From concept to first oil: Contracting challenges in FPSO projects

Since the first oil from Shell’s Castellon FPSO in 1977, floating production, storage, and offloading vessels (FPSOs) have become a central feature of offshore oil and gas development. Their ability to combine production, storage, and export in a single floating asset makes them particularly well-suited to developments in challenging environments, including ultra-deepwater locations offshore Brazil and areas with harsh metocean conditions (shorthand for meteorology and oceanography, including wind, waves, currents, and tides), where fixed platforms are uneconomic, technically impractical, or operationally prohibitive. FPSOs are particularly well-suited to marginal or medium-sized fields, including in West Africa and Southeast Asia.

Recent positive announcements and final investment decisions on major offshore projects underscore that the FPSO model is a proven, bankable, and increasingly preferred development option. Momentum in the FPSO sector is highlighted by recent first‑oil milestones at Equinor’s FPSO Bacalhau offshore Brazil, ExxonMobil’s Yellowtail development offshore Guyana, and Petrobras’ Búzios and Mero projects in Brazil. With the capital cost of a new large FPSO now ranging from approximately US$2.5 billion to over US$3 billion (depending on hull specification, topsides complexity, and local content requirements), and as projects become more complex, it is timely to revisit some commercial and contractual issues encountered during construction and installation.

Commercial Appeal of FPSOs

The commercial appeal of FPSOs lies in their efficiency and flexibility. Compared with fixed offshore platforms, FPSOs generally involve lower upfront capital expenditure, shorter development schedules, and the ability to be redeployed at the end of a field’s productive life. These advantages, however, are only realized where technical design, project execution and contractual structures are carefully coordinated from the outset.

An FPSO project typically involves two principal participants. The upstream company (or field operator) is responsible for the offshore field itself, while a contractor provides the FPSO, including sophisticated mooring systems and topsides. Independent FPSO operators continue to play a significant role in this market, including MODEC, SBM Offshore, MISC, BW Offshore, Yinson, Altera Infrastructure, Bluewater, and Bumi Armada.

Historically, FPSOs have been deployed under a range of ownership and leasing models, with the contractor often owning the FPSO. More recently, however, an increasing number of projects have adopted structures under which ownership of the FPSO is transferred to the upstream company after a relatively short period of production.

An FPSO is designed to be moored for long periods above subsea wells and connected via flexible risers and flowlines. Long-term station-keeping is achieved through sophisticated mooring systems supported by thrusters and satellite navigation, while personnel transfer is typically managed by helicopter, and produced oil is offloaded to shuttle tankers.

The topsides comprise the processing facilities and associated equipment installed on the FPSO above the hull, together with the systems required to operate and manage production. Their complexity varies depending on field characteristics and reservoir conditions. Topsides are designed to process hydrocarbons from the seabed, separating crude oil from associated gas, water, and solids while taking into account variations in fluid composition, pressure, temperature, and production profile. Depending on the development, the topsides may also include facilities for water re-injection, gas injection (including gas lift), and power generation for the FPSO itself.

FPSO Construction and Installation Stages Risk Intensive

Against this backdrop, the construction and installation phase represents one of the most risk-intensive stages of an FPSO project. Multiple contracts are usually in play at the same time, including those with shipyards, module fabricators, equipment vendors, logistics providers, and installation contractors. While it is not possible to contract for every eventuality, experience shows that contracts can be drafted to address foreseeable risks and to empower parties to manage these risks proactively.

Time risk is a recurring theme. The project schedule agreed under the FPSO lease or charter is typically the critical reference point against which all other contracts are aligned. In practice, however, delays are common. Contractual remedies such as extensions of time, liquidated damages, or termination rights may exist. Termination is rarely a realistic solution, though, as FPSOs are highly bespoke assets designed for a specific field and cannot simply be replaced by leasing or purchasing an alternative FPSO. Liquidated damages, meanwhile, often fall short of compensating the upstream company for the full economic consequences of delay (particularly lost production and deferred cash flow) while at the same time giving rise to potentially disproportionate financial exposure for smaller contractors with limited balance-sheet capacity.

