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OffshoreEnergyJune 2013OFFSHORE ENERGYBULLETINWelcome to the second edition of our quarterly Offshore Energy Bulletin.We open this Bulletin with an article from our Australian practice, reporting on a local policy shift thatis having significant consequences for ships servicing the offshore oil and gas industry. We then reporton the recent Offshore Technology Conference in Houston, OTC 2013, where indications were thatdeepwater development in both existing and frontier locations is making a serious comeback. Alsoin the drilling sector, we report on a recent US Court of Appeals decision relating to the DEEPWATERHORIZON catastrophe, with important lessons for the insurance market.Moving on, we consider the effect of a recent High Court decision on the “Supplytime” and “Towhire”standard form charters. We are pleased to introduce HFW’s new specialist construction team, led bypartners Max Wieliczko, Michael Sergeant and Robert Blundell, who have recently joined the firm fromMaxwell Winward. The team has particular expertise in international offshore construction projects, bothon the transactional side and in dispute resolution. We introduce the team with their interesting articleon delays in offshore wind farm construction.The expansion of our construction team is just one recent development in the continuing growth ofHFW’s offshore energy capabilities. In other news, in our Singapore office Dominic Johnson (AdmiraltyPartner) and Bob Spearing (Master Mariner) have just completed their Helicopter Underwater EscapeTraining and are now certified to travel by helicopter to offshore installations. This enhances HFW’sability to respond immediately to offshore casualties, which may require a physical presence at anoffshore installation for investigation, evidence gathering or legal support.If you require any further information or assistance on any of the issues raised in this edition of theBulletin, please do not hesitate to contact any of the contributors or your usual contact at HFW.Paul Dean, Partner, paul.dean@hfw.comSimon Shaddick, Associate, simon.shaddick@hfw.com


Importation of offshore shipsin AustraliaOwners and charterers of shipsservicing the Australian offshore energysector may be adversely affected by arecent and unforeseen development inrelation to the Australian Customs andBorder Protection Service’s (AustralianCustoms) approach to the importationof ships.In a radical policy shift, AustralianCustoms has abandoned the “90day rule” that was previously appliedto foreign ships trading in Australianwaters, and adopted a very narrowand arguably flawed interpretation of“importation” under Australian customslegislation, which is premised solelyon whether a ship has “entered intothe commerce of Australia”. This newapproach does not take account of theparticular circumstances and periodof a ship’s presence in Australia, norof the intentions of the operator of theship. As a result some ships servicingthe Australian offshore sector may nowface the risk of being imported.It is understood that the policy shift isAustralian Customs’ response to therevised cabotage regime that cameinto effect in July last year, one ofthe stated objectives of which is tofacilitate “the long term growth of theAustralian shipping industry” – which iscurrently in a parlous state. However,neither the current nor previouscabotage regimes had mandatoryapplication to voyages betweenports within an Australian State orTerritory (“intra-state voyages”), or anyapplication at all to voyages betweenoffshore installations and mainlandports (“shuttle voyages”).In other words, foreign shipsundertaking intra-state voyages andshuttle voyages (being the voyagesmost commonly undertaken inservicing the offshore energy sector)are not required to hold a ‘TemporaryLicence’ under the new cabotagelegislation. Notwithstanding thatthere has been no change of positionregarding the regulation of thesevoyages under the new cabotageregime, Australian Customs withoutprior warning has implemented astringent approach to the importationof ships that are not covered by aTemporary Licence (which in the caseof shuttle voyages is not capable ofbeing obtained).The policy shift has the potentialto result in absurd outcomes. Forexample, Australian Customs maydetermine that a ship which has beenin Australian waters for less than 48hours has been imported becauseit is trading without a TemporaryLicence, whereas a ship that hasbeen operating in Australia for severalmonths will not be imported because aTemporary Licence has been issued forthe trade it is engaged in.The current uncertainty caused bythe policy shift is having a significantnegative effect on the Australianoffshore oil production industry at atime when projects are already undersubstantial pressure due to costoverruns and delays. The voyagesmost likely to be impacted are intrastateheavy lift movements of projectcargo, e.g. on the Western Australiancoast, and the carriage of oil loadedfrom FPSOs for discharge at Australianmainland refineries.One consequence of the policy shift isto make it less profitable for Australianoffshore oil producers to supplyAustralian refineries. Ultimately, thisseems likely to result in the curiousposition that all crude produced frominstallations in Australia’s EEZ will beexported, with Australian refineriesimporting their crude requirements.Hopefully, a sensible solution can beachieved in the near future. In themeantime, owners and operatorsengaged in these Australian tradesshould proceed with extreme cautionand appraise themselves of the optionsavailable to minimise the risk of theirships being imported.For more information, please contactGavin Vallely, Partner, on+61 (0)3 8601 4523 orgavin.vallely@hfw.com, or your usualHFW contact.In a radical policy shift, Australian Customs has adopted a very narrow and arguablyflawed interpretation of “importation”.02 Offshore Energy Bulletin


