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	England and Wales High Court (Commercial Court) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Commercial Court) Decisions >> Petromec Inc & Anor v Petroleo Brasileiro SA & Ors [2011] EWHC 2997 (Comm) (17 November 2011) URL: http://www.bailii.org/ew/cases/EWHC/Comm/2011/2997.html Cite as: [2011] EWHC 2997 (Comm)

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IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		17/11/2011

Mr Justice Field:

Introduction

1. On 20 June 1997 a complicated suite of agreements was executed that was designed to provide for the sale over time of a semi-submersible oil production platform ("P 36") upgraded for use by the first defendant ("Petrobras") in the South Marlim oil field in the Campos Basin off the coast of Brazil. The preceding negotiations had been lengthy and difficult. There were many different interests to be secured, including not only those of Petrobras, the Brazilian state petroleum company that at that time had a monopoly in oil exploration and production in Brazil, but also those of the financial institutions who had financed the construction of the platform for Societa Armamento Navi Appogio S.p.A. ("SANA"), a subsidiary of Midland and Scottish Resources plc ("MSR"), and those of a group of companies controlled by Mr German Efromovich, including in particular: Maritima Petroleo E Engenharia Ltda ("Maritima"), which had organised the sale of P 36 from SANA; Petro-Deep Inc ("Petro-Deep"), a special purpose vehicle incorporated to purchase P 36 from SANA and to enter into the relevant contracts with the second defendant ("Brasoil"), a wholly owned subsidiary of Petrobras; and Petromec Inc ("Petromec"), another special purpose vehicle that was to be responsible for the upgrade of P 36, a responsibility that consisted exclusively in an obligation to enter into the necessary contracts as approved by Brasoil.
2. A good deal of time had been devoted to agreeing a specification for the upgrade for use of the platform in the South Marlim field. In about June 1996, Petrobras had submitted a five-volume South Marlim specification to Maritima ("the South Marlim GTS") which had been amended following technical discussions and negotiations between Maritima, MSR/SANA and Petrobras in December 1996. The amendments ("deviations") were set out in a document called "Annex X". The amended South Marlim GTS was referred to in the contractual documentation as the "Original Specification" and is referred to hereafter as the Amended South Marlim Specification (the "ASMS").
3. The contractual scheme provided for title in the platform to be transferred to Petro-Deep, which in turn bareboat chartered it to Brasoil for 12 years with an option to purchase at the end of the period. For its part, Brasoil made the platform available for use by Petrobras under a bareboat sub-charter for the same period. The daily charter hire of US$149,800, agreed in December 1996, included the price of the South Marlim upgrade, this price being in effect a lump sum.
4. Payment of the charter hire was governed by a security agreement under which the hire was paid to a security agent who then distributed it via a waterfall arrangement, the element attributable to the purchase of the platform (US$7.49m per quarter) going to SANA's creditors and the upgrade element (US$6,188,612 per quarter) going to Petromec.
5. In fact, several months before the execution of these various agreements, Petrobras had decided that P36 should not be used in South Marlim but in the newly discovered Roncador oil field, which was also in the Campos Basin. This discovery had come at a time when Petrobras's state monopoly was coming to an end and Petrobras was determined to bring the new field into production ahead of liberalisation of the Brazilian oil industry.
6. Conditions in the Roncador field were quite different in many respects from those in South Marlim and from about March 1997 work began on the design for an upgrade of P36 for the Roncador project in place of South Marlim project.
7. No upgrade work of any description had been started by 20 June 1997. It was recognised that a Roncador upgrade would likely cost more than the South Marlim upgrade and rather than abandon the contractual scheme that had taken so long to draft and negotiate, Maritima and Petrobras came to an unwritten understanding that the South Marlim scheme should nonetheless be implemented, but with the platform being upgraded to a new Roncador specification with Petromec being paid the additional costs of this upgrade over and above the costs that would have been incurred in upgrading the platform in accordance with the ASMS. In the meantime, SANA's creditors would be paid out of the charter hire and Petromec would receive the sums attributable to the South Marlim upgrade, which could now be used to assist in financing the Roncador upgrade.
8. In August 1998, a Supervision Agreement was signed and backdated to 20 June 1997, the relevant provisions of which are clauses 10, 11 and 12.

10 Change Orders

10.1 Both for the purposes of this Agreement and on an ongoing basis, Brasoil shall be entitled to instruct Petromec to propose:

10.1.1 any alteration to the Amended Specification; or

10.1.2 any change to any plan, drawing, specification, calculation or other document submitted to Brasoil pursuant to this Agreement; or

10.1.3 any alteration to the arrangements for the maintenance and repair of the Vessel prior to the Actual Delivery Date.

10.2 On receipt of an instruction pursuant to Clause 10.1 Petromec shall be obliged to use its best endeavours to agree the alteration(s) or change(s) set out in that instruction with the relevant Upgrade Contractor(s) pursuant to the terms of the relevant Contracts. If Petromec and the relevant Upgrade Contractors fail to agree on the alteration(s) or change(s) within fourteen (14) days of receipt by Petromec of such proposal, Brasoil shall be entitled to require Petromec to take such steps as may be appropriate to enable the alteration or change to be effected including (but without prejudice to the foregoing) replacing the relevant Upgrade Contractor(s)).

11. Amendment to Specification

11.1 It is hereby agreed that, pursuant to Clause 10 hereof, the Original Specification is amended by:

(i) Substituting for the General Technical Specification for the South Marlim Field in document ET.3010.38-1200-940-PPC-001 the Revision A which contains the requirements for the Roncador Field.

(ii) ….

12. Compensation

12.1 In consideration of Petromec's agreement to upgrade the Vessel in accordance with the Amended Specification Brasoil agrees to pay to Petromec an amount equal to the reasonable extra cost (if any) to Petromec of Upgrading the Vessel in accordance with the Amended Specification over and above the cost that Petromec might reasonably have incurred in Upgrading the Vessel in accordance with the Original Specification.

12.2 In the case of any further alterations or changes instructed by Brasoil pursuant to Clause 10 hereof, Brasoil agrees:

(i) to pay to Petromec the reasonable costs (if any) incurred by Petromec and its contractors in progressing the engineering in accordance with such Specification as was agreed before the alteration or change;

(ii) to pay to Petromec an amount equal to the reasonable extra cost (if any) to Petromec of Upgrading the Vessel in accordance with the Specification as altered or amended; and

(iii) to extend the date by which Petromec must complete the Upgrade.

12.3 The additional costs referred to in Clauses 12.1 and 12.2 above will become due and payable on the production by Petromec of evidence of expenditure satisfactory to Brasoil and Brasoil being satisfied that such costs were reasonable and properly incurred.

