Diamond Offshore "Beached" by Contract Termination

Oil drilling rig contractual dispute with Beach Energy leaks into public domain following Chapter 11 bankruptcy filing

For people involved in negotiation of high value contracts, it is always interesting from a learning perspective, to see what happens when things go wrong.

Usually, these cases are hidden behind confidentiality provisions. Here is an exception.

On 20th April, Beach Energy announced the termination of their contract with Diamond Offshore Drilling for the semi-submersible Ocean Onyx drilling rig because it apparently arrived in Victorian state waters later than agreed. The contract, according to Reuters, was worth US$65 million.

This looks to have pushed Diamond Offshore Drilling over the edge and on 26th April, they filed for Chapter 11 bankruptcy protection. 

They have sued Beach and are seeking to have the contract termination overturned, claiming to have spent “countless man-hours and more than $100 million preparing and transporting the rig” and are looking for damages from Beach.

A core part of Diamond’s claim is that Beach became so heavily (“intimately”) involved in preparing and upgrading the rig that it became a “bespoke rig” and it was these modifications which led to the delayed delivery. 

Amusingly, for those familiar with Australia, in addition to changes to things like electrical systems, amongst the modifications Beach requested were “modifications necessary for the installation of a SMOKO shack”! 

These modification delays were compounded by delays in transportation of the rig.

It looks like the parties agreed twice to delay the rig delivery date – initially to 1st April and then to 15thApril. However, that final agreement was only executed by Diamond and not by Beach.

Diamond further claim that after the rig had arrived in Victorian waters and on the same day that Beach announced the termination of the rig contract, Beach emailed Diamond looking to “continue discussions with Diamond regarding terms for offshore drilling”! 

Diamond is claiming Beach allowed Diamond to believe that delivery past the deadline would be acceptable but Beach’s true intention was to terminate the contract in order to write a new contract for the same work but on more favourable terms, presumably now that the oil price is much lower than when the original contract terms were agreed.

Diamond’s claim is an interesting read and is set out in detail and available to read here… https://cases.primeclerk.com/Diamond/Home-DownloadPDF?id1=MTQwMTU3OQ==&id2=0

It would be interesting to see Beach’s response. If anyone knows if this will be put in the public domain, please message me!

Thanks to Saul Kavonic at Credit Suisse for highlighting the existence of this public document.

Beach Energy Announcement: https://yourir.info/resources/0c5a441cf54ff229/announcements/bpt.asx/2A1220797/BPT_Victorian_Drilling_Update.pdf

Reuters report: https://af.reuters.com/article/energyOilNews/idAFL3N2CF4GG

Photos are sourced from the Diamond Offshore https://www.diamondoffshore.com/assets/Documents/Ocean%20Onyx_DO.pdf and the Seattle Times https://static.seattletimes.com/wp-content/uploads/2016/08/e647066d92bb4f86b6bdd8c3b13d58f3-780x504.jpg