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Gard News 206, May/July 2012

In the following trilogy, Gard News examines a serious gas well blowout, involving one of the largest jack-up drilling rigs in the world, from three different perspectives: that of the claims executive who handled the claim on behalf of Gard, that of the lawyers who had to navigate through a complete legal framework, and that of the wreck removal specialist who skilfully steered the process through a maze of regulatory and statutory challenges. The first article gives the claims executive's perspective on the incident.



In the early morning hours of 21st August 2009 a Gard claims executive received a phone call from the insurance department of a client who notified of a "gas leak on the WEST ATLAS drilling platform".  All personnel had been safely evacuated with no significant injuries.

It was not immediately apparent to the claims executive how serious the incident was, nor that this was the beginning of a saga which would last more than 75 days before efforts to normalise the situation were successful, although it would turn out to be too late to save the WEST ATLAS. In fact, the incident involved a gas well blowout, which is one of the most critical risks to which a jack-up drilling rig can be exposed.1

The WEST ATLAS and the Montara field operation
The WEST ATLAS jack-up drilling rig was one of the largest jack-up drilling rigs in the world, capable of drilling 30,000-foot wells in up to 120 metres' depth. It was built in Singapore in 2007.

At the time of the incident it was working on a contract for drilling and completion of wells at the Montara wellhead platform (WHP) in the Australian sector of the Timor Sea, approximately 250 km northwest of Truscott, Western Australia, in a water depth of circa 77 metres.

The WEST ATLAS had pre-drilled five wells through the platform jacket structure in the early part of 2009, and had returned back to the field in mid-August 2009 to tie the wells up to the platform deck, which had been installed whilst the rig had been away from the field. Once the wells were tied up to the platform deck level the rig should then drill into the reservoir and run the completion strings in the wells and make them ready for production of gas and condensate.

The incident
The top of the well casing strings were protected by corrosion and pressure caps which were installed after they were pre-drilled. These caps needed to be removed before the extension pieces to tie the wells up to the production deck could be installed.

On 20th August 2009 the corrosion cap of the first well was removed and the work to install the extension casing tube was carried out successfully. At the end of the day the drilling equipment was moved over to an adjacent well to do the same tie-back operation. In the early hours of 21st August a burst of fluid was observed coming from the well that had just been tied back. Gas alarms were triggered and emergency procedures were activated. It was decided to move the drilling equipment back to this well to set a mechanical plug in the well bore, and whilst the drilling equipment was being moved back the well blew out.

The order to abandon the WEST ATLAS was immediately given. In accordance with drills and standard procedures, complete shutdown of all power, plant and equipment except emergency back-up batteries were executed and all 69 crew abandoned the rig in three lifeboats.

Being hostage to a well out of control
Following the evacuation of the WEST ATLAS, the well blew out a steady stream of condensate, water and gas and an absence of wind caused the rig to be enveloped in a gas cloud.  Initial deluging was attempted by attending supply boats but turned out to have no effect due to insufficient capacity to deluge the rig from a safe distance.

The authorities ordered a 2 km safety and exclusion zone due to the gas cloud around the WEST ATLAS/Montara WHP. It was early concluded that the well could only be controlled by drilling a relief well to intersect with the original wellbore near the reservoir to kill the well flow and regain control of the well. This operation would, however, take about two months to complete.

Whilst this was on-going, the WEST ATLAS would be held hostage by the out-of-control well  and be exposed to the continuous flow of the condensate, salt water and gas that covered the rig and seeped into motors, switches and equipment on the outside of the rig and also gradually into the internals of the rig's hull and accommodation spaces. Certain materials in electric motors, components, switch gear and cables are subject to accelerated chemical degradation when exposed to gas and condensate. There was also the risk that something could ignite the gas and set fire to the WEST ATLAS, which was covered by a layer of condensate from the well.

Loss mitigation initiative
In the early phase of the blowout, the well operator and their well control specialists suggested they bring in high volume/high pressure deluging equipment which the owners and insurers of  the WEST ATLAS considered. In order not to lose any time it was agreed to go ahead to mobilise the equipment and not wait until it was finally determined that it was the right thing to do.

Having studied photos from aerial surveillance cameras it was discovered that hatches on the rig's main deck were left open, which raised concerns about the stability of the WEST ATLAS if a large quantity of water should enter the hull. Accordingly, the owner and insurers requested that the proposed deluge operations should be aborted, but agreed that the deluge equipment should be kept on location to fight a fire if the escaping gas ignited.

