When Good Gas Goes Bad: Gas Field Development Dispute

International Arbitration, Asia Pacific

This dispute relates to a lump-sum engineering, procurement, installation, and construction (EPIC) contract for development of an offshore gas field. The EPIC contractor was instructed to demobilize after analysis of produced gas indicated contaminants outside of the design basis. The arbitration panel relied on Baker & O'Brien's expertise to assess the value of construction defects, liquidated damage liability, reconfiguration work, and the effects of contaminants on processing facilities.

A well-known integrated energy company developed an offshore gas field in Australia using an experienced engineering and construction firm. The work scope included an offshore platform, a lengthy subsea two-phase natural gas pipeline, onshore pipelines, and an onshore cryogenic natural gas processing facility. As development of the field development neared completion, drilling and testing of the production wells revealed that the produced gas contained contaminants at levels outside the contract design basis.

The owner instructed the contractor to demobilize while the facilities were reconfigured by others to handle the new natural gas composition. Ultimately, a multitude of disputed issues related to the lump-sum Engineer-Procure-Install-Construct (EPIC) contract went to international arbitration. As is typical with engineering and construction-related disputes, several claims and counterclaims under the EPIC contract were made.

EPIC contracts are commonly employed in field developments. Key features of EPIC contracts that are important to owners and contractors typically include the following:

  • Provisions for mechanical and performance completion
  • Warranties and guarantees for workmanship and construction defects
  • Performance and delay damage provisions
  • Liability for basis of design errors
  • Scope of work type - functional or prescriptive
  • Geotechnical/subsoil liability
  • Change order provisions

As experts to this arbitration, Baker & O'Brien consultants analyzed an extensive volume of project records in order to determine the value of construction defects, liquidated damage liability, effects of the contaminants upon the processing facilities that had been installed, as well as the ability of the contractor to perform its contractual responsibilities, since the reconfiguration work was performed by others. Baker & O'Brien provided several reports and arbitration testimony, including an expert witness conferencing ("hot tub") session.

Our consultants' interpretation of the specific contractual provisions and language used in these provisions, based on their expertise as well as experience working for both international energy companies and EPC firms, was relied upon by the arbitration panel in reaching its final decision.

Tim D. Rooney

President

Industry
Oil & Gas Production / Natural Gas and NGLs / Transportation and Storage
Service
Standard of Care / Engineering, Procurement, and Construction (EPC) / Litigation / Arbitration / Expert Witness Testimony / Offshore / Pipeline / Gasification
Region
Asia Pacific