversion to the FLNG facility. For example, if an FLNG facility has its motive power and steering disabled due to long term anchoring it may no longer be “practically” capable of carrying people or things over water.

Determining whether an FLNG facility will receive the benefit of limitations of liability for maritime claims will require consideration of the physical characteristics of the facility and the jurisdiction in which it is employed. As this article highlights, such a determination will not be black and white and will involve an assessment of how the applicable regime defines a “ship” or a “vessel” and the unique attributes of the relevant FLNG facility.

David Lang is the Managing Partner of Vinson & Elkins’ Hong Kong office. His practice focuses on international energy transactions, with a particular focus on LNG project development. Lang earned a BS in Mechanical Engineering at The University of Texas in 1998, and his JD degree at The University of Texas School of Law in 2003. Prior to entering law school, Lang worked

as a reservoir engineer for a major international energy company.

Paul Greening is an Associate at Vinson & Elkins and is based in Hong Kong. His practice focuses on international energy, utilities and infrastructure projects. Greening earned a LL.B with honors and a B.E (Chemical) with honors from the University of Melbourne, Australia, in 2005. Greening is dual qualified in both England and Wales and Australia, and he currently practices English law in V&E’s Hong Kong office.

Categories: FPSO Vessels FLNG LNG

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