12.4 Brasoil agrees to negotiate in good faith with Petromec the extra costs referred to in Clauses 12.1 and 12.2 above and the extra time referred to in Clause 12.2 above and upon the determination of the same Brasoil and Petromec agree to enter into one or more addendums to this Agreement specifying the amounts to be paid by Brasoil to Petromec pursuant to this Clause 12 in good time for Petromec to meet its obligations to its contractors and specifying the date by which Petromec must complete the Upgrade of the Vessel in accordance with the Amended Specification."

9. The Original Specification was defined as:

"the specification annexed to the Bareboat Sub-Charter Agreement which contains the documents listed in Appendix A attached hereto and the deviations listed in Appendix B attached hereto."

10. The intended Appendix B was the final agreed version of Annex X.
11. It does not appear that either the Supervision Agreement or the Bareboat Sub-Charter Agreement was ever drawn up with the appropriate appendices. If they were, copies do not survive. However, there is no dispute that a document faxed to Linklaters & Paines (who were acting for Petrobras) which was before the court [F1/23] contains the final agreed version of Annex X.
12. The main part of the Roncador upgrade work was subcontracted to Davie Industries Ltd ("Davie") in Quebec, to whom the platform was delivered on 29 August 1997. The upgrade work commenced on 26 September 1997 and P36 left the Davie shipyard in October 1999, arriving off the Brazilian coast a month later. In April 2000 the Roncador upgrade works were completed and P36 commenced production in the Roncador field in May 2000.
13. Tragically, on 20 March 2001 P36 sank with the loss of eleven lives. As a result, Petrobras paid a Loss Payment to Petromec equivalent to the net present value of that portion of outstanding quarterly hire payments that would have been received by Petromec over the remaining eight years of the bare boat charter.
14. Accordingly, Petromec has received in full the South Marlim upgrade portion of the charter hire. It has also been paid US$55.8 million for the extra costs of the Roncador upgrade covered by two sets of Variation Orders (save for VO 13).
15. In the underlying proceedings, Petromec's principal claim is made under clause 12.1 of the Supervision Agreement for the difference between the cost of the Roncador upgrade and the cost that Petromec might reasonably have incurred in upgrading P36 in accordance with the Original Specification i.e. the ASMS. Petromec has claims for: (i) Roncador direct costs; (ii) Roncador external financing costs; (iii) other indirect costs; and (iv) maintenance and insurance costs at Roncador. The claims are pleaded in 7 very lengthy and highly detailed Scott Schedules. The total at stake is US$131,660,310.
16. There are before the court 7 Preliminary Issues ordered to be tried by David Steel J on 22 October 2010. All but one of these issues deal with questions going to how the notional South Marlim costs are to be determined. The remaining issue deals with a question of interest. These 7 Issues are only the latest of a series of questions arising out of Petromec's claims that have been before the courts. On 2 Februrary 2004, Moore-Bick J delivered judgement on a large number of preliminary issues. His judgement contains a valuable account of the relevant history and contractual structure which I have found extremely useful. Amongst the other rulings he made, Moore-Bick J held that "cost" in clause 12.1 of the Supervision Agreement did not include a profit element but did confer an entitlement on Petromec to recover not only direct costs but also the whole of the additional costs, including additional financing costs, incurred as a result of the change in the nature of the project from a South Marlim upgrade to a Roncador upgrade. Moore-Bick J's judgement was upheld by the Court of Appeal on 15 July 2005.
17. On 16 June 2006, Gloster J delivered judgement dismissing Petromec's claim that statements made by Petrobras during an attempt to agree a global payment approach to the notional South Marlim costs had been made fraudulently.
18. On 6 July 2007, Cooke J decided a number of preliminary issues arising out of Petromec's Revised Particulars of Claim that had been formulated in the light of the respective judgements of Moore-Bick J and Gloster J. Petromec's appeal against Cooke J's judgement was dismissed by the Court of Appeal on 21 December 2007 (save for one issue that was held over).

Issue 1.

In relation to the gas compression system:

What is the meaning and effect of the following provision in Appendix B to the Supervision Agreement?

"Brasoil re-confirmed the compression requirements as stated in the specification. The gas compression system will consist of the following equipment: 1 off new gas compression train with a capacity of 2,000,000 nm3/d, at 20°C/101,3 KPa abs.; and 1 off existing HP and export Gas Compressor, as supplied by Delaval Stork driven by an EGT RLM 1600 gas turbine."

In particular:

1.2 Does it mean, as Petrobras contends, that the cost that Petromec might reasonably have incurred in upgrading the Vessel is to be assessed by reference to the cost that Petromec might reasonably have incurred to purchase one new compressor with a capacity of 2 million cubic metres per day together with costs associated with the retention of the existing compressor; but otherwise those costs are to be assessed by reference to a total gas compression requirement of 6m cubic metres per day with inter alia three new compressors and three trains of compression; or

1.3 Does it mean, as Petromec contends, that the cost that Petromec might reasonably have incurred in upgrading the Vessel is to be assessed by reference to a gas compression system consisting of one new gas compression train with a capacity of 2nm³/d (at 20°C/101,3kPa abs) and the existing HP and export Gas Compressor, as supplied by Delaval Stork driven by an EGT RLM1600 gas turbine.

Discussion

19. P36 needed the facility to compress gas to be injected into the oil wells in the seabed to keep the reservoir pressures up. The Petrobras Board authorised negotiations for the acquisition of P36 for use in South Marlim on the basis that it would produce 150,000 barrels of oil a day and the South Marlim GTS as initially issued in June of 1996 specified a gas compression capacity of 6,000,000 m³ per day, which included a redundancy allowance so that the actual daily gas compression requirement was 4,000,000 m³ per day. The relevant provisions in the South Marlim GTS were as follows:

"P3.1.2 – Design Parameters"

Gas Compression Capacity: 6000000 m³/d (20oC and 101.3 kpa abs)

...

GAS COMPRESSION

Gas from Safety Gas K.O. Drum is sent to 3 x 50% three stage compressors (3 x 2000000 m³/d). Each compression stage shall be provided with a cooler, scrubber and compressor. A cooler shall be installed at third stage discharge.

The gas production facilities and utilities shall be design to attend total gas compression capacity (6000000 m³/d)

The compressor performance shall be guaranteed to the flow of 2000000 m³/d at package inlet (at 20oC and 101.3 kPa abs) with gas molecular weight of 18.5 ...

20. As gas is compressed its temperature rises and it is necessary to cool it at certain stages in the compression process. During the cooling process, liquid droplets are formed which are removed from the gas stream by separation equipment known as a "scrubber" or "knock out drum" prior to entry into the next compression stage. The whole package of equipment that compresses the gas, including a gas turbine that generates pressure through a drive shaft, and the scrubbers, is known as a "compression train".
21. The South Marlim GTS was a generic specification applicable to all Petrobras production platforms to be used in South Marlim. It originally provided for 3 compressors each with a capacity of 2,000,000 m³/d, which would allow one to be out of service at any given time for maintenance work. At meetings between Maritima and Petrobras in July 1996 a possible deviation for gas compression was discussed and minuted (by Petrobras) as follows:

"PETROBRAS re-confirmed the compression requirements as stated in the specification. MSR prefers to use compressors based on LM 1600 gas turbines. PETROBRAS stated that their studies indicated:

3 x 50% units driven by LM2500's or

or 2 x 100% units driven by LM 5000's

MSR will study the options further and submit to PETROBRAS approval."

