PRT: supplement - bringing about the commencement: field development
LB Oil & Gas does not regard commencement of production as completely cutting off entitlement to supplement under OTA75\S3(5)(a). Although such a cut-off is often appropriate to OTA75\SCH6 expenditure (see OT12250), expenditure on completion of the originally planned development may still be eligible. In this context a number of specific topics are considered below.
Overheads, see OT12400
Single Platform Fields
In a single platform field all expenditure incurred to bring the platform to production is likely to fall within OTA75\S3(5)(a), including changes to the initial design incorporated before production. Expenditure incurred after production start-up can, subject to the further comments below, still qualify under OTA75\S3(5)(a) if it relates to carrying out the original detailed design.
Expenditure which arose from a change to the development plan before production start-up but is not actually incurred until afterwards is more doubtful. Since production commenced without the work being done, it is arguable the expenditure was not incurred for the purpose of bringing about that commencement. Commercial logic or later statutory requirements should not be accepted as a qualifying purpose. But, if it is possible to say that the overlooked item was essential for the successful operation of the platform and not merely desirable, the expenditure may, depending on the facts, be accepted as a necessary element of commencing production and thus eligible for supplement. Changes or modifications to the production plan after commencement need to be looked at critically and are normally outside the scope of OTA75\S3(5)(a). They may nevertheless qualify under OTA75\S3(5)(b) (see OT12250) or OTA75\S3(5)(c) (see OT12300).
In a multi-platform field it is not feasible merely to look at the detailed plans for the whole field at inception. At the time earlier platforms are on stream, plans for the later stages of field development, including the number and nature of other platforms, are often little more than outlines. In such a situation the LB Oil & Gas’ approach is that
- the first platform is treated in the same way as it would be in a single platform field
- later platforms are assets which may qualify under OTA75\S3(5)(c), (see OT12300)
- in order as far as possible to ensure consistent treatment with the first platform, each subsequent platform is regarded as a single asset. Once that platform itself achieves production, any later expenditure will not be on providing the asset but on modifying it. To attract supplement those modifications will need to satisfy the conditions set out above in respect of single platform fields.
Design Defects and Modifications
Although equipment is usually tested offshore, operational problems may not arise until the platform is producing and expenditure will then be needed to modify the equipment or rectify defects. Such expenditure is not specifically covered in OTA75\S3(5) and needs to be considered on its own facts. It may qualify under OTA75\S3(5)(a), or under OTA75\S3(5)(c) (see OT12300), or OTA75\S3(5)(d) (see OT12350).
Such expenditure could involve putting right the following (but the list is not intended to be exhaustive):
- poor workmanship, e.g. faulty welding
- inadequate specification of materials, e.g. failure to use stainless steel causing corrosion
- poor engineering design - the equipment does not meet the required specification
- inadequate integration of detailed design - although the piece of equipment meets its individual specifications, when used with the associated equipment it fails to do the job intended of it
- failure of equipment to cope with later modifications or causing operational problems
- failure to install a piece of equipment whose desirability is not noticed until after production start-up.
In dealing with claims to supplement on this range of expenditures it is important to get precise factual information before making a decision. This will include details of the nature of the equipment in question, what it was intended to do, its expected life, what went wrong and why, whether the rectification or modification involved simply maintenance (post production ‘operating’ expenditure), or replacement by a more up to date but non-essential item etc. It is then a matter of making a judgement on each item by reference to the facts.
For categories 1 and 2 above, provided the expenditure on rectification is not down to fair wear and tear, it can generally be considered as a cost of construction and accepted as qualifying under OTA75\S3(5)(a).
Expenditure within category 3 is also likely to qualify provided that the problem comes to light fairly soon after production start-up.
For category 4 the position is not so clear. The piece of equipment must be looked at within the context of the originally designed system rather than in isolation. If it is incapable of playing its full part in the original system as a whole, then, even if it works satisfactorily on its own, the rectification costs may qualify under OTA75\S3(5)(a) depending on the facts.
Costs within category 5 do not fall within OTA75\S(5)(a) and will not qualify for supplement unless they can be seen as part of a larger modification programme for which the cost of works qualify under OTA75\S3(5)(c), see OT12300.
Category 6 is again a difficult area. Obviously if production start-up is achieved without the particular item of equipment it would seem to fail the OTA75\S3(5)(a) test, though OTA75\S3(5)(c) is a possibility. However not all pieces of platform equipment are used immediately on start-up, e.g. gas export equipment, so the precise facts will need to be obtained.