Drilling Partnership Turns Icy

   (FROM THE WALL STREET JOURNAL 3/9/15) 
   By Daniel Gilbert 

When Exxon Mobil Corp. in January started pulling oil from beneath the icebound waters off Russia's eastern coast, the project was over budget and a year behind schedule. The troubles likely would have remained out of public view had Exxon not sued contractor WorleyParsons Ltd.

The spat offers a rare glimpse of the challenges and sniping behind one of the world's most complicated oil developments as soaring costs and falling crude prices have bedeviled the energy industry.

The project, known as Arkutun-Dagi, called for building one of the largest offshore drilling platforms in the world, designed to withstand extreme winds, waves and earthquakes that shake the seabed beneath the icy Sea of Okhotsk. Oil began flowing in January, and is expected to reach up to 90,000 barrels a day.

Exxon claims the Australian contractor made so many mistakes designing the platform that the work took 2.7 million man-hours more than originally estimated and delayed the project by a year, according to a lawsuit in the Supreme Court of New York.

"The scope of WorleyParsons' errors is staggering," Exxon said in its complaint, citing pipes that didn't fit together and gaps between the platform's walls and the deck floor, contending defects were hidden so the firm could land another contract with Exxon.

WorleyParsons denies this, saying Exxon's complaint "is replete with unfounded, spurious allegations." The contractor says it didn't commit to a fixed deadline or price, and that Exxon "decided to retain the risks of cost overruns and delays rather than pay" WorleyParsons to bear them.

A New York judge sided with WorleyParsons' request for an international arbitration panel last July. WorleyParsons said the arbitration hasn't begun yet.

Exxon declined to comment on the overall cost of the project. The company said in court filings it paid WorleyParsons more than $550 million, and claims it is owed a refund for work the contractor did to fix mistakes. WorleyParsons says it is owed $20 million more.

Fran van Reyk, a spokeswoman for WorleyParsons, said the dispute is limited to the Russian mega project and hasn't affected its other work for Exxon.

Delays and cost overruns in recent years have heightened tensions between companies like Exxon and the contractors they hire to design and build massive energy installations. But experts say it has been uncommon for big oil companies and their engineering contractors, which work together around the world, to sue each other.

"It's very unusual to actually have a dispute go all the way to litigation," said Edward Merrow, president of Independent Project Analysis Inc., which consults for energy companies that operate big projects. Mr. Merrow declined to comment on specific projects but said that the industry in general is ailing from a shortage of experienced energy hands even as companies pursue harder-to-reach oil deposits.

When Exxon announced the startup of Arkutun-Dagi in January, oil sold for about $50 a barrel. A year ago, when the project was originally supposed to start pumping crude, a barrel of oil fetched more than twice as much.

The Arkutun-Dagi oil field lies beneath the shallow, ice-choked waters about 15 miles from the shores of Sakhalin Island in Russia's Far East. To tap it, Exxon ordered up a platform weighing more than 200,000 tons. Four cylindrical legs anchor into the seabed and rise above the water's surface, supporting a series of decks that house a drilling rig and crew quarters.

WorleyParsons' job was to design the top of the platform.

WorleyParsons, which brought in more than $7 billion in revenue last year, has worked for Exxon around the globe, from Alaska's North Slope to Papua New Guinea. After the firm started designing the platform top for Arkutun-Dagi, Exxon hired it in August 2010 to do a similar job for another offshore project, a $14 billion venture in Canada to tap oil off the coast of Newfoundland called Hebron.

Soon after, Exxon began complaining to WorleyParsons of delays, budget increases and staff turnover on the Arkutun-Dagi work. "After promising to use its 'A' team and all necessary resources when pursuing the project, WorleyParsons staffed the project with its 'C' team and used substandard resources," Exxon alleges.

WorleyParsons denies this, saying the project took longer largely because Exxon increased the scope of work required. From the beginning, Exxon "took a hands-on approach," the contract says, including reviewing the resumes and interviewing every WorleyParsons employee working on Arkutun-Dagi.

While WorleyParsons' contract required it to fix errors at no cost, the firm claims Exxon never notified it of deficiencies. As evidence of its good performance, the contractor cites Exxon's award to design a platform for the Hebron project, adding that the company specifically requested some of the same personnel that worked on Arkutun-Dagi. Exxon expects to start pumping oil from its Hebron project in 2017.

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