F. Daniel Knight
Chamberlain, Hrdlicka, White, Williams & Aughtry
For the offshore drilling industry, the old adage “time is money” is as true today as it was when Kerr-McGee successfully drilled in Ship Shoal 32 in 1947. In nearly 70 years of offshore drilling since, the industry has pushed the boundaries of what was thought possible in terms of technologies used and viable locations for offshore oil and gas exploration. Every year, it seems rigs are working in deeper waters. And with better technology, new deposits are identified, expanding the scope of what was once a limited industry.
Because offshore drilling is ever evolving, the laws and regulations applicable to it have also evolved, though not at the same pace, or evenly across the scope of operations. Despite the expansion of locations where rigs operate, regulations concerning the movement of rigs have not evolved as uniformly as other regulations, such as those dealing with safety or pollution.
When moving a rig from one location to another, be it from a shipyard to an offshore location or from the territorial waters of one nation to those of another, determination of the applicable legal framework is critical to evaluating risk and protecting all of the parties involved in the transaction. A common question in this process is what law applies. Due to the lack of international uniformity to this particular subset of carriage and towing, the answer, like many received by a first-year law student from a law professor, is “it depends.”
The dependent factors involve:
- The contents of the contract of carriage or towing
- The national affiliation of the parties and vessels involved to the transaction
- The laws and regulations of the nations both from which and to which the rig will be transported.
Despite the hodgepodge of potential applicable laws and regulations, there are ways in which to create certainty out of the fog of confusion. First, do the contract(s) for transportation of the rig have the appropriate clauses defining jurisdiction/venue, as well as state the applicable law? As there is no governing international body of law specific to the movement of rigs, the applicable legal regime could originate from the flag of the vessel(s), the flag of the rig, or the law of the nation to which the rig is being transported. Therefore, it is critical that all contracts related to the carriage and shipment of the rig contain choice-of-law clauses identifying a particular nation’s law to govern the agreement and any incidents arising out of the movement of the rig, excepting conflict of laws provisions, so as to avoid a renvoi situation.
Often, as entities from different nations are involved in the transaction, an arbitration clause is agreed to in the contract of carriage and other relevant paperwork so that any monetary awards can be enforced, and to establish both a uniform set of rules, as well as one location for the resolution of disputes.
Second, could the requirements of any international maritime convention or treaty affect the contract(s) of carriage? Application of such could arise through the laws of the flags of the vessels or rigs involved, or the applicable law as stated in the contract of carriage/towing. However, the default provisions of many of these conventions can be avoided through appropriate drafting of the contract(s) of carriage and bills of lading. Thus, more certainty can be created, although an evaluation of the default legal regime is necessary to ensure the best law applies in the event of a casualty or loss/damage to the rig while under transport.
Third, have the parties to the transaction considered the potential application of cabotage laws to the rig movement? The United States, along with Nigeria, Brazil, India, Australia, Canada, the European Union, Norway, and many other nations where offshore drilling is now common, have passed cabotage laws to protect domestic trade and require use of domestic vessels to transport passengers and goods between domestic ports. Cabotage laws vary from nation to nation, but the fines they carry can be significant.
The US has two such statutes applicable to rig movement: the Jones Act, 46 U.S.C. § 55102, and the Towing Act, 46 U.S.C. § 55111. Additionally, for movement of component parts of a rig to be assembled offshore, a separate section of the Jones Act, 46 U.S.C. § 55108, regulates the use of non-US flagged vessels in these activities.
An example of cabotage laws in rig movement can be found in the $15-million fine levied against Escopeta Oil for moving an inlet jackup rig in 2011 from the Gulf of Mexico to Alaska via a foreign-flagged heavy-lift vessel. The vessel transported the rig from the Gulf of Mexico to Vancouver, where it was towed the rest of the way to Alaska by US flagged vessels. Escopeta attempted to obtain a waiver of the Jones Act, but was unable to do so. The circumstances surrounding this waiver are hotly contested, and are inappropriate for discussion here. The Jones Act violation fine was for the stated value of the rig, which is the largest Jones Act fine in US history. The risks of violating cabotage laws are real, and should be evaluated before any rig movements begin.
There is a host of other issues that the parties involved in rig movement(s) should evaluate and address prior to beginning transportation. The aforementioned concerns are only the tip of the spear. If careful attention is not given to these concerns, the parties involved cannot best protect themselves in the event of a casualty or other incident, likely leading to litigation or arbitration, as well as potential government involvement and investigation. That creates delays, which preclude any drilling operations – thus costing both time and money.
Editor’s note:This is the second of an ongoing, bi-monthly column on legal issues facing the offshore oil and gas industry.