22. This minute was sent to Mr Padilha of Maritima by Mr Orzechovsky of the Petrobras Engineering Department ("SEGEN"). It was headed "Discussions with MSR".
23. MSR commissioned MSE (Consultants) Ltd ("MSE") to examine two options for the gas lift and export compression system to be installed on P 36:

3 x 50% Trains, each rated at 2 MMm³/d or

2 x 100% Trains, each rated at 4 MMm³/d

24. MSE had already advised that the gas compression system on P36 as constructed for SANA, consisting of an HP and Export Gas Compressor supplied by Delaval Stork driven by an EGT RLM 1600 gas turbine, was not suitable for Petrobras' requirements.
25. MSE's report was delivered in early October 1996. It was written by Dr Mirza Sibtain Akhtar who gave evidence at the trial as a co-author (with Mr Richard Utley) of an expert report signed on 9 March 2011. In his October 1996 report, Dr Akhtar recommended that there be 2 x 100% compression trains using RB211 gas turbines.
26. MSE were then asked by Oil Field Developments Ltd ("OFD"), a subsidiary of MSR, to prepare a package specification tender for the recommended gas compression system of 2 x 4 million³/d, which they issued on 15 November 1996, and design proceeded on the basis of such a system.
27. Mr Valerio, a mechanical and petroleum engineer employed by Petrobras in its Exploration and Production Department ("E&P") was asked by the Petrobras Negotiating Committee to consider MSR's proposed deviation to the GTS permitting 2 x 100% compressors instead of 3 x 50% compressors. Mr Valerio analysed MSR's proposal and approved it from an operational point of view because it was plainly capable of delivering: (i) the maximum gas requirement (4 million m³/d); (ii) an acceptable level of redundancy; and (iii) maximum oil production and (other things being equal) the commercial viability of the South Marlim field.
28. On 6 December 1996, the following deviation to the GTS was agreed:

BRASOIL re-confirmed the compression requirements as stated in the specification. BRASOIL stated that their preliminary studies indicated:

- 3 x 50% units driven by LM 2500's or

- 2 x 100% units driven by LM 5000's

CONTRACTOR will study the options further and submit to BRASOIL approval. Both alternatives may be accepted.

29. In the meantime, negotiations over the charter hire rate had been going on between the Petrobras Negotiating Committee and Maritima (the special vehicle which would be contractually responsible for the South Marlim upgrade was yet to be incorporated). In these negotiations, Maritima was represented by Mr Efromovich, accompanied on occasions by Mr Hamylton Padilla, and Petrobras were represented primarily by Mr Vilarinho, a SEGEN director, together with Mr Alceu of SEGEN, and Mr Agostini, a Director in the Exploration and Development ("E & P") Department. Representatives of Petrobras' Finance Department, SEFIN, were also involved. None of these Petrobras gentlemen was called by Petrobras to give evidence.
30. The Petrobras Board had approved the commencement of negotiations with Maritima on 11 July 1996 on the basis of a financial evaluation (EVTE) that the market value of an upgraded platform was US$356.5 million. Effectively, what Petrobras were looking at was how much it would cost them to buy a similar platform whether by a one-off payment or by virtue of a payment over time.
31. The first daily charter hire rate that appears to have been discussed was US$173,200. In subsequent negotiations, the rates under discussion moved downwards. By 10 October 1996 the rate on the table was US$166,400. On about 4 October 1996, Mr Efromovich was told by MSR that its estimate of the upgrade costs was about US$114.7 million. This estimate was calculated on the basis of a compression system consisting of 2 x 100% trains and it was made known to the Petrobras side by Mr Efromovich.
32. On 6 November 1996, Maritima and Petrobras signed a Memorandum of Agreement which set out the contractual structure that was eventually signed the following June; but neither the charter hire nor the upgrade specification had been finally settled at this stage.
33. MSR had a vital interest in the negotiations. Their bankers were pressing hard for a deal so that they could be repaid the loans they had advanced for the construction of the platform. MSR's Managing Director was Mr Jonathan Hawksley, who gave evidence before me. He testified that a budget covering the cost of the upgrade was prepared in August 1996 and he was provided by Mr Martin Pratt, an engineer, with a Lotus 123 spreadsheet containing some key financials that were derived from the budget. As the negotiations progressed this spreadsheet was updated.
34. Mr Efromovich was very resistant to Petrobras' insistence that the hire rate be reduced. Eventually, Petrobras, acting by Mr Agostini, suggested that Mr Efromovich should bid on the basis that Petrobras would provide the mooring lines and that the compression system should comprise the existing compression system on P36 and one new system with a capacity of 2 million m³/d. Mr Efromovich was asked by Petrobras to re-estimate the upgrade costs without the cost of the mooring lines and with only one new compressor. The amended estimate was US$96 million and this figure was given to Mr Agostini who said that it was too high. Petrobas' figure was about US$80 million.
35. By 2 December 1996, the proposed charter hire rate was US$154,000 per day; a document of that date sent to the Petrobras Board asked it to approve a bareboat charter at that rate of hire. The next Board Meeting was on 5 December 1996. At the following Board Meeting on 12 December 1996 it was decided to keep the proposal on the agenda for the meeting on 19 December 1996. On 19 December 1996, Mr Efromovich made a further offer of US$149,800 per day which Mr Vilharinho recommended to the Board, explaining the counter offer in terms of a reduction of the interest rate to be applied to US$356.5 million from 12.93% pa to 11.51% pa.
36. The negotiation of the charter hire rate was a commercial negotiation. There was no in-put from the Petrobras and Maritima technical people as to the new compression specification and no-one on the Petrobras Negotiating Committee was consulted about this change.
37. At the meeting on 19 December 1996, the Petrobras Board approved the 2 December 1996 proposal subject to the reduction in daily charter hire from US$154,500 to US$149,800 per day. There is no evidence to suggest that the Board were aware of the contents of the South Marlim GTS and Annex X, let alone that the charter hire negotiations had been conducted on the basis that the company responsible for the upgrade would provide one new 2 million m³/d compressor and the existing compressor rather than 3 x 50% or 2 x 100% compression systems.
38. Nine days earlier on 10 December 1996, MSR had instructed AMEC plc ("AMEC"), the well-known engineering consultants, to produce a process engineering design for a 3 x 50% compression system. Also on this date, Petrobras changed its specification from a 2 x 100% system to a 3 x 50% system, and on 11 December 1996, acting on the instructions of MSR and OFD, MSE produced a Package Specification for such a system. The aforesaid notwithstanding, on 13 December 1996, Mr O'Brien of MSR faxed Mr Padilla to tell him that the Gas Compression Specification had been changed to 1 new compressor plus the existing compressor; and the Equipment List prepared by AMEC on 20 December 1996 and which was sent to Davie on 3 January 1997 specified 2 x 100% compressors.
39. It is also of note that by 10 December 1996, unknown to Maritima, a Petrobras EVTE Working Party had already begun considering the use of P36 in the Roncador field, rather than in South Marlim, a use that turned out to require 3 x 2.4 million m³/d compression systems.
40. On 3 January 1996, MSR received a fax containing a "modified page 5 of the deviations" as follows:

P.3.1.2: "BRASOIL re-confirmed the compression requirements as stated in the specification.