Ultimately, the regulatory authorities rejected the proposed deluge operation, allowing only deluging during daylight hours, which was not taken up.

Relief well drilling and well control operation
The WEST TRITON, the sister-rig of the  WEST ATLAS, which was laid up at Batam, Indonesia, was contracted to drill the relief well. Due to the strict Australian regulations to avoid alien species getting into their waters, the rig had to undergo a thorough cleaning operation and ballast water change before it was allowed to enter Australian waters.

The WEST TRITON arrived at the Montara site on 10th September and jacked up 2 km from the WEST ATLAS/Montara WHP. The plan was to drill to a depth of about 2,600 metres below the seabed where the intersection into the original well should take place.

The drilling of the relief well commenced on 15th September and on 5th October 2009 it had reached the target depth of 2,600 metres within 10 metres of the original Montara well bore. On 6th October that first attempt to drill into the original well steel casing was made without success. On 13th October the second attempt to intersect the well also failed.

During the third attempt on 22nd October 2009, a piece of cement from the original well was found in the drill cuttings returned on board the WEST TRITON. The fourth attempt to intersect the well was successful when the drill bit drilled through the steel casing into the original Montara well bore on 1st November.

It had been estimated that it would take about 1,600 barrels of heavy well kill fluid to fill up the relief well and the original well bore. It had been considered prudent amongst well control specialists to mix 2½ times the calculated amount of fluid and accordingly the rig's mud capacity of 4,000 barrels had been prepared.

When intersection with the original well was achieved, the pumping of heavy well kill fluid started immediately and after 1½ hours the gas cloud around the WEST ATLAS/Montara WHP had reduced significantly. Shortly thereafter kill fluid was observed to flow out of the top of the well on the Montara WHP. However, the gas flow did not appear to be completely arrested and it became apparent that they were running out of kill fluid.

Suddenly the escaping gas ignited and the WEST ATLAS and the Montara WHP were immediately engulfed in flames. The condensate that had accumulated on board the WEST ATLAS and other combustible materials caught fire. The heat was so intense in the well head area that the drilling derrick collapsed in between the aft legs and the drilling package's cantilever became so hot that it sagged under its own weight of some 700 tonnes and collapsed onto the WHP over which it was skidded.

A further 4,000 barrels of heavier mud was prepared and pumped into the well from the WEST TRITON on 3rd November 2009 and, after 2½ hours of pumping, the gas flow from the well appeared to have stopped and the fire now starved of fuel slowly went out. On 27th - 30th November a bottom hole cement plug and a packer were installed in the original well, the relief well was plugged back to surface and the WEST TRITON was released from the field.

The well was, however, still not considered safe enough to allow work to be carried out near the site. On 13th January 2010 the installation of a plug in the well bore from the top of the well constituted the prescribed final well securing operation.

The WEST ATLAS Insurance arrangements
The WEST ATLAS was insured under a fleet package policy for hull and machinery, hull interest and loss of hire based on the Norwegian Marine Insurance Plan (the Plan), with certain additional special clauses. The placing of the policy was split between the Norwegian offshore energy market and certain overseas markets through a Norwegian energy specialist broker, and Lloyd's of London and London companies through a London-based Lloyd's specialist energy broker.

Gard was the overall policy claims leader and the Hiscox Syndicate at Lloyd's was the London market claims leader.

The WEST ATLAS was further entered with Gard for P&I and comprehensive general liability insurances.

Claims handling and management
It was agreed between the parties to appoint Matthews Daniel's (MatDan) Singapore office as loss adjusters for this incident. The assured's jack-up division was based in Singapore and MatDan, having been involved in other matters concerning the assured, were familiar with the personnel and their operations. Their knowledge of specific Australian factors also proved to be useful as things developed.

Insurer's challenges
30th September denoted the closing of the third quarter accounts for the majority of the insurers involved in the direct insurance policy, so they required an estimate of the exposure. The loss was well known through the markets and had been mentioned at the IUMI conference in Bruges that took place in mid-September 2009.

It was clear that the WEST ATLAS had already sustained damage to its jacking motors, cables and switches and gas would likely have seeped into the insulation in the accommodation compartment. However, due to the on-going blowout, it was impossible to go aboard the rig and inspect the damage.

