Two Ultra-Deepwater Rig Contracts Ended Early in the GOM

In a move that illustrates the weakening demand for deepwater drilling, BP has chosen to exit two ultra-deepwater floater contracts early in the Gulf of Mexico (GOM). The rigs in question were the following:

• ENSCO DS-4: 12,000 ft. DP Drillship (2010)
• West Sirius: 10,000 ft. Semisubmersible (2008)

Both rigs had been working in the GOM and had proven to be extremely capable, meaning that the early termination of the contract was not due to the quality or productivity of the drilling. To end the contracts, BP will pay Ensco a lump sum in termination fees totaling $160 million; for Seadrill Partners, they will instead pay the company off over a 2 year period so that they can hand West Sirius back 12 to 26 months early.

The Problem with Early Contract Terminations

While the payments will help offset the contractor's cash flow, it does have larger implications for the industry (and the offshore drilling model) as a whole. Primarily, the practice of ending contracts early calls into question whether operators are beginning to ignore the sanctity of contracts. By not honoring their contractual commitments, they place contractors into a bind where they cannot rely on the backlog to raise funds and build new rigs. It can disrupt more than a single contract and can exacerbate the supply / demand imbalance.

Over the last few months, the industry has increasingly seen national oil companies (NOCs) begin to hand out termination notices, mainly pointing toward contractual technicalities and rig portfolio rationalization. At first, it was assumed that they were attempting to hardball contracts to either slash dayrates or that the early terminations were a symptom of certain markets. This assumption, however, has fallen apart with the news from the GOM, which has so far proven to be a market where terminations was not a concern.

Terminations an Option When Sublets Not Available

It is believed that terminations are typically turned to when operators do not have the option of subletting the rig. While the termination fees may be hard to swallow at first, it does cut the NOCs' overall costs by allowing them to avoid paying for spread costs. Unfortunately, with the dwindling demand for deepwater drilling and the decreasing opportunity to sublet rigs, operators may continue to choose to terminate their contract early.

The Safety of Ultra-Deepwater Drilling

For offshore workers aboard deepwater drilling rigs, the problem is more than just NOCs honoring contracts. For these workers, safety remains as a primary concern. With drilling continuing to push to new depths—such as ultra-deepwater rigs that explore at 1,500+ meters—the equipment becomes increasingly complex. As one engineering professor from the University of California, Berkeley explained, deepwater rigs string out equipment and steel over thousands and thousands of feet, meaning there is an enormous amount of weak points.

Other significant dangers for offshore workers is the harsh environments that they face, as well as the simple inexperience of NOCs who choose to begin operating at these increasingly dangerous new depths. Following the tragic Deepwater Horizon explosion, the COO of BP stated that their company had been unable to stop the oil leak because they had never had to plug a well at such depths before and were unprepared.

Such dangers are only worsened when considering the new trend of early contract terminations and the overall high cost of ultra-deepwater drilling, where the advanced equipment and technology can cost from $250,000 to $415,000 to operate per day. In an attempt to avoid stoppages or delays, choices may be made that place the risk of the offshore worker in danger and compromise the safety of the entire operation.

If you or someone you love was involved in a serious deepwater drilling accident, we invite you to get in touch with a maritime attorney from our firm as soon as possible. We offer 100% free case evaluations.