Fifth Circuit Court makes ruling on decommissioning contracts

With eddies still spinning in the aftermath of its landmark en banc opinion in In Re Larry Doiron, Inc. 879 F.3d 568 (5th Cir. 2018), the Fifth Circuit in In re Crescent Energy Servs., L.L.C., 2018 WL 3420665 (5th Cir. July 13, 2018), has quickly answered one of the critical operation-specific questions left open by Doiron: is a contract to decommission an offshore platform a maritime contract or a contract governed by state law?

Christopher Hannan

Baker, Donelson, Bearman, Caldwell & Berkowitz, PC

With eddies still spinning in the aftermath of its landmark en banc opinion in In Re Larry Doiron, Inc. 879 F.3d 568 (5th Cir. 2018), the Fifth Circuit in In re Crescent Energy Servs., L.L.C., 2018 WL 3420665 (5th Cir. July 13, 2018), has quickly answered one of the critical operation-specific questions left open by Doiron: is a contract to decommission an offshore platform a maritime contract or a contract governed by state law?

This question is crucial in the offshore industry given the prevalence of contractual knock-for-knock indemnity/additional insurance provisions, which can be invalidated if state law (as opposed to maritime law) applies (either directly or via the Outer Continental Shelf Lands Act, or OSCLA, which incorporates adjacent state law as the law applicable to OCS platforms).

The court in Crescent Energy has definitively answered the critical post-Doiron question in the affirmative, holding that a “contract to plug and abandon [i.e. decommission] …offshore oil wells is a maritime contract” under the two Doiron factors:

1. whether “the contract [is] one to provide services to facilitate the drilling or production of oil and gas on navigable waters”; and if so,

2. whether it “provide[s] or [whether] the parties expect that a vessel will play a substantial role in the completion of the contract.” 879 F.3d at 576.

Interestingly, Crescent Energy did not involve an OCS/OCSLA operation (where this issue most typically arises) because the underlying incident involved plugging and abandoning (P&A)/decommissioning of three wells in coastal waters of Lafourche Parish, Louisiana pursuant to a Turnkey Bid and MSA (the latter of which included defense/indemnity/additional insurance requirements from the service contractor in favor of the well owner). After a service company crewmember was injured during the operations, the well owner sought indemnity and insurance pursuant to the MSA/turnkey bid, but the request was rejected on the basis that Louisiana state law, not maritime law, applied to the contract (thus precluding indemnity/insurance under the Louisiana Oilfield Anti-Indemnity Act, or LOAIA). The lower court disagreed and held that maritime law governed the MSA/turnkey bid, and thus the LOAIA did not apply. While an appeal of this ruling was pending, the Doiron decision was issued; and so the Fifth Circuit panel in Crescent Energy considered the issue for the first time under the new Doiron test.

Crescent Energy re-framed the first Doiron factor as follows: “does the [MSA/Turnkey Bid] concern ‘the drilling and production of oil and gas on navigable waters? . . . We start with whether the activity concerns development of oil and gas offshore.”

This formulation is not the exact language used by the Doiron en banc (which phrased the first prong as whether “the contract [is] one to provide services to facilitate the drilling or production of oil and gas on navigable waters”). The Crescent Energy opinion’s slight change of wording to include (1) the broader term “concern” as well as (2) the broader term “development” as opposed to only “drilling or production” has arguably broadened the limits of the Doiron test from its original context.

Under this broadened first factor of Doiron, the court held that P&A/decommissioning is a necessary and mandatory activity in the “life-cycle” of a well, and thus satisfies the “facilitates the drilling or production” and/or “concerns the drilling and production” component of Doiron. Indeed, “[i]t is fair to say that [Louisiana] state [statutory and regulatory] law regulates the exploration for and production of oil and gas starting from the initial exploratory drilling in a likely location, through production…until the process ends by [P&Aing] the well and removing such structures as state law requires.” Likewise, the court held that even though the MSA/Turnkey Bid concerned otherwise non-maritime fixed-platform structures, it is not the location of the incident that informs the maritime contract inquiry, but the nature of the operations called for by the contract. Because the MSA/Turnkey Bid indisputably involved and required the use of vessels on navigable waters, this aspect of the Doiron first factor was also satisfied.

Likewise, the court held under the second prong of Doiron that vessels “played a substantial role in the completion of the” MSA/turnkey bid contract. The court rejected the argument that maritime law should apply only if a majority of the work contemplated by the contract requires vessels. The court held that Grand Isle was irrelevant because Doiron did not impose any such “majority” inquiry, and indeed acknowledged that as little as 30% vessel-necessary work can be “substantial” in the maritime/non-maritime inquiry (excluding any use of the vessels merely to transport equipment/crew to/from the work site).

The court’s focus on this second Doiron prong was the use of the crane-barge, which was necessary for essentially 50% of the P&A work involving wireline equipment housed on/deployed from the crane-barge. This fact required the court to revisit “30 years [of] Fifth Circuit law [that] has [held that wireline] work from a vessel is not a maritime activity.” However, because the en banc Doiron opinion criticized this historic jurisprudence, the court discounted this pre-Doiron-and-Doiron-criticized case law and focused solely on the fact that “the wireline unit on the vessel was central to the entire [MSA/turnkey bid] contract.”

The court also noted the somewhat counterintuitive proposition that “a vessel’s being indispensable may not equate to its role being ‘substantial’” under the second Doiron factor. However, the court rejected the argument that the crane-barge was a mere insubstantial “work platform,” and held that “the vessel [was] being used for more than transporting between land and the wellsite” because its use as a work and equipment platform, as well as its required maneuverability to facilitate different operational tasks, were a substantial part of the work.

Barring any en banc reconsideration or grant of certiorari by the Supreme Court (which notably denied certiorari on the Doiron en banc ruling from which Crescent Energy derives), the Crescent Energy opinion continues Doiron’s sea-change for the offshore oil and gas industry, which has endured decades of notoriously and often admittedly uncertain/contradictory/ conflicting decisions from the Fifth Circuit on the critically important issues of defense/indemnity/additional insurance under the dichotomy of maritime versus state law.

And while Crescent Energy only expressly concerned the Doiron test as applicable to platforms within state territorial waters, the same analysis should apply to platforms on the OCS based on the court’s “life cycle” argument, and its conclusion that the state law requirement for removal of platforms in state waters meets the first Doiron requirement. This should apply equally to the OCS: “Federal law requires removal to complete the decommissioning of a well on the Outer Continental Shelf.”

Thus, while Crescent Energy directly concerned only a state water scenario, the same analysis and result should apply to the federally mandated removal of offshore OCS platforms to the extent the contracts involving those removal operations require “substantial” involvement of vessels. •

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