Smooth Sailing – Managing Vessel Risks in Offshore Wind Construction Projects
In an effort to meet global net zero targets, the offshore wind industry is experiencing rapid advancements in technology, with the size and capacity of wind turbines having increased significantly over the last decade.
However, advancements in technology are contributing to a problem that the industry is facing – a lack of vessels that are capable of performing offshore installations. In simple terms, the size of the turbines is increasing faster than the size of the installation vessels. Project owners are currently facing fierce competition for vessels, with the market for monopile foundation and turbine installation vessels capable of installing 10MW+ turbines being particularly tight.
This article explores the risks associated with vessel availability issues and the steps that parties can take to protect themselves in the event that a vessel is delayed or unavailable for project execution.
Vessel availability risks
Despite there being a number of new build vessels currently under construction, studies have indicated that the demand for offshore installation vessels may exceed the capacity of the current fleet as early as 2024.
Even if an owner does manage to secure an installation vessel contract for its project, there are various reasons why the vessel may be unavailable when it is scheduled to perform work. For example:
- the vessel could be delayed in completing work on its previous project;
- the vessel or its mission equipment could have been damaged on its previous project; or
- for a new build vessel, there could have been delays in its construction.
The unavailability of an installation vessel can have serious consequences for an owner during the construction phase, particularly due to the multi-contracting nature of large-scale offshore projects by which the owner bears the risk where one contractor has delayed another.
For example, if the foundation installation vessel or a critical piece of its mission equipment is not available when the vessel is scheduled to start work, this will not only delay the foundation installation work, but could also delay the cable installation and turbine installation work (depending on how much float is in the overall schedule). In such a scenario, the owner will face delay and disruption claims from the cable and turbine contractors. These knock-on delays can be amplified if they cause another vessel’s availability window to be missed or if they result in the work being pushed into a period of bad weather.
Getting the contractual framework right
Clear allocation of risk and responsibilities
Parties should ensure that their vessel charter or T&I contract clearly allocates risk and responsibilities in the event that the vessel is delayed in beginning work on the project. For example, which party is responsible for mitigating the vessel delay? If the delay persists for an extended period, is the vessel contractor obliged to procure a replacement vessel? This point is discussed further below.
Given the significant financial implications that the unavailability of a vessel can have for an owner, careful consideration should be given to what compensation is owed by the vessel contractor for the period in which the vessel is delayed. Contractors should ensure that their overall liability and liquidated damages caps are appropriately limited to avoid being liable for significant losses. On the other hand, owners should ensure there are sufficient carve-outs from the contractors’ liability caps so that their ability to recover losses is not severely restricted.
Vessel substitution rights
If an installation vessel is delayed or unavailable for a prolonged period of time, it may be necessary to substitute it with another vessel of similar or better capabilities (if possible) to perform the installations. Accordingly, parties should ensure that their contracts are clear about the circumstances in which a vessel can be substituted.
Contractors will want the right to use a substitute vessel in order to mitigate their liquidated damages exposure. On the other hand, an owner may also want the right to instruct a contractor to use a substitute vessel. Depending on the terms of the contract, this may be a particularly important mechanism to deploy if the contractor’s liquidated damages cap would be less than the costs of bringing in a substitute vessel. In other words, it avoids the risk that the contractor will opt to incur its total liquidated damages liability and wait for the original vessel to arrive rather than finding a substitute vessel.
Effective priority clause
Due to high demand, installation vessels are often booked years in advance. This creates a risk that there may be a scheduling conflict between two projects, such as when the first project is delayed, causing the vessel to be unable to start work on the second project when planned.
In order to mitigate such risks, an owner should consider including a ‘priority’ clause in its contract, which prevents the vessel from assigning a higher priority to any other work within the contract period. The effectiveness of a priority clause will depend on the consequences of a breach under the contract. For example, a breach that would expressly constitute ‘willful default,’ which could result in a contractor’s total liability cap or liquidated damages cap being lifted, will be more effective than a breach that would result only in a liquidated damages claim.
On the other hand, a vessel owner will want to limit the scope of a priority clause. This could be accomplished by ensuring that the clause only prevents the vessel from assigning a higher priority to projects that were not made known by the contractor to the owner at the time of contract execution. Another option could be to ensure that appropriate carve-outs from liability are included to protect vessel owners where they are delayed on previous projects by certain causes, such as adverse weather.
Getting your insurance coverage right
Parties should ensure that they have appropriate insurance in place to protect them when things go wrong. Damage to vessels will usually be covered by hull and machinery and P&I coverage. However, particular attention should be given to the scope of a project’s CAR policy and delay in start-up coverage, which usually will not cover project delays caused by damage to vessels or mission equipment. Specialist operation insurance is also available for vessels that perform works beyond those carried out by ordinary shipowners (installation, construction, cable laying, dredging, etc.).
We have explored some of the key things to keep in mind when negotiating vessel charters or T&I contracts in order to manage the risk that a vessel is delayed or unavailable for project execution. In the current vessel market, these considerations are more important than ever.
