Seadrill Management Services Ltd v OAO Gazprom Operator (The Ekha)

JurisdictionEngland & Wales
CourtQueen's Bench Division (Commercial Court)
JudgeTHE HONOURABLE MR JUSTICE FLAUX,Mr Justice Flaux
Judgment Date01 July 2009
Neutral Citation[2009] EWHC 1530 (Comm)
Docket NumberCase No: 2007 FOLIO 1227

[2009] EWHC 1530 (Comm)

IN THE HIGH COURT OF JUSTICE

COMMERCIAL COURT

QUEEN'S BENCH DIVISION

Before : The Honourable Mr Justice Flaux

Case No: 2007 FOLIO 1227

Between:
(1) Seadrill Management Services Limited (2) Seadrill Larissa Limited
Claimants
and
OAO Gazprom
Defendant

Richard Jacobs QC and Nigel Eaton (instructed by Holman Fenwick Willan) for the Claimants

Simon Rainey QC and Nigel Cooper (instructed by Herbert Smith) for the Defendant

Hearing dates: 7, 11–13, 18–20 May, 8–9 June 2009

Approved Judgment

I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.

THE HONOURABLE MR JUSTICE FLAUX Mr Justice Flaux

Mr Justice Flaux:

Introduction

1

The Claimants are both companies in the Seadrill group of companies, of which the ultimate beneficial owners are Norwegian shipping interests, including Mr John Fredriksen. The Second Claimant is the owner of the jack-up drilling rig EKHA (sometimes known as SEADRILL 5) and the First Claimant (known at the relevant time as Guildford Management Limited) was the manager of the various rigs and drilling units in the Seadrill fleet, including the EKHA. Save where it is necessary to distinguish between them, I will refer to the Claimants compendiously as “Seadrill” and I will refer to the EKHA as “the Rig”.

2

The Defendant (to which I will refer as “Gazprom”) is a Russian registered company specialising in the exploration for and exploitation of gas deposits. Gazprom was party to a Production Sharing Contract (“the PSC”) dated 3rd October 2000 concluded between it, the Gas Authority of India Limited (“GAIL”) and the Indian Government, under which Gazprom was licensed with GAIL for a period of seven years to carry out exploration for gas deposits as joint contractor with GAIL in Block NEC-OSN-97/1 (“the Block”) in the Bay of Bengal. In addition to the PSC, Gazprom entered an operating agreement with GAIL.

3

By a contract between the First Claimant and Gazprom on the International Daywork Drilling Contract-Offshore (“IDDCO”) form as developed by the International Association of Drilling Contractors (“IADC”) dated 10 September 2005, the First Claimant (referred to in the contract as “the Contractor”) agreed to furnish the Rig for the purpose of drilling one well in the Bay of Bengal. Under paragraph 910 (b) of the contract, the obligation to indemnify extended not just to the indemnified party but to any of its Affiliated Companies as defined. The Second Claimant fell within that definition and it is on that basis that the Second Claimant claims under the contract in these proceedings. The contract was to be in direct continuation of Seadrill's existing contractual commitment drilling for Oriental Oil. The contract was silent as to its duration, although it seems to have been contemplated by both parties at the time that the drilling would take about 45 days.

4

The Rig was loaded on the carrying vessel ASIAN ATLAS at Dubai on 9 December 2005 and carried to the drilling location in the Bay of Bengal. Before drilling could begin, the Rig had to be preloaded, a process by which, in order to provide a firm support foundation, the three legs of the Rig are driven into the sub-sea soil under the weight of first the Rig itself and then, as necessary, seawater ballast which is used to provide additional weight, then dumped, a process which is repeated in four stages, with increasing amounts of ballast. The process simulates the maximum vertical loads which the Rig may later impose on the seabed. The final objective is to have applied a vertical load to the foundation for the Rig that will exceed the load which may be imposed by the Rig upon the foundation in operation, and also in foreseeable storm or other environmental condition when the Rig is elevated. The practical result of preloading is that the Rig, after it is completed, is at its maximum level of penetration evenly on all three legs and will not sink further during operation.

5

Preloading was on this occasion a protracted process because of the depth to which the legs were to penetrate the sub-sea soil, in excess of 40 metres. The process began on 2 January 2006 and was still continuing on the morning of 9 January 2006. In the period between 0200 hours and 0600 hours on that day during the stage 4 preloading, the stern legs (port and starboard) penetrated the sub-sea soil significantly, with uneven and excessive trim to the stern. As a consequence, the legs “bound” i.e. they could not be moved up or down. A number of recovery operations by the crew took place between then and 11 January 2006, which resulted in damage to the Rig, her legs and jacking systems.

