Hurricane Changed the Job, but Not the Contract

HOUSTON (CN) - The former owner of an offshore oil-and-gas block is not liable for expenses Hurricane Rita added to the cost of decommissioning and abandoning the block, a federal judge ruled.

Located in the Gulf of Mexico, the block was originally leased to five companies by the U.S. government in 1973.

Devon Energy took over operation of the block in 2001 from Forest Oil, becoming a 76 percent owner of the lease. Forest then assigned its 13.33 percent interest in the block to Devon Energy and co-owner Phillips Petroleum through a letter agreement in February 2002.

Under this agreement, Forest said it would still be liable for its share of abandoning oil wells, platforms and equipment in the block, but only as outlined in a decommissioning liability report prepared by Twachtman, Snider & Bird on orders from Devon.

Mariner Energy acquired Forest Oil's offshore interests in the Gulf of Mexico in 2005, including Forest Oil's abandonment obligations under the letter agreement.

After Hurricane Rita tore through the Gulf in September 2005, Devon decided to decommission and abandon the block. But it wanted Mariner pay $25 million of the costs for its 13.33 percent share.

Mariner filed suit for a declaratory judgment to limit its abandonment-cost liability to the costs of the scope of work outlined in the Twachtman Report. It also sought to limit its liability in relation to the equipment that was on the block as of Dec. 1, 2010, the date the assignment from Forest Oil to Devon Energy became effective.

U.S. District Judge Lee Rosenthal sided with Mariner Energy in the first phase of litigation for the case, and ruled that Mariner was only responsible for abandonment costs as outlined in the Twachtman Report.

The parties subsequently disagreed about how to split up the abandonment costs resulting from Devon's inability to "reef" part of an oil platform in the block.

Reefing is a popular alternative to retrieving the supporting structure, or "jacket," of the oil platform deck, and disposing of it onshore. Instead the material is left underwater to become an artificial reef.

The Twachtman Report assumed that the platform's jacket would be reefed 3 nautical miles from its original spot.

In the wake of Hurricane Rita, however, Louisiana denied Devon Energy permission to reef the jacket and required it to retrieve the platform and take it to shore. Devon also had to spend extra because Hurricane Rita had knocked the platform jacket to the sea floor, and it had to be brought to the surface before being hauled on land.

Because of Devon's inability to reef the platform and its added costs in getting the platform from the sea floor, the total decommissioning costs increased by as much as $6 million estimated from the cost that the Twachtman Report anticipated.

The parties filed cross-motions for summary judgment, asking for Judge Rosenthal to determine if Mariner Energy had to pay a 13.33 percent share of the additional costs caused by Devon Energy's inability to reef the platform jacket as contemplated in the Twacthman Report.

Rosenthal sided with Mariner Energy once again in a 10-page ruling Wednesday. As in her previous ruling, the judge found Mariner Energy's liability hinged on the parties' letter agreement.

"The court previously found that under Louisiana law - which the parties agree applies - 'Mariner's liability is limited to the scope of work 'as outlined' in the Twachtman Report, not for work required to respond to storm damage," she wrote.

"This court's ruling is consistent with the letter agreement's unambiguous statement that 'Forest will be liable only for its proportionate share of abandonment expenses for wells, platforms, and equipment on the block as of the effective date and as outlined in the Twachtman Snyder & Bird, Inc. Decommissioning Liability Report," she added.

Follow @cam_langford

Subscribe to Closing Arguments

Sign up for new weekly newsletter Closing Arguments to get the latest about ongoing trials, major litigation and hot cases and rulings in courthouses around the U.S. and the world.

Email *

Submit