OTC 2013 – is deepwaterdrilling making a comeback?Following the events in the Gulf ofMexico in April 2010, one might haveexpected that deepwater drilling maytake a while to return to the level ofactivity seen pre-Macondo. For thosewho attended the Offshore TechnologyConference (OTC) in Houston thisMay, this was clearly not the case.Over 100,000 people descended onHouston for the week to see and hearabout the latest advances in everythingto do with the oil and gas industry.There were some interesting statisticsbeing advanced:• One oil major expects the rise intotal global energy demand to bein the region of 36% by 2030 – theequivalent of adding another USand another China to current globalenergy needs over the next 17years. This potentially means thatthe world could need to produce16 million more barrels of crude oila day.• This year, it is expected that theUS will surpass Russia and SaudiArabia as the world’s largest crudeoil producer.• The shale gas revolution is set tocontinue as fracking technologyimproves. The US EnergyDepartment projects that in the USalone, gas production is likely togrow 44% between now and 2040.A key theme that emerged at OTC2013 was establishing the longevityof existing oil and gas fields throughthe use of new technologies suchas seismic acquisition and datainterpretation, enhanced oil recoveryand advanced field technology. Despitethe North Sea being one of the oldestoil and gas producing areas, one oilmajor estimates that it has only tappedinto 40% of its reserves, and thatbetter seismic profiling has alreadyresulted in an increased recovery ratefrom existing wells.Another theme at OTC 2013 was theongoing discovery and development ofnew oil and gas fields around the word.In Angola, one of the newest areas tobe explored and developed, large fieldssuch as Greater Plutonio are startingto come online. For example, BP’sPSVM FPSO will tap into four fieldssimultaneously, in water depths of over2000m. With 75,000 tons of subseaequipment beneath it, the footprint ofthe subsea system alone is larger thanGreater London, at 600 square miles.Enormous investment continues in theoffshore energy sector. One oil majorannounced that it is planning to spend$12 billion in Azerbaijan between 2013and 2017, and has recently installedthe largest jacket ever in the CaspianSea, in the Azeri-Chirag-Gunashli field.Returning to the Gulf of Mexico, BPalone is planning to invest between $4and $5 billion a year in the region until2020, as advances in technology allowcompanies to explore ever deepergeological strata.This is all good news for participantsthroughout the offshore oil and gasindustry, and is likely to correspondwith increased demand for supportservices including finance, legal andinsurance.For more information, please contactTom Walters, Senior Associate, on+44 (0)20 7264 8285 ortom.walters@hfw.com, or your usualHFW contact.Insurers beware: BP winsUS$750 million additionalinsured claimIn March 2013, the US Fifth CircuitCourt of Appeals ruled in In Re:Deepwater Horizon 1 that BP wasentitled to coverage as an additionalinsured under Transocean’s insurancepolicies, giving BP access to US$750million under Transocean’s insurance tocover pollution-related liabilities arisingout of the Deepwater Horizon oil spill,even though Transocean was notresponsible for those liabilities underthe underlying contract.Under the underlying Drilling Contract,Transocean was responsible for, andwas obliged to indemnify BP against,liabilities for pollution originating on orabove the surface of the water. BP wasresponsible for, and was obliged toindemnify Transocean against, all otherpollution.The Drilling Contract also requiredTransocean to maintain variousinsurances, and provided that BPshould be “named as additionalinsureds in each of [Transocean’s]policies, except Workers’Compensation for liabilities assumedby [Transocean] under the terms of thisContract.”The relevant insurance policies heldby Transocean contained materiallyidentical provisions, and wereaccordingly treated as one for thepurposes of the Court’s analysis.The parties agreed that the policiesprovided some insurance coverage toBP as an additional insured. The issuein contention was the scope of BP’scoverage.1 In re Deepwater Horizon, No. 12-30230, 2013WL 776354 (5th Cir. Mar. 1, 2013)Offshore Energy Bulletin 03


