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Gard News 206, May/July 2012

By Morten Lund Mathisen and Andreas Fjærvoll-Larsen,
Wikborg, Rein & Co.

The risks involved in a wreck removal project largely depend on the state of the casualty and the condition of the wreck removal site. Compared to conventional wreck removals, oil field removals typically involve increased risks due to the proximity of the wreck to offshore installations, pipelines and wells. Such projects require not only extensive engineering and offshore operations by the wreck removal contractor but also a comprehensive legal framework within which those operations take place. The removal of the jack-up rig WEST ATLAS is a good example of the complexities involved with such a project.

 

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Circumstances relating to wreck removal in oil fields and particular
challenges of the WEST ATLAS case required a tailor-made wreck removal
contract to be drafted.
 

On 21st August 2009 the WEST ATLAS was adjacent to the Montara well head platform in the Timor Sea when there was a blowout in one of the wells. On 1st November 2009 during an attempt to stop the blowout the platform and rig caught fire. The blowout was finally killed and the fire extinguished three days later. The blowout caused a massive oil spill in the Timor Sea and the WEST ATLAS was severely damaged with its cantilever with drill floor extending over and touching the well head platform. The WEST ATLAS was declared a constructive total loss and the wreck had to be removed.1

Contract format and selection of contractor
In considering what wreck removal contract to use for the WEST ATLAS an early decision was made to use one of the BIMCO wreck removal forms.  These forms provide a contractual framework that is generally suitable for use in wreck removals and they are well known to both P&I Clubs and salvors. In co-operation with the International Group of P&I Clubs, the International Salvage Union and certain other industry groups, BIMCO has prepared three standard forms: WRECKHIRE, WRECKSTAGE and WRECKFIXED. P&I Clubs normally prefer to use one of the lump sum agreements (WRECKSTAGE or WRECKFIXED) so as to have a fixed estimate of cost for their reserves. Salvors on the other hand normally will want to use WRECKHIRE and thereby be remunerated for their work on a daily hire basis. 

Whilst the BIMCO forms could be used as a starting point it was quickly recognised that the specific circumstances relating to wreck removals within oil fields and the particular challenges posed in this case required a tailor-made wreck removal contract to be prepared. In order to provide an adequate contractual framework, the wreck removal contract needed to combine the standard WRECKHIRE form with provisions from drilling and other offshore service contracts.

In December 2009 an invitation to tender was issued to potential wreck removal contractors. The main scope of work was the removal of the rig from the worksite and its delivery in Singapore.  In addition, scattered items and debris from the seabed/subsoil within the worksite needed to be removed and disposed of. The invitation to tender required the contractors to provide detailed plans for the technical execution of the project.

Tenders were received in March 2010. All the shortlisted tenders were prepared by joint ventures consisting of a salvage company and an offshore contractor.  This was to be expected given the need for the combined expertise and resources of both types of companies in this project. 

The successful tenderer was a joint venture between SVITZER Salvage Australasia Pty Ltd and Sea Trucks Australia Pty Ltd, using a DP3 crane vessel as the main unit for the removal of the rig. The wreck removal agreement was signed in May 2010 based on the WRECKHIRE 1999 form but with extensive amendments and several additional clauses in particular relating to the remuneration scheme.

Remuneration scheme
The main challenge when pricing the WEST ATLAS project was how to take into account the various uncertainties relating, for example, to the condition of the rig and the worksite and government requirements and local regulations. These uncertainties had the potential to impact at various stages of the project and create the risk of cost overruns. The general pricing scheme in WRECKHIRE was too simplistic for what was required and a comprehensive remuneration scheme was therefore agreed. This scheme involved three elements: payment of a net base cost for the wreck removal services, payment of a margin on top of the base cost in accordance with a declining margin scale and payment of a bonus in certain circumstances. In conjunction with this scheme a general obligation was imposed on the contractor to reduce costs throughout the project.

The base costs for the wreck removal services were split into separate cost categories payable by way of fixed lump sums, fixed day rates, estimated day rates and reimbursable costs corresponding to the various elements of the wreck removal services. Mechanisms for reductions of day rates were set out for periods of standby, breakdown of equipment, unavailability of personnel or non-performance by the contractor. The estimated total base cost of the project was used to calculate a target price, which constituted the benchmark for determining the payment of the margin and any bonus.

The margin payable to the contractor on top of the base cost was dependent on the actual total cost of the project. If the actual total cost of the project exceeded the target price, the margin payable to contractor would be reduced in accordance with a fixed scale. The bonus payable to the contractor was dependent on the actual total cost of the project not reaching the target price. It was agreed that the contractor would receive a certain percentage of any difference between the target price and the actual total cost as a bonus.

It is interesting to note that the "stick and carrot" approach used in the WEST ATLAS contract is very similar to the scheme in the newly-published revised version of the WRECKHIRE. This 2010 revision includes provisions that enable the parties to include a target date/event for completion of the services. Completion before the target date may result in the payment of a bonus, whilst completion after the target may result in a reduced daily rate of hire.

Liability and indemnity scheme
The BIMCO wreck removal forms contain a simple liability regime based on the "knock for knock" principle. This scheme is often not adequate for wreck removals within oil fields, as the operations do not involve only the owner of the rig and the wreck removal contractor. The high risk of physical damage and pollution due to close proximity to the field operator's offshore installations and wells is a further complicating factor for wreck removals within offshore oil fields. However, these risks are well understood in the offshore industry and are the main reason for the extensive liability regimes based on the "knock for knock" principle found in offshore contracts. The wreck removal contract for the WEST ATLAS included an extensive liability regime based on the "knock for knock" principle inspired by provisions in offshore contracts.  In addition, there were specific regulations designed to cover the pollution risk.

The issue that caused a particular challenge in the WEST ATLAS project was the fact that the cantilever with drill floor was actually extending over and touching the well head platform and that it was necessary to carry out parts of the wreck removal work from this well head platform. It was necessary to negotiate a mutual hold harmless agreement between the owner of the WEST ATLAS and the oil field operator. This agreement also included an extensive liability regime based on the "knock for knock" principle with a particular regulation of pollution liability among the owner, the field operator and the wreck removal contractor for liabilities arising in relation to the wreck removal work. Since the mutual hold harmless agreement had been entered into between the rig owner and field operator prior to the selection of the wreck removal contractor, there was a mechanism in that agreement for the wreck removal contractor to become a party to the agreement at a later stage.

Conclusion
Following the selection of the contractor and successful contract negotiations, operations commenced and in October 2011 the rig was safely removed, towed to Singapore and later sold.

Footnotes
1 For a more detailed account of the facts of the case see the article "WEST ATLAS - The ill-fated drilling rig" elsewhere in this issue of Gard News. 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.

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