6

The Rig was subsequently towed to the Keppel Fels shipyard in Singapore for repairs where she arrived on 17 February 2006. Whilst at the yard carrying out repairs to the damage sustained, she also undertook upgrade works both for reclassification with DNV and as required for service off Indonesia under Seadrill's next contractual commitment with Premier Oil. On 16 May 2006 Gazprom wrote to Seadrill terminating the contract for alleged repudiatory breach by Seadrill, inter alia, in the negligent operation of the Rig in preloading and in undertaking the additional works at the yard.

7

Seadrill refuted the suggestion that it had repudiated the contract, claiming that Gazprom's purported termination was itself repudiatory. On 10 July 2006, Seadrill wrote terminating the contract for repudiation of the contract by Gazprom and/or pursuant to paragraph 802 of the contract which provided for termination for non-payment of hire. Gazprom had never paid any hire under the contract, which remains the case.

8

Gazprom in fact eventually drilled the well and a second well in the Block using a semi-submersible unit called GALAXY DRILLER. After completion of repairs at the yard the Rig went into service with Premier Oil.

9

In these proceedings, Seadrill claims hire under the contract at various applicable rates from November 2005 to July 2006. It also claims for various uninsured losses in relation to the repairs, which it says it is entitled to recover by virtue of paragraph 606 of the contract. Gazprom accepts that, subject to set off of its counterclaims for damages, hire was payable from 9 December 2005 until the time of the incident, but disputes, for a number of reasons, that any hire was payable before 9 December 2005, when the Rig was loaded on the carrying vessel or after the incident occurred.

10

Gazprom's case is that the incident was caused by mis-operation of the Rig during preloading, said to go beyond negligence and to amount to incompetence on the part of Seadrill and its personnel, in breach of an obligation to operate the Rig with reasonable skill and care, which Gazprom contends is the correct construction of paragraph 502 of the contract. Gazprom contends that that breach was sufficiently serious to be repudiatory and to entitle it to terminate the contract, which it did by its letter of 16 May 2006. Gazprom claims damages for that breach of contract, whether it was repudiatory or not.

11

Gazprom also contends that even if it was not entitled to terminate the contract for that breach, there was in fact another repudiatory breach in existence at the time, albeit unknown to Gazprom, namely that Seadrill's commitment of the Rig to Premier Oil on the basis that it would be delivered into service with Premier Oil after completion of the works in the yard amounted to renunciation or repudiation through impossibility of performance.

12

Gazprom puts forward substantial counterclaims for the losses it contends it has suffered as a consequence of Seadrill's breach of contract, repudiatory or otherwise. As a consequence of the Order which I made at the pre-trial review on 31 March 2009, the present trial has only been concerned with the issues of principle concerning quantum and any detailed dispute has been left for another day.

13

Before setting out in more detail the issues in the case and the facts, I should mention how the trial progressed and the extent to which certain areas of dispute narrowed during the course of the trial.

The course of the trial

14

Seadrill's pleaded case was that there was sudden and rapid penetration of the soil by the Rig on the morning of 9 January 2006, caused by what was in effect a hidden defect in the soil at the drilling location, namely that, although the strength of the soil generally increased with depth of penetration, the strength reduced between 33 and 36 metres before increasing again and the rate of increase in strength reduced after about 40 metres.

15

Quite apart from the fact that the factual evidence of those on board the Rig did not support a case of a sudden and rapid penetration (the sort of “punch through” which can happen during preloading where soft soil is encountered beneath heavy soil) the case that there was a defect in the soil was not supported by the expert evidence. Reports from geotechnical and PCPT data experts were exchanged and, after experts' meetings took place and joint memoranda were produced, it became clear that it was essentially common ground between the various soil experts that the seabed features alleged by Seadrill were not present and that there was no increased risk of rapid and sudden penetration of the Rig's legs due to the nature of the sub-sea soil conditions.

16

Notwithstanding this, at the outset of the trial Seadrill still maintained a case that there had been some reduction in strength of the soil based upon so-called “back calculations” carried out by its rig expert, Mr Hoyle. There were all sorts of problems with these calculations, but it is not necessary to go into those, since any case based on...

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