Wednesday, June 23, 2010

Oil Companies, Drill Operators Clash Over Idled Rigs


Oil companies and drilling-rig operators are entering uncharted waters as they fight over who should pay for rigs idled by the recent U.S. offshore-drilling moratorium, and one case has already landed in court.

While offshore drilling could legally resume after a federal district court judge overturned the moratorium Tuesday, few if any oil companies are likely to go back to work until higher courts rule on appeals, officials at several companies said. Meanwhile, the unused rigs are costing them as much as $600,000 a day.

At least three oil companies are demanding early exits from long-term leases on five rigs in the Gulf of Mexico, alleging the ban on offshore drilling voided their contracts.

The drillers disagree, claiming the rigs could move to international projects or work in shallower waters, where the federal moratorium didn't apply.

Anadarko Petroleum Corp. last week asked a federal judge in Texas to terminate its contract for a Noble Corp. rig, the first of the disputes to go to court. An Anadarko spokesman said it was too early to speculate on how Tuesday's district court ruling would affect the company's lawsuit against Noble.

Uncertainty about the moratorium complicated predictions about operators' losses, but several analysts have estimated a total shutdown in the Gulf of Mexico would cut drillers' profits by about one-third.

U.S. drilling agreements have ironclad provisions for who pays when a hurricane interrupts work.

But government interference is typically written into contracts only for operations in more uncertain political territory such as Venezuela and Nigeria, according to analysts and others familiar with oil-industry contract language.

They said it was unlikely most Gulf rig contracts anticipated an event like the six-month deepwater drilling moratorium instituted by President Barack Obama on May 27. That was five weeks after Transocean Inc.'s Deepwater Horizon rig caught fire and sank in the Gulf of Mexico, triggering the worst offshore oil spill in U.S. history.

"No one ever expected political risk in the Gulf of Mexico, but that's exactly what they've got now," said Michael Lynch, a consultant who has negotiated rig contracts for offshore drillers. He said he couldn't recall another rig-contract dispute involving U.S. political risk going to court, nor could several other longtime industry analysts.

Judge Martin L.C. Feldman of U.S. District Court in New Orleans overturned the drilling moratorium Tuesday, saying that plaintiffs, a group of oilfield-services companies, "established a likelihood of successfully showing that the Administration acted arbitrarily and capriciously" in issuing the moratorium.

The administration quickly announced it would appeal the ruling. As a result, "fundamentally nothing has really changed," said Jud Bailey, an analyst with Jefferies & Co.

Norwegian oil company Statoil ASA, which has signaled its plan to exit two rig contracts, owes Transocean nearly $600 million through October 2013 for one rig. Transocean has denied Statoil's right to an early termination, though the companies said they were still negotiating.

About 30 rigs could end up in similar disputes, and who pays will hinge on how the contracts define force majeure, a catchall term for uncontrollable events that halt work. Anadarko's contract with Noble, for example, defines force majeure as including "rules or regulations" that make "continuance of operations impossible," though Noble contends the rig has tasks it can perform other than drilling deepwater wells.

"We don't believe this is a true force majeure situation," said Noble spokesman John Breed.

Neither the oil companies nor the drillers have much incentive to back down. Oil companies hope to avoid being stuck paying for rigs they don't need. Rig operators have come to rely on premium-rate deepwater contracts to boost earnings as producers have cut spending on other exploration work since oil prices peaked in 2008.

Finding new customers willing to pay deepwater rates would be difficult, particularly if tighter regulations discourage new offshore projects.

Several drillers were also under pressure after taking out loans to build rigs to capitalize on what had been a strong market. "They've got bank payments to make that were based on getting $500,000 a day," said Bob Fryklund, vice president for industry relations at consultancy IHS Inc.

Write to Brian Baskin at

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