The gas compression system will consist of the following equipment: 1 off new gas compression train with a capacity of 2,000,000 Nm³/d, at 20°C, 3 kPa abs.; and 1 off existing HP and Export Gas Compressor, as supplied by Delaval Stork driven by an EGT RLM 1600 gas turbine"

41. It is agreed that this represents the finally agreed Annex X deviation in respect of the compression system for the purpose of clause 12.1 of the Supervision Agreement. I shall refer to it hereafter as "the compression deviation".
42. Mr Efromovich did not say in his witness statement when the parties began negotiating on the basis that the compression systems should be the existing system and one new 2 million m³/d compressor. He was asked in cross examination whether he remembered when it was agreed that Maritima would bid on this basis and replied that he did not remember the date but it was obviously before closing. Mr Hawksley on the other hand testified in cross-examination that Mr Efromovich told him at the time that he (Mr Efromovich) and Mr Agostini agreed that Maritima should bid on this new basis at the end of November/early December 1996, with the intention of wrapping up the charter hire issue by the time of the weekly Petrobras Board meeting on 5 December 1996. It was this agreement, said Mr Hawksley, that led to the proposed charter rate coming down to US$154,500 as recorded in the document sent to the Board on 2 December 1996 asking it to approve a bareboat charter at that rate of hire. Mr Agostini agreed the newly proposed rate but it was subject to Board approval. At Mr Efromovich's request, Mr Hawksley sent him a new budget in early December 1996 to reflect the new basis of negotiation. Mr Efromovich was not scurrying around in the few days before 19 December 1996 looking at the costs of different compressors and neither was Mr Hawksley answering any enquiries at this time from Mr Efromovich as to the cost implications of what came to be specified in the compression deviation.
43. Mr Hancock QC for Petrobras went so far in cross-examination as to suggest to Mr Hawksley that he was making up this part of his evidence. In his closing submissions, Mr Hancock argued that Mr Hawksley's evidence was seriously unreliable: his witness statement had been put together from passages in previous statements and he had not seen any of the relevant underlying documents before signing it. Further, as confirmed by Mr Hawksley, he had an interest in the outcome of the litigation under an agreement by which he will receive 1.25% of amounts paid by Petrobras to Petromec, plus a possible success fee.^[1] In addition, Mr Hancock submitted that Mr Hawksley's evidence was not corroborated by Mr Efromovich and was inconsistent with: (i) the deviation agreed on 6 December 1996; (ii) certain of the items contained in the updated Lotus 123 spreadsheet; and (iii) Petrobras' change of specification to 3 x 50% compression systems on 10 December 1996.
44. I reject Mr Hancock's criticisms of Mr Hawksley's evidence. In my judgement, notwithstanding his interest in the outcome in the litigation, which he declared, Mr Hawksley's evidence as to when and how the agreement on the new compression configuration system came to be made was truthful and reliable, and should be accepted. It is true that Mr Efromovich did not say when it was he was invited to bid on the basis of a new compression configuration, but his evidence was not inconsistent with that of Mr Hawksley. I am also unconvinced by Mr Hancock's inconsistency points. In my view, the reason why the 6 December 1996 deviations recorded that the mooring lines would be provided by Brasoil but did not set out the new compression configuration was that the former had been the subject of straight-forward agreement (as Mr Hawksley testified), whereas the consequences on the charter hire rate of the latter had to await the Board's acceptance of the recommended charter hire rate, and until this occurred the deviation could not be recorded. I also accept Mr Hawksley's evidence that the figures in the Lotus 123 spreadsheet relating to 3 x 50% compressors were inserted not as part of a new budget drawn up on the basis of a 3 x 50% configuration but to assist Mr Efromovich who had asked for the figures in case he needed them in the course of the negotiations. As to Petrobras' specification of 3 x 50% compression systems on 10 December 1996, it is quite clear that the engineering teams on both sides were not told that Mr Efromovich and Mr Agostini were negotiating the charter hire on the basis of a completely new compression configuration. I am also satisfied that at no time did the charter hire negotiators know that on 10 December 1996 Petrobras' engineers changed the compression specification back to 3 x 50% systems.
45. I also think it a fair inference and so find that Mr Agostini and possibly others of those who participated in the charter hire negotiations, including Mr Alceu and Mr Vilarinho, appreciated that: (i) Maritima's October 1996 upgrade estimate of US$114.7 million was calculated on the basis of 2 x 100% compression systems; and (ii) the revised estimate of US$96 million reflected downward adjustments to the October figure to reflect the deletion of the cost of the mooring lines and the cost of the new compression configuration consisting of the existing system and one new 2 million m³/d compressor.
46. The question posed by Issue 1 is one of contractual construction. The compression deviation is a contractual document. As we have seen, it is part of the Original Specification referred to in clause 12.1 of the Supervision Agreement which was signed on 17 August 1998.
47. The principles to be applied when construing contractual terms are well known. In BCCI v Ali [2001] 1 AC 251 Lord Bingham said:

"In construing this provision, as any other contractual provision, the object of the court is to give effect to what the contracting parties intended. To ascertain the intention of the parties the court reads the terms of the contract as a whole, giving the words used their natural and ordinary meaning in the context of the agreement, the parties' relationship and all the relevant facts surrounding the transaction so far as known to the parties. To ascertain the parties' intentions the court does not of course inquire into the parties' subjective states of mind but makes an objective judgment based on the materials already identified. The general principles summarised by Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, at 912-913 apply in a case such as this. [P. 259]"

48. The first three of Lord Hoffmann's principles referred to by Lord Bingham are:

"(1)  Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

(2)  The background was famously referred to by Lord Wilberforce as the "matrix of fact," but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.

(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them."