For this reason, parties exposed to potential delay (including the FPSO owner, shipyard, or key vendors) require clear contractual tools to keep the project on track, such as rights to accelerate works, to step in to complete unfinished scopes, or to take control of critical equipment. Special attention is required when critical-path items are bought with standard purchase orders, as these typically offer little protection if delays occur.

Multiple Contracts in FPSO Construction

The construction and installation of an FPSO is typically not confined to a single contract. Misalignment across the contractual framework can magnify delay exposure, leave parties exposed to non-conformity with technical specifications, complicate liability for third-party damage, and undermine dispute resolution and insurance arrangements, particularly where governing law, arbitration clauses, or indemnity regimes diverge. These risks are further intensified by sanctions and increasingly complex regulatory regimes, where missteps can halt work entirely.

While greater standardization is sometimes proposed (and some contractors have made meaningful progress through standardized hulls, modular designs, and repeatable specifications), FPSO projects remain inherently bespoke. In practice, contractors and upstream companies increasingly seek to coordinate provisions across the full suite of project contracts, recognizing that an integrated contracting approach helps manage execution risk and reduces the likelihood of gaps emerging as issues arise.

As offshore developments continue to move into deeper waters and other fields, FPSOs are likely to remain a central development solution, with a pipeline of FPSO projects emerging, including offshore Suriname, Namibia, the Falkland Islands, Guyana, Brazil, and parts of West Africa. Market practice increasingly reflects early, integrated attention to contract coordination, risk allocation, and enforceability, supporting timely first oil and the delivery of safe, reliable production for many years to come.

Ton van den Bosch is a corporate and projects lawyer and Head of Projects, Energy and Infrastructure (PEI) transactions at Singapore‑based law firm Drew & Napier LLC. Before returning to private practice, Ton served as general counsel for an FPSO contractor and subsequently for a global port operator. Ton advises contractors, upstream companies, terminal operators, logistics companies, investors, suppliers, and banks on upstream, offshore, renewable energy, terminals, and logistics projects, with a particular focus on emerging markets in Africa and Asia.

Since the first oil from Shell’s Castellon FPSO in 1977, floating production, storage, and offloading vessels (FPSOs) have become a central feature of offshore oil and gas development. Their ability to combine production, storage, and export in a single floating asset makes them particularly well-suited to developments in challenging environments, including ultra-deepwater locations offshore Brazil and areas with harsh metocean conditions (shorthand for meteorology and oceanography, including wind, waves, currents, and tides), where fixed platforms are uneconomic, technically impractical, or operationally prohibitive. FPSOs are particularly well-suited to marginal or medium-sized fields, including in West Africa and Southeast Asia.

Recent positive announcements and final investment decisions on major offshore projects underscore that the FPSO model is a proven, bankable, and increasingly preferred development option. Momentum in the FPSO sector is highlighted by recent first‑oil milestones at Equinor’s FPSO Bacalhau offshore Brazil, ExxonMobil’s Yellowtail development offshore Guyana, and Petrobras’ Búzios and Mero projects in Brazil. With the capital cost of a new large FPSO now ranging from approximately US$2.5 billion to over US$3 billion (depending on hull specification, topsides complexity, and local content requirements), and as projects become more complex, it is timely to revisit some commercial and contractual issues encountered during construction and installation.

Commercial Appeal of FPSOs

The commercial appeal of FPSOs lies in their efficiency and flexibility. Compared with fixed offshore platforms, FPSOs generally involve lower upfront capital expenditure, shorter development schedules, and the ability to be redeployed at the end of a field’s productive life. These advantages, however, are only realized where technical design, project execution, and contractual structures are carefully coordinated from the outset.

An FPSO project typically involves two principal participants. The upstream company (or field operator) is responsible for the offshore field itself, while a contractor provides the FPSO, including sophisticated mooring systems and topsides. Independent FPSO operators continue to play a significant role in this market, including MODEC, SBM Offshore, MISC, BW Offshore, Yinson, Altera Infrastructure, Bluewater, and Bumi Armada.

