Oil Companies, Rig Operators At Odds Over Who Pays For Idled Rigs

23rd Jun 2010 12:36

(This article was originally published Tuesday.) By Brian Baskin Of DOW JONES NEWSWIRES Oil companies and rig operators are entering uncharted waters as a fight over who pays for rigs idled by the recent offshore drilling moratorium heads to court. At least three oil companies have demanded early exits from long-term leases on five rigs in the Gulf of Mexico, claiming that the recent U.S. ban on offshore drilling voids their contracts. The drillers disagree, claiming that the rigs could have moved onto international projects or perform work in shallower water, where the federal moratorium didn't apply. Last week, Anadarko Petroleum Corp. (APC) asked a federal judge in Texas to terminate its contract for a Noble Corp. (NE) rig, the first of the disputes to go to court. U.S. District Court Judge Martin L.C. Feldman on Tuesday overturned the moratorium, saying in his decision that the plaintiffs "have established a likelihood of successfully showing that the Administration acted arbitrarily and capriciously in issuing the moratorium." While offshore drilling can legally resume, few if any rigs are likely to go back to work until higher courts rule on the administration's appeal. Meanwhile, the unused rigs are costing oil companies as much as $600,000 a day. "Fundamentally nothing has really changed," said Jud Bailey, an analyst with Jefferies & Co. The Obama administration has promised to appeal Judge Feldman's decision. An Anadarko spokesman said it's too early to speculate on how the ruling will impact the company's lawsuit against Noble. The uncertain length of the moratorium, if reinstated, makes predicting the loss to drillers complicated, but several analysts have estimated that a total shutdown in the Gulf of Mexico will cut driller 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 when operating in riskier political territory like Venezuela and Nigeria, according to analysts and others familiar with oil-industry contract language. They say it's unlikely that most of the Gulf rig contracts anticipate an event like the drilling moratorium. President Barack Obama instituted the six-month ban on May 27, five weeks after Transocean Inc.'s (RIG) Deepwater Horizon rig caught fire and sank in the Gulf of Mexico, triggering one of the worst oil spills 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 veteran oil industry consultant who has negotiated rig contracts for offshore drillers. Lynch said he couldn't recall a similar rig contract dispute going to court, nor could several longtime industry analysts. Statoil ASA (STL.OS), which signaled its plan to exit two contracts, owes Transocean nearly $600 million through October 2013 for one rig. Transocean is denying Statoil's right to an early termination, though the companies said they are still negotiating out of court. Up to 30 rigs could end up in similar disputes, and who pays will hinge on how the contracts define "force majeure," a catch-all 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 other 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. Rig operators have come to rely on deepwater drilling contracts to boost earnings even as producers have cut spending on other exploration work since oil prices peaked in 2008. Finding new customers willing to pay those peak rates will be difficult, particularly if tighter regulations discourage new deepwater projects. Oil companies, too, hope to avoid being stuck paying for rigs they no longer need. Several drillers are under additional pressure after taking out loans to build new rigs to take advantage of what was 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 IHS Inc., a consultancy. -By Brian Baskin, Dow Jones Newswires; (212) 416-2453; [email protected] (END) Dow Jones Newswires June 23, 2010 07:36 ET (11:36 GMT)