"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.
***
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 contracts.
They said it was unlikely most Gulf rig contracts anticipated an event like the six-month deep-water 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.
***
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 deep-water wells.
"We don't believe this is a true force majeure situation," said a Noble spokesman.
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 deep-water contracts to boost earnings.
COMMENTS:
This situation illustrates an extremely important aspect of the real world: it is a very complicated place filled with uncertainty. A stable legal system provides fixed rules concerning how private contracts will be interpreted and enforced. Having such a framework makes it possible for private individuals and businesses to write contracts which specify what each party is obligated to do if various unexpected circumstances do in fact occur. Through these contracts risk is transferred to those parties who are most willing and able to bear it.
It also illustrates that when government acts outside of the legal system, it reduces the effectiveness of the legal system and of private contracts at dealing with risk. The end result is that economic life becomes more uncertain than if the rule of law was fully respected by the government. More uncertainty means less investment, less capital, less output, and lower living standards than would otherwise occur.