The insurers argued that the additionalinsured provision in the DrillingContract limited BP’s coverage toliabilities specifically assumed byTransocean under the Drilling Contract(“misdirected arrow” cover). However,the Court found that “This argument issimply not persuasive given how Texaslaw has developed.” Under Texaslaw, to discern whether a commercialumbrella insurance policy “purchasedto secure the insured’s indemnityobligation in a service contract witha third party also provides directliability coverage for the third party,”one must look to the “terms of theumbrella insurance policy itself,” ratherthan those of the underlying servicecontract.The Court considered the 2005case of ATOFINA, which dealt withsubstantially similar policy wording,in which the Texas Supreme Courtsaid that “where an additional insuredprovision is separate from andadditional to an indemnity provision,the scope of the insurance requirementis not limited by the indemnity clause.”On this basis, the Court held thatthere was also no relevant limitationto BP’s coverage under the policy asan additional insured, provided theinsurance provision and the indemnityclauses in the Drilling Contract wereseparate and independent.In deciding this question, the courtapplied the reasoning in ATOFINA 2and concluded that the two relevantprovisions (one requiring Transoceanto obtain coverage for its contractualliabilities, another simply requiringTransocean to name BP as anadditional insured) were separate andindependent.2 Evanston Ins. Co. v. ATOFINA Petrochemicals.,Inc., 256 S.W.3d 660 (Tex. 2008)Parties are advised carefully to review the hire paymentobligations in their charters and consider how theirposition might be affected.Accordingly, since (1) the policies didnot impose any relevant limitationon the extent to which BP wasan additional insured, and (2) theadditional insured provision in theDrilling Contract was separatefrom and additional to its indemnityprovisions, the court found as a matterof law that BP was entitled to coverageunder each of Transocean’s policies asan additional insured.A particular feature of Texas law isthat any ambiguity in an insurancecoverage provision (particularlyexceptions or limitations on liability) areinterpreted strictly against the insurerand in favour of the insured, providedthat interpretation is reasonable –even if the insurer’s interpretation ismore reasonable than the insured’s.Whilst it remains to be seen, therefore,whether this decision will be followedin other jurisdictions, insurers wouldbe well-advised to scrutinise theirpolicy wording to ensure it placesthe intended limits on the scope ofadditional insured coverage.For more information, please contactEmilie Bokor-Ingram, Associate, on+44 (0)20 7264 8463 oremilie.bokor-ingram@hfw.com, or yourusual HFW contact.Impact of “The Astra” onSupplytime and TowhireThe recent decision of the EnglishHigh Court in the ASTRA is generallyexpected to have profound effectson hire payments and terminationrights under time charterparties. Aretimecharter-based contracts in theoffshore sector, such as Supplytimeand Towhire, likely to be affected?The Astra was a ship fixed on a fiveyear time charter on an amendedNYPE 1946 form. Clause 5 of thecharterparty required punctual andregular payment of hire, and an antitechnicalityclause was incorporatedinto the charter. Charterers defaultedon several occasions, culminating inowners sending an anti-technicalitynotice, subsequently withdrawing thevessel and claiming that chartererswere in repudiatory breach.When the owners were successful atarbitration, the charterers appealed tothe High Court. Although Mr JusticeFlaux dismissed the appeal, he madesome important comments about theunderlying nature of the obligationto pay charter hire. In particular, heindicated that the charterers’ obligationto make punctual payment of hireunder clause 5, especially in light ofthe anti-technicality clause, amountedto a condition of the contract, breachof which would entitle an ownerto terminate the charter and claimdamages for future loss of earnings.This represents a significant turnaroundin opinion. Previously it was widelybelieved that non-payment of hirewould allow an owner to withdraw thevessel and claim unpaid hire only upto the date of withdrawal – not futurelosses.04 Offshore Energy Bulletin


Clause 10 of the “Supplytime 1989”form permits the owner to suspendperformance whilst payment remainsdue, and withdraw the vessel for latepayment of hire. By comparison,clause 12 of the “Supplytime 2005”form contains much more prescriptiveprovisions relating to disputed invoicesand late payment of hire. In particular,clause 12(f)(i) contains a grace periodprovision, which is designed to avoidthe abuse of an owner’s right towithdraw where delays in remitting hireare through no fault of the charterers.The fairly loose wording of the 1989form suggests that there may beroom for the application of the ASTRAdecision: owners could potentiallyargue that the obligation to makepunctual payment of hire amounts to acondition of the charter. On the otherhand, the 2005 form clearly stipulatesthe parties’ agreement as to theconsequences of late hire payment,and so it seems unlikely that theASTRA will have any significant impacton the parties’ rights and obligationsunder the 2005 form.Clause 3 of the “Towhire 2008” formis virtually identical to clause 2 of theformer 1985 version of the form, andsimply states the daily rate of hireand that payment should be made inadvance. The clause does not statewhat will happen in the event of latepayment of hire and, unlike the NYPE1946 form, it does not expresslyrequire punctual and regular paymentof