49. Despite the fact that the deviation derives its contractual force from the Supervision Agreement signed in August 1998, the parties focused on the genesis and factual matrix of the agreement reached on 19 December 1996. In my view, this was a sensible approach but, as Mr Vineall QC for Petromec submitted, it has also to be remembered that when the Supervision Agreement was signed the parties must have appreciated that many matters in the Original Specification would have been more closely defined and bottomed out if P36 had in fact been upgraded for use in South Marlim, rather than in Roncador.
50. The relevant factual background for purposes of interpretation consists of those facts and matters set out above in paragraphs 19-33; and 35-39 that were known to both parties down to 19 December 1996, including those facts jointly known by Mr Efromovich and the senior Petrobras representatives.
51. Petrobras, focusing on the first sentence, contends that the compression deviation means that:

(a) The compression requirements remained those originally specified in the South Marlim GTS, namely: (i) that the rig had to be capable of processing 6 million m³ per day; and (ii) this processing capability would be met with 3 trains of 2 million m³ per day.

(b) However, the compression system to be provided by Petromec would be the one existing compressor and one new 2 million m³ per day compressor.

52. In a nutshell, Petrobras' case is that the second sentence governs the cost that Petromec might reasonably have incurred to procure the gas compression system described in the second sentence but otherwise (i.e. apart from the cost of procuring the gas compression system described in the second sentence), the cost that Petromec might reasonably have incurred in upgrading the platform in accordance with the ASMS is to be assessed by reference to the reconfirmed gas compression requirements under the first sentence.
53. It is clear from these submissions that the relevance of Issue 1 goes beyond the actual cost of procuring the gas compressors. Thus on Petrobras' case, whilst it would be responsible for meeting the cost of the two additional 2 million m³ per day trains it says are necessary to achieve the total compression requirement of 6 million m³ per day, Petromec would be responsible for meeting the whole of the rest of the cost incurred in upgrading the platform in accordance with the ASMS, including the cost of: (i) the extending the deck space; (ii) gas processing equipment (e.g. TEG Contactor used for dehydration of natural gas); (iii) the cooling system capacity and other associated items.
54. Petromec submitted that the first sentence of the deviation makes no sense when the deviation is construed as a whole in the light of its factual matrix and should be ignored. On that basis, the second sentence should be given its ordinary meaning, namely, that Petromec's sole obligation in respect of gas compression equipment was to supply a gas compression system consisting of one new 2 million m³/d gas compression train and the existing gas compressor. If Petrobras wanted any additional gas compression equipment, it would have to instruct a variation to the specification and pay for it separately, including the cost of any necessary additional deck space.
55. In the alternative, Petromec submitted that, if the first sentence is not to be entirely disregarded, it should be construed to impose the limited obligation of requiring that the platform should be capable of further modification, to be achieved by a subsequent variation order or other agreement, so as to be able to meet a total compression requirement of 6,000,000 m³/d. It was the unchallenged view of its compression systems expert, Mr Utley, that the platform could have been modified by constructing a modest deck extension to accommodate 2 x 4,000,000 m³/d compression trains. Thus, on Petromec's primary or secondary case, the final Annex X requirement was a platform with one new compressor and the existing compressor left in place, with a modestly extended deck capable of accommodating 2 x 4,000,000 m³/d compression trains.
56. In Mr Hancock's submission, Petrobras' interpretation gives full effect to the whole of the compression deviation, including the first sentence, and makes commercial sense. He argued that this interpretation stands in favourable contrast to Petromec's interpretation which would: (i) re-write the contract by deleting the first sentence and revise those other aspects of the South Marlim GTS which were inextricably interlinked with P36's gas processing capability, including in particular the requirement that the platform be capable of processing 150,000 barrels of oil per day; and (ii) denude the transaction of its commercial raison d'être by falsifying the principal assumption underlying the Petrobras Board's decision to proceed with the purchase, namely, that P36 would be capable of processing 150,000 barrels per day.
57. Mr Hancock further contended that Petrobras' construction is in line with: (i) the parties' behaviour before and after the finalisation of the charter hire deal -- AMEC continued to design for a 3 x 2 million configuration and MSE and OFD continued with their tender for that configuration; (ii) Mr Efromovich's evidence that the end product of the agreement was that Petromec should supply less equipment; (iii) the correlation in the amount that MSR had budgeted for the change in supply of compressors (US$21 million) and the amount of the reduction in hire from US$154,500 to US$149,800 over the life of the bareboat charter (US$20.586 million).
58. As to Petromec's alternative case (styled Issue 1A by Mr Hancock), Petrobras submitted that the 3 x 2 million configuration was part of the requirements in the South Marlim GTS. The parties had dispensed with the possibility of using a 2 x 4 million configuration by the time the deviation was finalised. Thus come that point, such a system was past and irrelevant history: the intermediate "draft" of Annex X which had referred to 2 x 4 million as an option had been superseded and replaced by the final version of Annex X. Further, a 2 x 4 million system would not provide 6 million m³ per day, as the specification required, but would provide 8 million m³ per day; and Petrobras could not be required to accept a system that exposed them to the disadvantages that came with large compressors as time went by.
59. In my judgement, the compression deviation was intended to operate as a cost allocation provision. One new 2 million m³/d compression system together with the existing system were never going to be sufficient to answer Petrobras' compression requirement of 6 million m³/d and it is common ground that Petrobras was going to have to pay the additional acquisition cost of such compression systems as might be specified to achieve Petrobras' overall compression requirement.
60. The question is whether any further costs that would arise out of Petrobras' compression systems specification, such as additional deck space and gas processing equipment, are allocated by the compression deviation to Petrobras' account rather than to Petromec's account. In my judgement, they are. In my opinion, the meaning and effect of the compression deviation when construed against the relevant background is that, apart from Petromec having to supply the existing compressor and one new 2,000,000 m³/d gas compression train, the whole of the cost of acquiring, installing and accommodating such further compression systems, including additional deck space and processing equipment, as might be specified by Petrobras to meet their compression requirement of 6 million m³/d, was for Petrobras' account.
61. In my opinion, the first sentence of the compression deviation is not meaningless. Its function is to specify the area in which the cost allocation provided for in the second sentence is to operate and to require Petromec to supply and install the compressions systems specified by Petrobras to satisfy its compression requirements, albeit at Petrobras'cost and after the execution of an agreed variation. In my view, the construction I propose to give to the deviation is a commercial one. It recognises that it is for Petrobras to specify what compression configuration it wanted to achieve the overall daily compression requirement and it contemplates Petromec supplying and installing what is specified, with the cost of the supply, installation, accommodation and all associated costs being borne in accordance with the allocation agreed by the parties. I do not think that the first sentence imposes an overarching obligation on Petromec to deliver a rig capable, with modification if necessary, of accommodating the necessary compression systems to answer the requirement of 6 million m³/d. But even if it does, this does not narrow the width of the cost allocation provision so as to make Petromec liable for the cost of additional deck space to accommodate 3 x 50% systems if this be the configuration Petrobras specifies.
62. In my opinion, once it is recognised that the compression deviation is a cost allocation provision, the fact that Petrobras reverted to a 3 x 50% configuration on 10 December 1996 is nothing to the point. The compression deviation was negotiated without reference to what the engineers were saying to each other. And on any view, some system or systems additional to those identified in the compression deviation were going to be required. It was for Petrobras to specify what its requirements were subsequent to the compression deviation being agreed. The original gas compression specification (3 x 50%) in the South Marlim GTS did not spring back into life. The effect of the deviation is that the acquisition cost and all associated costs of such additional systems as might be subsequently specified are to be for Petrobras' account and not Petromec's.
63. Even if it were admissible on the construction of the deviation, which it is not, Mr Efromovich's evidence that the end-product of the charter hire negotiations was that Petromec would supply less equipment is not inconsistent with the interpretation that I think is the correct one. I am also unpersuaded by Mr Hancock's reliance on what he said was a correlation in the amount MSR had budgeted for the change in supply of compressors and the amount of the final reduction in hire. I say this not only because here again reliance is being placed on inadmissible evidence but also because: (i) it is far from clear that it was only the final reduction in the proposed charter hire that was given in exchange for the revision to the specification; and (ii) Mr Hancock overlooks the fact that the predicated reduction of US$20 million in the price would be worked out over 20 years, whereas the saving to Petromec would be immediate.
64. My conclusion on the interpretation of the compression deviation makes it unnecessary to consider Petromec's alternative case on Issue 1 and I do not propose to lengthen this already long judgment by dealing with this aspect of the case.