The solution was to make a best-case  assumption, which included a significant estimate for anticipated damage under the hull and machinery insurance and total loss of the limit under the loss of hire insurance, assuming that it would take more than the insured number of days and deductible days to move the unit to a yard and carry out repairs if the well flow was successfully stopped without further damage to the rig.

The 1st November fire changed the loss scenario significantly, and the question was then whether the WEST ATLAS was condemnable, i.e., a constructive total loss, or not. The rig remained inaccessible to complete a damage survey, without which it was not possible to solicit tenders for repairs.

There were, however, some major components that could be seen from the photos of the incident on which a loss estimate could be built, such as the drilling equipment and cranes totally collapsed and partly melted over the Montara WHP, severe fire damage to main deck and deck equipment, tops of aft legs damaged by the fire, jacking system made unusable and soot and petroleum residues that would have to be cleaned before the rig could be salvaged.

It was fortunate that Gard's local contact within the assured's organisation had a very good relationship with the builder of the WEST ATLAS, and they were willing to provide a repair estimate on the basis of the externally visible damage. A further estimate for the salvage and moving the rig to a yard in Singapore was requested from an Australian offshore contractor.

The estimates were submitted on 12th - 13th November and combined they were in excess of 108 per cent above the insured market value of the WEST ATLAS, well in excess of the 80 per cent threshold for condemnation under the Plan's terms and conditions. The assured filed its claim for condemnation of the WEST ATLAS on 19th November 2009.

The insurers requested a more detailed breakdown of the building yard's repair estimate and asked MatDan to review and verify the itemised estimate. Most items appeared to be adequate, some on the low side and some items appeared to be missing and, following their review, the total estimate had increased to 120 per cent of the market value.

Accordingly, Gard, as claims leader, accepted the assured's request for condemnation of the WEST ATLAS on 30th November 2009 and the total loss compensation was paid under the hull and machinery and hull interest insurances on 15th December 2009. Insurers waived their right to take over the ownership of the WEST ATLAS but retained the subrogated rights if the investigation on the cause of the incident should conclude that recourse against a third party would become available. Interest payable in accordance with the Plan was agreed and paid at a later date. The loss of hire insurance does not pay in respect of a total loss of the insured rig.

Cause investigation
On 5th November 2009, the Hon. Martin Ferguson MP, the Australian federal government minister for resources and energy, announced a commission of inquiry into the uncontrolled release of oil and gas from the Montara Wellhead Platform in the Timor Sea.

The commission conducted hearings between 15th March and 16th April 2010 and issued its final report on 17th June 2010. The report was ordered to be withheld from the public and was not released until 24th November 2010. The commission found 51 errors and omissions, mostly committed by personnel of the field operator, but with a little shared responsibility between the personnel of the operator and the owner of the WEST ATLAS, and some were attributed to the regulatory authority's staff. The errors and omissions were committed both when the well was drilled and temporarily plugged in the early part of 2009 and when the well was re-entered in August 2009. They collectively contributed to the well not having the required two physical barriers between the reservoir and the atmosphere when the protection caps were removed for the work to tie the well up to the WHP deck on 20th August 2009.

Details of the commission of inquiry and its report and associated documents can be found on www.montarainquiry.gov.au/ and www.ret.gov.au/Department/responses/montara/Pages/MontaraInquiryResponse.aspx.

Recovery potential
In its report, the commission was very critical of the acts and omissions of the field operator's personnel both on board and on shore, which contributed to the blowout.

However, the errors were not committed at sufficient level within the field operator's organisation to establish them as being the intent of the company itself and therefore to jeopardise the company's status as a co-insured under the WEST ATLAS's insurances and the contractual knock-for-knock clause in the drilling contract between the owner of the WEST ATLAS and the operator and owner of the Montara WHP. Nor did the inquiry identify a third party who would have part responsibility for having contributed to the causes for the well blowout. Accordingly, insurers agreed not to commence any subrogation action for the total loss of the WEST ATLAS.

1 For details about the regulatory and statutory challenges faced during the wreck removal operation see the article "The WEST ATLAS wreck removal - A regulatory and statutory approvals management triumph" elsewhere in this issue of Gard News. For a discussion of the legal framework surrounding the incident see the article "WEST ATLAS - The legal framework of a complex but successful wreck removal project" elsewhere in this issue of Gard News.

Any comments on this article can be e-mailed to the Gard News Editorial Team.