Down-cycle in the offshore energy market

Lay-up for Mobile Offshore Units

Over the last few months, the news has been full of stories describing the weak market for all companies involved in the offshore oil and gas industry. We may hope that this is only a short down-cycle, and that we will have a quick recovery, but there are troubling signs that this difficult market may last for a while yet.

Lately, we have all seen contracts not being renewed or at least being renegotiated, options not being taken up, and some contracts even facing early termination, all of which has forced companies to firmly focus on trimming fat and cutting costs. Following these reduced contractual activity levels, many contractors are now stacking rigs as well as delaying delivery of those under construction.

Regardless of the duration of the current down-cycle, all companies need to react appropriately to the new reality which now faces the industry. As contribution to this need, Norwegian Hull Club will highlight various challenges and questions which may occur in relation to today’s reduced activity levels over a series of articles published on our internet page in the upcoming months.

As a consequence of the current MOU market, a material portion of Norwegian Hull Club’s MOU book of business has already been laid up. In this respect, we have received numerous questions regarding how the requirements of the insurers, in particular the safety regulations for lay-ups, ref. Nordic Marine Insurance Plan § 3-26, are to be understood and complied with.

In this first article, we will try to clarify the duties of the assured in respect of laying-up MOUs.

Lay-up for MOUs – Approval of a lay-up plan

In general, there are two lay-up conditions to be considered, so called hot lay-up and cold lay-up, depending of the extent of the functions that are shut down:

In its April 2015 Procedure for the lay-up of mobile offshore units, DNV GL has the following description for each lay-up condition:
Hot lay-up: In this lay-up condition, the machinery is kept in operation for the sake of fast re-commissioning, but measures may be taken to reduce various operational costs. Lay-up time is usually less than 12 months and relevant cargo may be kept on board.

Cold lay-up: In this lay-up condition, the machinery is taken out of service and the unit is kept “electrically dead,” with the exception of emergency power. Lay-up time is usually more than 12 months and manning is reduced.

For cold lay-ups as defined above, it is clear that a lay-up plan is to be approved by the insurers and followed by the assured, ref. NMIP 3-26, cf. Cl. 3-25. The lay-up plan shall consider the below parameters at a minimum.

For hot lay-ups as defined above, it seems equally clear that a lay up-plan is not required for shorter periods. However, if the assured starts to shut down certain functions and/or starts to reduce the manning, it is difficult to outline exactly when an approval of lay-up plan is a requirement according to NMIP Cl. 3-26. It is worth noting that a MOU might be considered laid-up even if it is under contract and is earning income.

As a general rule, if a unit has a lengthy stay out of operation, accompanied by a request for reduction in premium cf. Cl. 6-6, it must be deemed to be laid-up according to Cl. 3-26. Whether or not any weight shall be put on the fact that the assured asks for a premium reduction will however depend of the insurance policy, cf. the fact that it is quite common to purchase insurance for MOUs on basis of a “cancelling return only”. If the MOU after a thorough consideration is deemed to be laid-up, the lay-up plan should therefore address the same below parameters as for a cold lay-up.

The lay-up plan shall state and consider the following parameters at a minimum:
• Name and IMO number
• Position (latitude and longitude)
• Class status during lay-up period
• Natural hazards and environmental conditions
• Safety precautions (fire management, water integrity, etc.)
• Mooring plan
• Preservation issues
• Minimal manning requirements
• Compliance with vessels class rules and guidelines
• Compliance with local authority and port requirements
• Compliance with statutory/flag state rules and regulations
• Security measures (theft, piracy, etc.)

It would be normal practice for lay-up surveys to be issued and approved by a classification society or other institute/surveyor agreed by the claims leader and all recommendations to be commented with due dates for compliance.

We hope the above assists to help clarify the duties of the Assured in respect of maintaining seamless insurance coverage when laying-up objects insured. Please feel free to contact us if you have any questions. In our next article, we will look at implications of suspending loss of hire insurance during lay-ups.


DNV GL – Procedure for the lay-up of MOUs

The Nordic Marine Insurance Plan of 2013:

22. Jun. 2015