hire. Given the difference in wording,the effect of the ASTRA decisionis more open to debate. Ownersmay seek to argue that clause 3 isa condition, breach of which wouldentitle them to terminate the charterand claim damages including for futureloss of earnings. Naturally, chartererswould argue to the contrary, to avoidsuch exposure.Which party is correct will dependon how the English courts interpretand apply the ASTRA decision, whichwill only become clear over time. Fornow, parties are advised carefully toreview the hire payment obligationsin their charters and consider howtheir position might be affected by thisrecent High Court decision.For further information on theASTRA decision please see ourrecent briefings: “Payment of hire isa condition – an end to a charterer’sability to deduct from hire” at http://www.hfw.com/Astra-Briefing-April-2013, and the Astra AppealStatus and Update at http://www.hfw.com/Astra-Appeal-Status-and-Update-June-2013For more information, please contactPaul Dean, Partner, on+44 (0)20 7264 8363 orpaul.dean@hfw.com, orDaisy Rayner, Associate, on+44 (0)20 7264 8751 ordaisy.rayner@hfw.com, or your usualHFW contact.The fairly loose wording of the 1989 form suggests thatthere may be room for the application of the ASTRAdecision: owners could potentially argue that theobligation to make punctual payment of hire amountsto a condition of the charter.Delays in Offshore Wind FarmConstructionThe market in Northern Europe foroffshore wind farm constructionremains vibrant, with much of thesecond round of the UK developmentpushing ahead in the 2013 workingseason. The level of activity meansthat some areas are currently suffering‘pinch points’ of supply where there isa shortage of workboats, barges andother specialist equipment.This restriction in supply has enabledsuppliers and contractors to negotiatemore favourable terms in respect ofproject risks: in particular their liabilityfor ground conditions, adverse weatherand tidal conditions. The dynamicnature of the environment for offshoreworks means that parties mustcarefully consider any clauses in whichthese risks are apportioned.It is now usual practice to allocateweather risk by reference to an agreedbaseline: a table of agreed parametersfor certain operations, with theirappropriate Significant Wave Heightand Wind Speed measurements,along with the size of the ‘window’within which certain activities will becarried out. Additionally, the partiesmay agree that a certain number ofadverse weather days will inevitablytake place, and be programmed for bythe contractor.Weather events outside the agreedscope will be deemed unexpectedand therefore outside the contractor’sresponsibility. This means that acontractor will be entitled to claim forthe necessary extension for carryingout the remaining works (avoidingliability for delay damages), and mayalso have an entitlement to recoverthe additional costs incurred, such asvessel standby, crew costs, etc.Offshore Energy Bulletin 05


However, the apparently simpleallocation of risk for adverse weatherevents may still cause complication interms of its practical consequences.This is because a relatively minorchange to an offshore worksprogramme may have a significantimpact on the critical path for theremainder of the works. It may, forexample, become necessary to adjustthe programme to accommodate newweather windows, which is a significanttask in any live project. This is furthercomplicated when additional eventsof delay occur at a later stage, whichagain will require assessment in termsof their impact on the critical path.Despite the skills to be found in theoffshore construction industry, suchherculean powers of assessmentin a live project, within an existingprogramme, will usually be beyond amortal project manager. This will resultin claims simply being ‘parked’ by theparties and swept up at the end ofthe project. Such an approach mayhave its merits, but does not lend itselfto cost certainty, and the negotiatingpower of the parties may also besignificantly different at completion.Alternative approaches to assessmentmay include the introduction ofAdjudication Boards or other,independent third parties chargedwith imposing a binding assessmentof time and cost consequences in veryshort timescales, to permit the projectto continue.Whatever method is adopted, thecomplicated environment of windfarm developments will require greaterconsideration of delay management toavoid the issues that have affected somany projects to date.For more information, please contactRobert Blundell, Partner, on+44 (0)20 7264 8027 orrobert.blundell@hfw.com, or your usualHFW contact.Conferences & EventsEnergy & Resources SeminarHFW Perth(10 July 2013)Presenting: James Donoghue,Hazel Brewer, Matthew Blytcha,Julian Sher9th Annual InternationalColloquium: Maritime law –offshore contracts and liabilitiesSwansea(9–10 September 2013)Session Chair: Paul DeanLondon International ShippingWeek – HFW Piracy SeminarHFW London(11 September 2013)Presenting: James Gosling,Richard Neylon, Elinor DautlichWhatever method is adopted, the complicatedenvironment of wind farm developments will requiregreater consideration of delay management to avoidthe issues that have affected so many projects to date.07 Offshore Energy Bulletin


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