The 13 July 2018 Tullow v. Seadrill case shines a light on unexpected exposure in the upstream oil & gas industry that can flow from contracts that fail to foresee swings in the oil market.
Tullow tried to terminate its rig contract with Seadrill on the basis of force majeure. Ghana had failed to approve its development plan, at least partly due to the fall in oil & gas prices. When the force majeure notice was served, the operating rates on the drilling market had dropped by 60 - 75%.
Seadrill won the case. The way the force majeure clause was negotiated and drafted, Tullow was only able to rely on it for one well.
Having lost its case against Seadrill, Tullow is now liable for US$257M of standby rates.
To make matters worse for Tullow, on 18 July 2018 Kosmos Energy, one of Tullow's joint venture partners, won an ICC arbitral award, making Tullow liable for Kosmos's US$50M share of the standby costs.
The court also considered Tullow's obligations to mitigate the effects of force majeure. These included carrying out work-overs that went against Tullow's commercial interests.
In my view, if the contract had been drafted differently, Tullow could have terminated the contract, saving several hundred million dollars.
In this article, I discuss what you can do to avoid finding yourself in the same position as Tullow.