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Come Well or High-Water – Fifth Circuit Confirms Maritime Contract Law Applies to Decommissioning of Platforms in Navigable Waters

With the eddies still spinning in the wheelwash of its landmark en banc opinion in In Re Larry Doiron, Inc., the Fifth Circuit in In re Crescent Energy Servs., L.L.C., 2018 WL 3420665 (5th Cir. July 13, 2018), — F.3d —, has quickly answered one of the application-specific questions left open by Doiron, as noted previously on Striding the Quarterdeck’s discussion of Doiron: is a contract to decommission an offshore platform a maritime contract or a contract governed by state law?  Specifically, under the newly launched Doiron analysis, courts must consider two factors in determining whether a contract is maritime: (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.”  Under the first factor, the issue of whether deconstructing a well/platform can be deemed “services to facilitate the drilling or production” of the well remained to be decided after Doiron.

And this maritime/non-maritime question is critical in the context of offshore industry operations because state law may bring with it application of state anti-indemnity statutes, which in the Gulf of Mexico generally means either the Texas or Louisiana Anti-Indemnity Acts, pursuant to the Outer Continental Shelf Lands Act’s (OCSLA) adoption of adjacent state law.  Under these statutes, the industry standard contractually agreed risk allocations – i.e. knock-for-knock indemnity and additional insurance coverage pursuant to which each party covers damage to their own personnel/equipment – may be prohibited as a matter of state public policy; whereas under maritime law, those same indemnity/insurance provisions are fully enforceable.

BACKGROUND

Under the facts of Crescent Energy, which (as discussed below) are paradigmatic of how the issue typically has arisen in the case law (as previously discussed on Striding the Quarterdeck here and here), a Fifth Circuit panel has definitively answered this critical question in the affirmative:  a” contract to plug and abandon [i.e. decommission] …offshore oil wells is a maritime contract.”  2018 WL 3420665, at *1. Thus, although Louisiana federal district courts had previously settled on the rule that “All’s a Well That Ends a Well” in determining that state anti-indemnity acts do apply to decommissioning work, and despite another Fifth Circuit panel’s decision (Tetra Techs., Inc. v. Cont’l Ins. Co., 814 F.3d 733, 736 (5th Cir. 2016)) after “Going Back To The Well” to confirm the lower courts’ consensus that anti-indemnity statutes apply to decommissioning, neither of these lines of cases answered the fundamental question of whether the underlying contracts were maritime law contracts.  Rather, these cases focused primarily on whether a contract for decommissioning a “dead”/non-producing well could be deemed to “pertain to a well” under the language of the state anti-indemnity statutes. Thus, while not directly abrogating these prior decisions,[1] the Crescent Energy panel decision has changed the analytical framework to favor application of maritime law and enforceability of contractual indemnity/additional insurance obligations pursuant to the newly christened Doiron analysis.

FACTS AND LOWER COURT JUDGMENT

Interestingly, Crescent Energy did not involve an OCSLA scenario (which is where this issue most typically arises) because the underlying incident in the case did not occur on the OCS.  Rather, the case involved plugging and abandoning (P&A)/decommissioning of three wells “in coastal waters of Lafourche Parish, Louisiana” Id. at *1.  P&A work is essentially the act of completely “killing” or shutting down a well by (1) setting cement plugs in the well below the mudline/seafloor (to prevent any hydrocarbons from migrating up the wellbore) and (2) cutting and removing all the casing pipe above the plugs.

Carizzo (the owner of the wells) hired Crescent Energy pursuant to a “Turnkey Bid” contract consisting of a bid letter listing the equipment and personnel Crescent Energy would use for the job.  This equipment included 3 vessels: a quarters barge with a 30-foot crane, a tug boat, and a cargo barge.  The crane was an essential piece of equipment for performing the P&A/decommissioning operation.  In addition, Carizzo and Crescent Energy also had a preexisting master service agreement (MSA) that generally governed any contractual operations between the two; and the “Turnkey Bid” contract was in turn effectively a specific work order/assignment under and pursuant to the MSA.  The MSA included provisions requiring knock-for-knock indemnity/additional insurance between Carizzo and Crescent Energy.

