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. WorleySHYParsons 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.
"I think we'll see more litigation in part because we're going
to see more important, glaring engineering errors," he said.
The stumbles at Arkutun-Dagi are relatively mild compared with
other projects, such as a venture in Kazakhstan's Caspian Sea that
is more than $30 billion over budget and has yet to cough up oil in
meaningful amounts. But even a yearlong delay can have a
significant impact on the profitability of a big project. 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. Exxon even
installed 100 of its own workers in the Houston offices of
WorleyParsons' affiliates, often sitting a few feet away from the
contractors they managed.
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.
Write to Daniel Gilbert at daniel.gilbert@wsj.com
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