You must detach the disk first
Before you can format a disk it must be detached from the virtual machine using it. Refer to the Detach a disk from a virtual machine how to guide for more information.
- Select Compute -> Virtual Machines from the left sidebar
- Select the virtual machine which contains the disk you wish to format
- From overview page select Disks -> System disks from the menu below the virtual machines hostname.
- Click the name of the disk you wish to format
- Select Format disk from the right sidebar
- Select the desired file system
- Click the Format disk button
The formatting action will be queued. Once completed you will then be able to mount it to a virtual machine(s).