Thus, when Crescent Energy’s crewmember was severely injured after a pressurized pipe and flange separated, Carizzo sought indemnity and insurance from Crescent Energy/its insurers pursuant to the MSA.  Crescent Energy/its insurers rejected Carizzo’s defense/indemnity /insurance claims pursuant to the Louisiana Oilfield Anti-Indemnity Act (LOAIA, La. Rev. Stat. §9:2780), arguing essentially that because the incident occurred on a fixed platform (and not on any of Crescent Energy’s vessels); and because the MSA/Turnkey Bid involved decommissioning of a fixed platform (not a vessel), the LOAIA should apply.  On cross-motions for summary judgment, the district court agreed with Carizzo that maritime law applied to the MSA/“Turnkey Bid” contract, and thus Crescent Energy and its insurers were contractually bound to indemnify/insure Carizzo for the incident.

APPEAL AND ANALYSIS

On appeal, the Fifth Circuit panel affirmed, with an explanation of how the Doiron test applies in the decommissioning context.

A. Rejection of “Maritime but Local” Argument

Initially, however, the court had to briefly portage over the shoals of a curious, after-the-fact argument by Crescent Energy/its insurers (which the court ultimately deemed waived because it was not raised before the appeal) under the obscure “maritime but local” doctrine set out (but not applied) most recently by the Supreme Court in Norfolk S. Ry. Co. v. Kirby, 543 U.S. 14, 27 (2007).  Under this doctrine, if a maritime contract implicates a “dispute so inherently local as to cause application of state law,” then state law may supersede maritime law in the specific context of that dispute.  Id.  Thus, Crescent Energy/its insurers argued that because the work was in shallow waters within the territorial jurisdiction of the state of Louisiana, the maritime-but-local doctrine should apply and the LOAIA should displace maritime law.

However, the Fifth Circuit (after indicating the argument had been waived in any event) suggested that the mere locus of the work in Louisiana waters was not enough to trigger the doctrine given the overriding interest of uniformity in the maritime law:

The fact that [MSA/Turnkey Bid] was to be performed in the territorial waters of Louisiana does not justify causing the outcome of this lawsuit to be different than if the contract was for work on the high seas. Consistency and predictability are hard enough to come by in maritime jurisprudence, but we at least should not intentionally create distortions.

B. The Doiron Analysis

The court then moved on to directly address whether the MSA/Turnkey Bid was a maritime contract under Doiron (given that the district court had reached its determination under the complex pre-Doiron analysis).

1. Prong 1 – Facilitating/Concerning Drilling/Production in Navigable Waters

The Crescent Energy panel then framed its analysis of 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.”  2018 WL 3420665 at *4.  Interestingly, 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.[2]

Under this broadened first factor of Doiron, the court held that P&A/decommissioning is a necessary and inescapable 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 when the exploration is successful, until the process ends by plugging and abandoning the well and removing such structures as state law requires.”  2018 WL 3420665 at *5.  Likewise, the court held that even though the MSA/Turnkey Bid involved 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: “We are no longer concerned about whether the worker was on a platform or vessel[;] [t]he question is whether this contract concerned the drilling and production of oil and gas on navigable waters from a vessel.” Id. at *5.  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.

2. Prong 2 – Substantiality of Vessel Use

And likewise, in turn, the court held under the second prong of Doiron that vessels “played a substantial role in the completion of the” MSA/Turnkey Bid contract.  In this analysis, the court rejected the argument that maritime law should apply only if a majority of the work contemplated by the contract (harkening back to the Fifth Circuit’s en banc opinion in Grand Isle Shipyard, Inc. v. Seacor Marine, LLC, 589 F.3d 778 (5th Cir. 2009)) is to occur from vessels.  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.  Importantly, the court specifically excluded from its “substantiality” inquiry (as Doiron requires) any use of the vessels merely to transport equipment/crew to/from the work site.

