The Commercial Court recently decided that notification of an “option well” under special conditions to a LOGIC Mobile Drilling Rig Contract likely required the company (charterer) to specify the location of the option well to be drilled. Once this was done, the company (charterer) will likely be irrevocably bound to use the rig at the agreed rates at the location specified in the notification of the option. Additional side-tracks agreed outside the scope of work at wells to be drilled prior to the option well in the drilling program, absent express agreement, would not alter the obligations created by the exercise of the option.
Whilst the court’s decision is largely unsurprising, it is helpful reminder of parties’ contractual obligations relating to option wells.
On 14 March 2011, Awilco Drilling plc (“Awilco”) and AGR Well Management Limited (“AGR”) entered into a contract for the provision of a drilling unit, the WilPhoenix. Under the contract, one firm well was to be drilled, and AGR had an option for up to 6 further wells. The option was exercisable at AGR’s “sole discretion”.
The contract incorporated the standard oil industry terms, which included a provision for scope of work:
“The duration of this CONTRACT shall be the time required to drill:
- One (1) firm well in Block 206/5a-c in UKCS waters West of Shetland; and
- Up to six (6) options wells in UKCS waters;
Up to and including the date and time at which COMPANY’S well operations have been completed.”
“The foregoing option wells shall be at COMPANY’s sole election, and each option well shall be declared on or before sixty (60) days prior to the spud of each option, unless agreed otherwise between the Parties.
Furthermore, COMPANY shall have the opportunity to declare further option wells subject to mutual agreement between the Parties, by giving CONTRACTOR notification sixty (60) days prior to the spud of each option, unless agreed otherwise between the Parties.”
The exercise of the option required AGR to specify the location of the option wells.
In addition to the firm well, AGR notified three option wells. The second and third option wells were to be drilled by AGR for its customer Antrim Energy inc (“Antrim”) at Erne and Carra. Around October and November 2011 Awilco, AGR and Antrim commenced steps to prepare for the move of the drilling unit from Erne to Carra – including, signing an emergency response interface document, a management interface document, and an amendment to the rig move procedure.
On 29 November 2011 AGR learned that Antrim may wish to carry out a geological side-track at Erne. AGR took the view that such geological side-track would be outside the scope of work, but it was open to Awilco to agree to undertake such side-track. As the drilling unit did not have follow-on work after Carra, Awilco agreed to carry out the side-track at a reduced daily rate.
After the drilling of the side-track AGR informed Awilco that the drilling unit was no longer required. Awilco claimed that AGR had exercised an option to drill a fourth well at Carra and its refusal to proceed was a breach of contract.
The essence of Awilco’s argument was that an option, once exercised, was irrevocable and gave rise to an enforceable contractual obligation to drill in the location specified and extend the contractual term until that drilling was complete. AGR contended that the options declared were not limited to particular locations and that, consequently, the Erne side-track constituted the fourth well per the declared option so that there was no further obligation to drill at Carra.
Awilco sought summary judgment that AGR was in breach of contract. Whilst the court decided that the issue should go to full trial and refused to grant summary judgment it did make some interesting comments:
- It considered that Awilco’s argument was strongly arguable.
- A sensible, fair and commercial reading of the contract is that the company (charterer) must specify a location in respect of each of the option wells for there to be a finally effective exercise of the option.
- Once this is done, an irrevocable option will have been exercised binding the charterer to using the rig at the rate agreed at the particular locations notified.
- This makes commercial sense, as for the contract to work in a sensible and commercial way, the owner of the drilling unit needs to know the intended location of the option wells, so that preparatory steps can be taken to ensure the efficient deployment of the drilling unit.
Although the court refused to grant summary judgment and gave AGR permission to defend at trial, it considered Awilco’s arguments sufficiently strong as to require AGR to pay US$2 million security into court if it wished to proceed with its defence.
As any agreement to charter a drilling unit is a significant financial commitment and market rates for drilling units can change substantially over time, the exercise of options can have a significant financial consequence.
“When using standard term contracts, parties should carefully consider the relationship between the special terms and the general conditions. In many cases, where parties agree to include an “option” that may be taken up by one party, absent express words to the contrary, that “option”, once exercised, may become irrevocable.”