After several years of very low activity in the mobile offshore rig market, green shoots of growth are starting to appear. Clients in all areas of the market, including owners, charterers and builders of both rigs and drillships have reported increased activity and appetite for investment.
While many are still evaluating the costs and benefits of re-commissioning assets that have spent long periods in stack (whether cold, warm or smart) or buying on the secondary market, we are seeing more interest in newbuildings (albeit at a very early stage) than has been the case for many years.
In view of this renewed optimism, here are some points to bear in mind when preparing your next mobile rig newbuilding contract, drawing on some of the lessons learned from the widespread litigation that flowed from the oil crash:
1) Beware the ghosts of contracts past
Parties will often use a previous contract as the base for a new order, where the same buyer is ordering from the same yard. It is particularly tempting if the previous project was delivered on time and without difficulties, as many are. When reusing contracts, however, it is essential to reread every last clause (including the legal boilerplate) to make sure it is still fit for purpose.
Bespoke terms that were included for the previous project may no longer be appropriate or necessary. This is particularly important now, following a four-year lull in the newbuilding market, as new safety and technical standards have been introduced by NORSOK, the UK’s Offshore Safety Directive Regulator, and others since the last generation of drilling units was ordered.
At a more basic level, the total lack of activity in the newbuilding market over the last four years presents a unique opportunity to reassess fundamentally how contracts for drilling units should be structured. The use of traditional shipbuilding forms for such projects made sense at a certain point in the past, but the complexity and value of modern drilling units is so great that a wholesale change to the underlying contracts is desperately needed (and long overdue).
2) Involve key stakeholders early and often
The run-up to signing a newbuilding contract for a drilling unit is a stressful time, with the commercial and technical teams from each side working long hours to get everything right. It can often seem like there are already too many voices in the mix, and the prospect of adding more people can be unpleasant.
However, if time allows, many problems that can arise in the future might be reduced or eliminated by involving a wider circle of interested parties. In particular, if a rig is being built to a new or bespoke design, prepared by a design house, it can be a very good idea to have the designers engage directly with the technical teams on both sides before the contract is signed. This can allow the yard to work through kinks with the designers and allow the buyer’s technical team to work with both of them to optimise key features before the contract is signed and further changes become pricy variation orders.
3) Expect the best, plan for the worst
Signing a newbuilding contract is a cause for celebration. The buyer is making an exciting investment in their future; the yard has secured a prestigious and lucrative order. Nobody wants to think about what happens if it all goes wrong, so dispute resolution and arbitration clauses are often left at the bottom of the priority list.
Experience has shown, however, that a number of potential arguments can be defused entirely with sensible dispute resolution clauses. These can include expert determination provisions, clauses requiring senior management meetings, fast and cost-limited arbitration clauses and more. If the parties consider how they would deal with the worst case scenario before it happens, we often find they prevent it from happening entirely.
These are just a few lessons that we have learned from decades of combined experience in the market, including negotiating and closing newbuild, sale & purchase and charter contracts, as well as management and resolution of disputes at the pre-contract, in-build and post-delivery phases of a project’s life.