Historically, FPSOs have been deployed under a range of ownership and leasing models, with the contractor often owning the FPSO. More recently, however, an increasing number of projects have adopted structures under which ownership of the FPSO is transferred to the upstream company after a relatively short period of production.

An FPSO is designed to be moored for long periods above subsea wells and connected via flexible risers and flowlines. Long-term station-keeping is achieved through sophisticated mooring systems supported by thrusters and satellite navigation, while personnel transfer is typically managed by helicopter, and produced oil is offloaded to shuttle tankers.

The topsides comprise the processing facilities and associated equipment installed on the FPSO above the hull, together with the systems required to operate and manage production. Their complexity varies depending on field characteristics and reservoir conditions. Topsides are designed to process hydrocarbons from the seabed, separating crude oil from associated gas, water, and solids while taking into account variations in fluid composition, pressure, temperature, and production profile. Depending on the development, the topsides may also include facilities for water re-injection, gas injection (including gas lift), and power generation for the FPSO itself.

FPSO Construction and Installation Stages Risk Intensive

Against this backdrop, the construction and installation phase represents one of the most risk-intensive stages of an FPSO project. Multiple contracts are usually in play at the same time, including those with shipyards, module fabricators, equipment vendors, logistics providers, and installation contractors. While it is not possible to contract for every eventuality, experience shows that contracts can be drafted to address foreseeable risks and to empower parties to manage these risks proactively.

Time risk is a recurring theme. The project schedule agreed under the FPSO lease or charter is typically the critical reference point against which all other contracts are aligned. In practice, however, delays are common. Contractual remedies such as extensions of time, liquidated damages, or termination rights may exist. Termination is rarely a realistic solution, though, as FPSOs are highly bespoke assets designed for a specific field and cannot simply be replaced by leasing or purchasing an alternative FPSO. Liquidated damages, meanwhile, often fall short of compensating the upstream company for the full economic consequences of delay (particularly lost production and deferred cash flow) while at the same time giving rise to potentially disproportionate financial exposure for smaller contractors with limited balance-sheet capacity.

For this reason, parties exposed to potential delay (including the FPSO owner, shipyard, or key vendors) require clear contractual tools to keep the project on track, such as rights to accelerate works, to step in to complete unfinished scopes, or to take control of critical equipment. Special attention is required when critical-path items are bought with standard purchase orders, as these typically offer little protection if delays occur.

Multiple Contracts in FPSO Construction

The construction and installation of an FPSO is typically not confined to a single contract. Misalignment across the contractual framework can magnify delay exposure, leave parties exposed to non-conformity with technical specifications, complicate liability for third-party damage, and undermine dispute resolution and insurance arrangements, particularly where governing law, arbitration clauses, or indemnity regimes diverge. These risks are further intensified by sanctions and increasingly complex regulatory regimes, where missteps can halt work entirely.

While greater standardization is sometimes proposed (and some contractors have made meaningful progress through standardized hulls, modular designs, and repeatable specifications), FPSO projects remain inherently bespoke. In practice, contractors and upstream companies increasingly seek to coordinate provisions across the full suite of project contracts, recognising that an integrated contracting approach helps manage execution risk and reduces the likelihood of gaps emerging as issues arise.

As offshore developments continue to move into deeper waters and other fields, FPSOs are likely to remain a central development solution, with a pipeline of FPSO projects emerging, including offshore Suriname, Namibia, the Falkland Islands, Guyana, Brazil, and parts of West Africa. Market practice increasingly reflects early, integrated attention to contract coordination, risk allocation, and enforceability, supporting timely first oil and the delivery of safe, reliable production for many years to come.

Editor note: Ton van den Bosch is a corporate and projects lawyer and Head of Projects, Energy and Infrastructure (PEI) transactions at Singapore‑based law firm Drew & Napier LLC. Before returning to private practice, Ton served as general counsel for an FPSO contractor and subsequently for a global port operator. Ton advises contractors, upstream companies, terminal operators, logistics companies, investors, suppliers, and banks on upstream, offshore, renewable energy, terminals, and logistics projects, with a particular focus on emerging markets in Africa and Asia.