Issue 3

65. The answer to this issue has a possible impact on the answer to be given to Issue 2 and thus it is dealt with before Issue 2 is considered.
66. Issue 3 is in these terms:

In relation to risers:

3.1. What number of risers would have been required for South Marlim and how were they required to be bundled or grouped? How would that have differed from the number and bundle grouping required for Roncador?

3.2. What is the meaning and effect of the following provision in Appendix B to the Supervision Agreement: "The central caisson may be used for attachment of the risers and using the craw^[2] works for pull in. BRASOIL accepts this concept. It was agreed that CONTRACTOR would contact flexible riser manufacturers and develop a study to maximise the use of the central caisson. The design would be discussed and finalised with BRASOIL."

Does it mean, as Petrobras contends, that the result would have been that Petromec could reasonably have had to install a spider deck, the same as or similar to the installed for Roncador? Or does it mean, as Petromec contends, that Petromec could reasonably have used the central caisson for the attachment of the risers and in any event would not have had to install a spider deck?

Discussion

67. The term "risers" is the generic oil industry term for the conduits that move the fluids and services vertically between a floating production facility projecting above the sea surface and the sea-bed. Once on the sea-bed, the conduits that radiate out along the sea-bed from the risers to the wells are generically called "in-field lines". Control-signal cables, hydraulic hoses, electrical-power cables and chemical-injection lines bundled together and protected by an external sheath are known as "umbilicals".
68. The functions performed by risers include: (a) movement of produced fluids (produced gas, oil and water) from production wells to the floating production facility; (b) movement of "lift gas" from the production facility to the production wells where it can be mixed in at the base of the well to help lift the produced fluids up the well or to start them flowing; (c) movement of water and/or gas from the production facility to the water/gas injection wells, so that it can be re-injected into the reservoir to replace produced fluid, keep reservoir pressure up, or to help sweep hydrocarbons towards the production wells; (d) movement of chemicals from the FPF to the wells where they can be injected to help the produced fluids flow more freely; and (e) sending control and monitoring signals to and from the wells and sending electrical and hydraulic power to the wells to power valves and other equipment.
69. Both sides called expert evidence in respect of Issue 3. Mr Frank Grealish, an acknowledged specialist in the field of risers, gave evidence on behalf of Petromec and Mr Michael Taggart, a naval architect and marine consultant, gave evidence on behalf of Petrobras. Both dealt with the technical background to risers and the number and bundling or grouping of risers that would have been required as part of the South Marlim upgrade. In addition, Mr Taggart's report contains a detailed analysis of the relevant correspondence and reports on the attachment of risers that occurred in the lead up to a decision taken after the switch to Roncador that a so-called "spider deck" – a lattice of walkways – should be constructed below the deck proper but above the water line to which the risers were to be attached. Mr Taggart also expresses the opinion that even if there had been no switch to Roncador, the risers necessary for the South Marlim upgrade would have been attached using a spider deck in the same manner as actually happened for Roncador.
70. The first question asked in Issue 3.1 can be readily answered. Mr Grealish and Mr Taggart agree that if P36 had been upgraded for South Marlim, the number of individual risers would have been 98. The number of single risers attached as part of the Roncador upgrade was 89.
71. The balance of the questions posed in Issue 3 requires the determination of the meaning of the words quoted in Issue 3.2 (hereafter "the riser deviation") and then a counter factual inquiry premised on that interpretation as to how the necessary risers would have been attached if there had been a South Marlim upgrade.
72. The original specification for the riser system for the South Marlim upgrade was set out in section H.13 of the South Marlim GTS. Section H.13.2.1 (i) states:

… All risers shall be connected to the outside perimeter of the Unit, according to drawing DE-3534.38-6500-942-PGT-004.

73. The referenced drawing was also one of the Basic Design Documents forming part of the Original Specification. It shows that the bundles specified in Table H.13.3 were to be attached in a specific order around the periphery of the pontoons. Section H.13.2.3 provided:

Risers and control umbilicals arriving at port and starboard sides shall be connected to a riser hanger structure, arranged on top of pontoons, which shall provide the following operational features:

(i) Considering the Unit in pull-in draught, the connecting point shall rise to a minimum air gap of 3.5m, measured from connecting point to the surface of calm water;

(ii) In addition, the riser hanger structure and accessories shall have a minimum immersion of 9 meters, taking into account the unit at operational draft, in order to avoid supply boats collision.

Risers and control umbilicals arriving at stern and bow sides shall be arranged on pontoon tips. They shall be arranged according to the following operational features:

(a) considering the unit in pull-in draught, the connecting point shall rise to a minimum air gap of 3.5m, measured from connecting point to the surface of sea water, taking into account pitch motion in the pull-in environmenta1 condition herein defined;

(b) there is no requirement for immersion, since these sides are not expected to support supply boat operations.

On pull-in draught the following results must be achieved:

- The connecting point shall rise to a minimum air gap of 3.5m;

- ……

74. Features (i) and (ii) meant that the riser attachment locations had to be: (i) 3.5m above the riser installation waterline with the platform in pull-in draught (ie when the platform's pontoons were floating sufficiently high for it to be pulled to its destination); and (ii) 9 metres below water when the platform was at operational draught so as to avoid accidental damage with supply boats. There was therefore to be dry attachment of the risers at locations on the pontoons that would be 3.5 metres above the waterline at pull-in draught and that would be 9 metres below the water when the platform was in operational mode in the South Marlim sea.
75. Section G1.1.3, para 15 and Section H.13.2 envisaged that alternatives to the basic design could be considered.

