BG Global Energy Ltd & Ors v Talisman Sinopec Energy UK Ltd & Ors

Under a commercial cost-sharing agreement, an inclusive definition of operating expenditure is not converted into an exclusive one by references to particular contractual payments. Unless the contract provides otherwise, the relevant expenditure is the direct and indirect expenditure actually incurred in providing the contracted services.

A clause requiring prior approval for changes which in fact increase expenditure or materially affect services is engaged by the actual effect of the change. A party cannot avoid the approval requirement by relying on its reasonable belief about the future effect. Failure to seek approval is a breach, not a condition precedent to payment. The burden of proving that approval would have been unreasonably withheld lies on the party required to obtain it.

This was a Stage 1 trial of preliminary construction issues arising from a Transportation, Processing and Operating Services Agreement concerning the use of an offshore production, storage and off-loading vessel. BG claimed that charges for services during the secondary term should be calculated by reference to the 2001 FPSO Agreement, notwithstanding its replacement by a Bareboat Charter under which Talisman operated the vessel.

The court considered the meaning of operating expenditure, the status of the Bareboat Charter, the effect of the prior-approval requirement in clause 6.4, the burden of proof concerning unreasonable refusal, the contractual consequences of non-compliance, the treatment of additional operator costs, and the allocation of shared water-injection-riser costs.

1. Operating expenditure. The definition covered all direct and indirect costs and expenses actually incurred by Talisman in providing the TPOSA services, including costs incurred under or in relation to the Bareboat Charter. The references to Schedule 5/Schedule D payments were illustrative and non-exhaustive. They did not require Talisman to charge by reference to notional payments which were not incurred. Talisman could provide the services itself, through subcontractors, or through a combination of both.
2. FPSO Agreement. The definition was wide enough to include an agreement of a different kind which substituted the 2001 FPSO Agreement. The Bareboat Charter could therefore be a substitute FPSO Agreement. Whether it was substituted in accordance with clause 6.4 depended on factual issues concerning approval and unreasonable refusal.
3. Clause 6.4. Prior written approval was required where a change in fact resulted in increased operating expenditure or had a material adverse impact on the services or other TPOSA obligations. Talisman’s subjective belief, or an objective assessment of what was more likely than not at the time, was irrelevant. Where the effect was uncertain, a reasonable and prudent operator would seek approval and would bear the risk of not doing so.
4. Approval was not a condition precedent to BG’s obligation to contribute under clause 6.2. Failure to obtain approval was a breach sounding in damages. BG could claim damages and equitable set-off for loss caused by the breach. If approval had been sought but unreasonably withheld, it was treated as given for the relevant purpose. If approval had not been sought, the reasonableness of withholding it was irrelevant to breach but relevant to damages.
5. The burden of proving that approval was unreasonably withheld or would have been unreasonably withheld rested on Talisman.
6. The costs of repairs or replacement of a water-injection riser used for both fields were to be shared equally under clause 18.2, notwithstanding the production-rate sharing mechanism in clause 6.2. Talisman was liable for the additional operator charge after the first twelve months if the contractual review occurred and the conclusion that the positions remained necessary was reasonable.
7. The court found for Talisman and Idemitsu on the construction of operating expenditure and the condition-precedent issue, and for BG on the trigger for clause 6.4 and the burden of proof. Costs were reserved.