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Vol. 17, No. 53 Week of December 30, 2012
Providing coverage of Alaska and northern Canada's oil and gas industry

Archer fires back

Archer claims it fired Buccaneer over jack-up rig, not the other way around

Eric Lidji

For Petroleum News

The international drilling giant Archer Drilling LLC is seeking more than $6 million in damages from Buccaneer Energy Ltd. for a breach of contract connected with maintenance work on the Endeavour jack-up drilling rig currently docked in Homer.

Coming as Buccaneer publicly announced that it had terminated the contract with Archer over late payments and “nonperformance,” Archer filed a suit claiming the opposite: that it had terminated the contract because Buccaneer — and its affiliates and subsidiaries, including Kenai Offshore Ventures LLC — “undermined and underfunded” the project.

“By favoring wishful thinking over hard facts, (Buccaneer) turned a blind eye to the amount of time, money, and effort needed to bring such a rig up to operational levels,” Archer claimed in its 18-page petition filed in Texas state court, in Harris County.

Specifically, Archer claims Buccaneer underfunded maintenance work on the rig undertaken at a shipyard in Asia and moved the rig to Alaska before crews finished the necessary work, including “installation of the mud treatment and conditioning systems, refurbishment of deep well riser systems, winterization of exposed working areas, full commissioning of all drilling systems, and a DROPS survey of the drilling derrick.”

Buccaneer maintains its charge that Archer failed to uphold its end of the contract.

“Kenai Offshore has been continually forced to undertake unanticipated work and to contribute unanticipated expenses,” Director Dean Gallegos said in a Dec. 21 statement. “Archer Drilling’s failure to live up to its representations and contractual responsibilities under the (Master Service Agreement) seriously undermined Buccaneer’s confidence in their ability to complete their work under the MSA and subsequently operate the Endeavour within the Cook Inlet while undertaking drilling operations, requiring the termination of Archer Drilling services and the identification of a replacement.”

Underfunded “from the outset”

As a “relatively new player” embarking on “an entirely new business strategy” in the purchase of a jack-up rig, but investing “little of their own money in the project,” Buccaneer and its affiliates needed a “very experienced operator” to oversee the project, and hired Archer in October 2011 to oversee the refurbishment of the rig at an Asian shipyard and to eventually operate the rig once it arrived in Alaska, according to the suit.

Through a joint venture with the Singapore-based Ezion Holdings Ltd. and the Alaska Industrial Development and Export Authority, Buccaneer formed Kenai Offshore Ventures to purchase the Transocean GSF Adriatic XI jack-up rig for $68.5 million.

Under the terms of the deal, Archer was not responsible for the condition of the rig at purchase, or for the work and equipment provided by third parties, according to Archer. To actually complete the work, Buccaneer hired the Singapore shipyard Keppel FELS.

Built in 1982, the Adriatic XI rig — renamed Endeavour-the Spirit of Independence — “had not worked in years” and was cold-stacked off the coast of Malaysia. “It was always clear that the Endeavour required a significant amount of work,” Archer claimed. While saying Buccaneer budgeted $18 million to refurbish, winterize and move the rig, Archer believed the project required significantly more money. According to Archer, a new rig for Alaska would cost some $200 million, and transportation alone would cost $1 million.

According to Archer, this underfunding “from the outset” and subsequent “overdue invoices” caused delays by slowing down the deliveries of crucial parts. Because of late payment, Archer was forced to “stand down its workforce” and “vendors were unwilling to commence scopes of work or release equipment without these payments due to Defendants’ payment track record and poor credit lines,” Archer claimed in its lawsuit.

Moved the rig too soon?

As the delays continued and “millions of dollars” in unpaid bills piled up, Buccaneer wanted to move the rig to Alaska, according to Archer. “Despite the substantial amount of work needed to bring the Endeavour up to compliance levels, Defendants insisted that the Endeavour exit the Singapore shipyard in the hope of commencing drilling operations in Alaska prior to the work stoppage brought on by winter,” Archer wrote in its suit.

While Buccaneer claimed the remaining work could be completed en route, Archer thought it would be “improper to conduct such ‘hot-work’ while in transit.” According to Archer, Buccaneer moved the rig “knowing that there were not sufficient resources in Alaska, such as a shipyard, a labor force and a management agreement with Archer.”

As a result, Archer claims, Buccaneer created a “logistical quagmire: more work needed to be done on the rig but they no longer had the resources or the manpower of a shipyard with which to complete it.” To resolve this, Buccaneer told Archer to hire more than 70 workers, Archer claims. While these workers were being hired to eventually operate the rig, they would be asked to temporarily work to bring the rig up to code, Archer claims.

This work was “plainly outside the scope of existing work orders,” Archer claims. While Archer expected to sign a management agreement for its role as operator, it claims Buccaneer failed to provide the document after “four months” and “several requests.”

Meanwhile, Archer claims, Buccaneer kept hiring third parties and telling them to bill Archer for the work. While claiming Buccaneer failed to pay for its work requests, Archer said its own employees “have been fully paid by Archer throughout the project.”

According to Archer, the two sides signed a memorandum of understanding in November 2012, resolving “all previously disputed invoices in a timely manner,” but Buccaneer officials failed to show up to a scheduled meeting in Houston to conclude the process.

After “several attempts” to collect payment, Archer said it terminated the contract on Dec. 13, and notified local vendors and federal and local officials of its departure from the project. “The very next day, in an effort to avoid public embarrassment,” Buccaneer publicly claimed that it had terminated the contract with Archer, according to Archer.

Buccaneer stands firm

While Buccaneer, through Kenai Offshore Ventures, admits it is “currently withholding payments” to Archer for disputed work, the company also claims it “has paid all undisputed amounts owed to Archer Driller and has done so within payment terms.”

Additionally, Buccaneer said in its statement that it has contacted all the vendors that Archer hired to perform services on the rig “with the understanding that Kenai Offshore will review each of their cases and will step in and make payments for legitimate expenses associated with work performed by those contractors on the Endeavour.”

The case is ongoing: “Buccaneer is currently reviewing the lawsuit lodged by Archer Drilling and believes that the allegations are entirely without merit,” Gallegos wrote. “When served with the lawsuit, Buccaneer will respond fully, and such response will include its own claims for the damage caused by Archer Drilling’s actions and inaction.”

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