The first focus of the court’s “substantiality” analysis was Crescent Energy/its insurers argument that only 37% of the total project bid cost (not the actual cost) was attributable to vessel day rates (for 33 days).  However, the court discounted any importance of this after-the-fact metric, because the Doiron test focuses on whether substantial vessel involvement was contemplated at the time of contracting.  The court also noted as an additional relevant point that Crescent Energy “had designed and built [the crane barge] for the specific purpose of decommissioning wells.” 2018 WL 3420665 at *9.

Ultimately, the court’s focus for the second Doiron prong was on the use of the crane and barge for P&A/decommissioning work.  First, the court noted that essentially 50% of the work for the job involved use of wireline equipment, and that the wireline equipment was housed on the crane barge.  This fact required the court to revisit the fact that “for 30 years, Fifth Circuit law has [held that wireline] work from a vessel is not a maritime activity.” 2018 WL 3420665 at *9.  However, because the en banc Doiron opinion criticized (although without actually reversing/abrogating) this historic jurisprudence, the Crescent Energy panel 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.”  Id.

Finally, however, the court noted the somewhat counterintuitive proposition that “a vessel’s being indispensable may not equate to its role being ‘substantial’” under the second Doiron factor.  Id. (emphasis added).   Nonetheless, rejecting efforts by Crescent Energy/its insurers to diminish the role of the crane barge as a mere insubstantial “work platform,” the court found that indispensability/substantiality both coalesced under the facts:

[S]o long as the vessel is being used for more than transporting between land and the wellsite….its necessity as a work platform is particularly relevant. To the extent there was not enough space on the fixed platform for the equipment, such as for the wireline unit, the role of the vessel becomes more significant. Its utility as a work platform comes from its being a vessel, as it could be positioned as needed at the well site, then proceed to the other wells to perform similar functions. … In conclusion, this contract anticipated the constant and substantial use of multiple vessels. It was known that the [crane barge] would be necessary as a work platform; that essential equipment would need to remain on that vessel, including a crane; that the most important component of the work, the wireline operation, would be substantially controlled from the barge; and that other incidental uses of the vessel would exist such as for crew quarters.

Id. at *9-10.

CONCLUSION

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[3] 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, as the Crescent Energy court itself suggested in a footnote.  Specifically, the court’s reliance on the “life cycle” argument, and its conclusion that the state law requirement for removal of platforms in state waters renders such operations “facilitative of oil and gas drilling/production” under the first Doiron prong applies equally to the OCS: “Federal law requires removal to complete the decommissioning of a well on the Outer Continental Shelf. See Cutting Underwater Techs. USA, Inc. v. Eni U.S. Operating Co., 671 F.3d 512, 519 (5th Cir. 2012).” 2018 WL 3420665 at *1.

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

[1]  Notably, the Crescent Energy opinion specifically addresses Tetra Technologies, and notes that the determinative issue of whether the underlying contract was maritime or not was necessarily not addressed because the record did not include the actual contract in dispute.  Thus, the Tetra Technologies court’s analysis of the OCSLA/LOAIA question was in effect dicta insofar as the threshold question of the applicability vel non of maritime law was never answered.

[2]  Notably, the Crescent Energy panel opinion was written by Judge Southwick, who also authored the original panel decision in Doiron, and joined in the special concurrence to that original panel decision by Judge Davis, who himself in turn authored the Doiron en banc.  In short, Judge Southwick has ostensibly agreed all along with Judge Davis vis-à-vis the Doiron analysis, and thus his nuanced reframing of the issue in Crescent Energy is presumptively not merely arbitrary.

[3]  See The Outer Continental Shelf Lands Act’s Provisions on Jurisdiction, Remedies, and Choice of Law: Correcting the Fifth Circuit’s Mistakes, 38 J. MAR. L. & COM. 487, 541–42 (PLT), 562–64 (Texaco), 566 (Laredo) (2007).