G1.1.3 Para 15: The CONTRACTOR shall follow the Basic Design requirements, but changes may be proposed, if they improve operation, decrease weight or simplify construction. Such changes, as any deviation from the technical requirements intended to be performed by the CONTRACTOR, have to be previously submitted to BRASOIL's approval.

H.13.2: Although pontoons are the connecting positions specified for all risers on this document, CONTRACTOR may submit to BRASOIL's approval an alternative positioning for risers support.

76. P 36 was built to a topsides design with a production plant on her aft deck but also with a drilling derrick to make the platform more marketable across a number of different applications. The drilling derrick and other equipment were housed in a central caisson, essentially a large (20m diameter) metal tube towering from above the centre of the platform down into the water. The central caisson contained, inter alia, a shaped moonpool (hole in the centre) to facilitate drilling activities and annular compartments specially sized to house sections of heavy walled pipe (from the drilling riser) when not in use.
77. During discussions between Maritima and Petrobras in July 1996, Maritima proposed that the central caisson be used for the attachment of the risers and that the draw works located therein be used for pulling the risers in for attachment. The idea that the central caisson would form a convenient funnel through which the risers could be drawn for attachment to the platform had been expressed in an SPL Engineering Report in October 1995. Petrobras was agreeable to this suggestion and it was agreed that MSR would contact flexible risers manufacturers and develop a study to maximise the use of the central caisson, with the design being discussed and finalised with Petrobras. The South Marlim GTS was then later amended in the terms of the riser deviation. It appears in Annex X with the reference H13 of ET-GTS.
78. In about July 1996, MSR instructed Noble Denton Europe ("NDE"), marine consultants engaged by Maritima/MSR, to carry out a feasibility study into the use of the central caisson for the attachment of the risers. In September 1996, NDE concluded that 98 risers could be tied into the platform through the central caisson and moonpool area so that the horizontal loads were taken at the base of the central caisson and the vertical loads taken at the tank top level. It was noted that this would have stability implications but these could be solved by modifications proposed by MSR. A detailed appraisal was also sought from the Aberdeen office of Coflexip Stena Offshore ("CSO") who, by a telefax dated 2 October 1996, provided a preliminary response in which doubts were expressed as to the proposed layout whereby the risers would be arranged in two concentric rings and as to the risk of damage to the external sheath of the risers. The CSO Aberdeen office stated that they could not confirm that they had sufficient resources to carry out the study requested and suggested that the work might be done by the Brazilian office.
79. As we have seen, there followed the charter hire negotiations that led to the agreement between Maritima and Petrobras on 19 December 1996 which committed Maritima to an upgrade in accordance with the South Marlim GTS, as amended by the deviations contained in Annex X, for a fixed price that was part and parcel of the agreed daily hire rate of US$149,800.
80. The switch to Roncador was notified to Maritima/MSR on 28 January 1997. At a Roncador clarification meeting on 4 March 1997 three options for riser attachment for Roncador were discussed: (i) pontoon attachment; (ii) a combination of pontoon and riser attachment; and (iii) a combination of pontoon and cross bracing attachment. The following day, Petrobras questioned whether there was enough buoyancy to reach the Amended Roncador Specification's pull-in draft and offered to use their experience to develop a base riser attachment scheme that reflected a mixture of hang-off locations, including the central caisson, and the aft apron. In a telefax dated 13 March 1997 to Maritima/MSR, Petrobras stated that they considered that the "arrival" of risers at the central caisson may cause installation problems in respect of the winch pull-in and the sheaves arrangement and asked for details of the proposed attachment to be submitted for approval.
81. Between the end of March 1997 and June 1997, it was increasingly realised that the Roncador upgrade weight required more and more buoyancy to be added low down to achieve dry attachment to the pontoons and the idea emerged that attachment to a spider deck – a lattice walkway – constructed beneath the deck proper would require much less buoyancy. On 2 June 1997, NDE reported that attachment to a spider deck was the best alternative and that was how the risers were eventually attached for Roncador, save for 6 bow risers for production and gas which were wet-attached to the pontoon and then hard piped to the spider deck at the central caisson. Riser protection nets were also fitted to two sides of the platform to prevent interference with supply vessels.
82. Petromec submitted that the effect of the riser deviation is that Petromec was entitled to use of the central caisson to attach the risers to the extent that this was feasible. Petrobras argued that: (i) the deviation did no more than permit Petromec to submit proposals for use of the central caisson for riser attachment for approval; (ii) no such proposals were submitted and the deviation became a dead duck; and (iii) even if there had been no switch to Roncador no definitive proposals for the attachment of the risers to the central caisson would have been submitted and the parties would have agreed instead that the risers should be attached from a spider deck as in fact happened under the Roncador upgrade.
83. Under clause 12.1 of the Supervision Agreement, Petromec is entitled to be paid "an amount equal to the reasonable extra cost (if any) to Petromec of Upgrading the Vessel in accordance with the Amended Specification over and above the cost that Petromec might reasonably have incurred in Upgrading the Vessel in accordance with the Original Specification"[Emphasis supplied]. The italicised words are important. In my opinion, their effect is to exclude an enquiry into what cost Petromec might reasonably have incurred in accordance with a specification that was not part of the Original Specification, namely the South Marlim GTS as amended by the deviations set out in Annex X. In my judgement, attachment of the risers to a spider deck was wholly outside the scope of the Original Specification (the ASMS). It follows that I reject Petrobras'case based on the theory that if there had been no Roncador upgrade the parties would have agreed that the risers were to be attached to a spider deck.
84. It remains to determine the true interpretation of the riser deviation and then to consider on the basis of that interpretation how the necessary risers would have been attached if there had been a South Marlim upgrade in accordance with the Original Specification.
85. The riser deviation derives its contractual effect from the Supervision Agreement. Like the compression deviation, it was part of the basis on which Maritima negotiated what was in effect a fixed price for the South Marlim upgrade. In my judgment, construed against this background, Petrobras could only refuse to accept a design for making maximum use of the central caisson for the attachment of the necessary risers if it had reasonable grounds for doing so. As a consequence, in practice, Petrobras were obliged to accept such a design if it were feasible and did not adversely affect to a material extent the safety and operational efficiency of the platform.
86. Does this mean "that Petromec could reasonably have used the central caisson for the attachment of the risers and in any event would not have had to install a spider deck?" In my judgement it does. The following three potential ways in which the risers could have been grouped for attachment making maximum use of the central caisson are discussed in the experts' reports: (i) multibore risers; (ii) "piggy-backed" risers; and (iii) single risers. Multibore risers are risers consisting of a number of lines combined in one larger pipeline which is attached to the platform as a single unit. Mr Grealish raised the possibility of multibore risers being used "for the sake of completeness." He and Mr Taggart were agreed that multibore risers were new technology and not in common use in 1996/1997. In cross-examination, Mr Grealish accepted that use of multibore risers would have been a major stretch in the technology and that realistically such use was unlikely. In the face of this evidence, I am bound to conclude that multibore risers were not a feasible option for attachment of the risers to the central caisson.
87. Piggy-backed risers are risers that are clamped together into a group and pulled into a single I-tube per group. In the case of P36, generic I-tubes could have been used for each bundle with an inside diameter of 1m. The experts were agreed that: (i) adoption of multiple piggy-back risers would likely require a more diving intensive attachment procedure and a separate riser pull-in past the other risers within the I-tube; (ii) based on the I-tube spacings recommended by Friede & Goldman (the naval architects who designed P 36), it would have been feasible to have a minimum of 28 bundles in the caisson, with the remainder to be installed as 28 individual risers (from 13 bundles) on the pontoon.
88. In their preliminary response dated 2 October 1996, CSO's Aberdeen office expressed the view that pulling three independent risers into the same I-tube may lead to damaging the external sheath of the flexible structures and that there might be similar damage in the course of maintenance. Mr Grealish rejected this concern, although he accepted that the piggy-back option was not the simplest solution. He thought that CSO were being over-cautious and was of the view that their response was superficial, probably because it came from the Aberdeen office which was not going to get the riser contract, this being something that would go to CSO's Brazilian office. Mr Grealish cited the Gryphon production platform in the North Sea as an example where piggy-back risers had been used and pointed out that the supplier of the risers in that case was Coflexip. But he accepted that this was the only known case where bundled risers had been drawn through a single I-tube.
89. Mr Taggart endorsed the views expressed in the CSO preliminary response of 2 October 1996.
90. I also heard evidence from Mr Flavio Pinto who is a mechanical and structural design engineer with specific expertise in riser installation who has been employed by Petrobras since 1990. In 1996/97 he was an Equipment Engineer 1, one level above the bottom in the Petrobras Engineer hierachy. In his first witness statement, Mr Pinto stated:

Since 1995, [piggy-back] riser grouping has not been used by Petrobras in shallow water or otherwise, for a number of reasons. First, the size and weight of the risers when bundled together is very substantial. Second, if one of the risers in the piggy-backed bundle needed to be repaired then all of the risers in that support needed to be disconnected. Third, with risers so close together, the risk of risers clashing together is greatly increased. Fourth, to reduce the risk of clashing, the risers need to be clamped together at several points, and in deeper water this can be difficult.

...

If Petromec had asked Petrobras to agree to a solution for installing risers in the central caisson on South Marlim which involved the use of piggy-backed risers, I do not think Petrobras would have agreed, because it was an innovative solution that would have required substantial further work, and this would have conflicted with the time schedule of the enterprise that Petrobras was working towards.

91. Mr Pinto was not cross-examined on these parts of his evidence but in the first passage he is essentially repeating the view expressed by CSO in their preliminary response and in the second he is offering an opinion when he was called as a witness of fact.
92. I found Mr Grealish to be an impressive witness. He was fair and balanced and, unlike Mr Taggart, who is a naval architect, he is a renowned expert on risers and their installation. However, I have reached the conclusion that Petrobras could reasonably have refused to accept a piggy-back design. My reasons are: (i) although CSO's preliminary response does appear to have been somewhat dashed off, I think there was a risk of metal-pulling components damaging the riser's external sheath leading to water ingress and premature failure; (ii) the experts were aware of only one example of piggy-back risers having been attached through a single I-tube – the Gryphon platform in the North Sea; and (iii) Petrobras has not to date used this technology on any other of its many production platforms.
93. The experts agree that the risers could have been attached singly, in which case 52 could have been attached through the central caisson with the remaining 46 being attached to the pontoons.
94. As for the remaining 46 risers, the first thing to note is that no calculation was done by Maritima or Petrobras and none has been done by either Mr Taggart or Mr Grealish as to whether sufficient buoyancy could have been achieved for risers to be dry-attached to the pontoons. On 5 March 1997, Petrobras doubted whether there was sufficient buoyancy for this purpose and Mr Taggart agrees with this stance. Realistically, therefore, attachment to the pontoons of those risers that could not be accommodated in the central caisson would have had to be done under water through the use of divers.
95. It is clear that Petrobras prefers dry-attachment of risers to wet attachment. Thus, on the vast majority of its platforms (circa 25), the risers are all dry-attached. However, in the case of P18 (designed in 1996), 71 of the 74 risers were wet-attached with diver assistance when it was discovered that the platform's pull-in draft was worse than expected. In addition, 43 out of a total of 65 risers were wet-attached in the case of P 52 in 2007 because steel catenary risers were used on account of the depth of the water and such risers need to be attached low down on the platform. It is also the case that 9 risers out of 70 were wet-attached on P26 to avoid having them run beneath accommodation sections and on P36 itself, 6 risers were wet-attached to pontoons for similar safety reasons.
96. Mr Grealish accepted that dry attachment is a simpler option than wet attachment but neither he nor Mr Taggart thought that wet-attachment was not feasible in this case.
97. Mr Pinto stated in his first witness statement that he did not think Petrobras would have agreed to wet-attachment of risers on P36 at South Marlim unless it was necessary for safety or specific design reasons: Petrobras' preference would have been to install risers on a spider deck. Leaving aside the consideration that he was called as a factual and not an expert witness (this statement is essentially an expression of opinion), it is to be noted that he accepts, as he was bound to given the examples given in paragraph 93 above, that Petrobras permitted wet attachment if it were necessary for design reasons.
98. In my judgement, had Petromec proposed a design whereby 52 risers were to be attached to the central caisson and 46 were to be wet-attached to the pontoons, Petrobras could not reasonably have withheld their agreement. Such wet-attachment was feasible, had been done on a considerable scale in the case of P18 and the cost would have been for Petromec's rather than Petrobras' account.
99. Accordingly, I answer Issue 3 as follows. Petromec could not reasonably have had to install a spider deck, the same as or similar to that installed for Roncador. Instead, Petromec could reasonably have used the central caisson for the attachment of 52 risers with the remaining 46 being wet-attached to the pontoons.

Issue 2

Would the upgrade for South Marlim have required the same or similar deck space requirements to that for Roncador, including an aft deck extension and the relocation of the transverse piperack to a more forward location?

Discussion

100. Consistently with its submissions on Issues 1 and 3, namely that the ASMS required Petromec to provide, install and accommodate at Petromec's expense 3 x 50% compressors and a spider deck, Petrobras contended on the basis of an expert's report prepared by Mr Steve Fogg, a Chartered Engineer and a Corporate Member of the Institution of Chemical Engineers, that Petromec were required under ASMA to upgrade the platform with a topsides layout that would have been the same as that in fact constructed for Roncador which would have included an aft deck extension of 13 m x 68.58 m (890 m² ).
101. Mr Fogg's first report is an enormous piece of work contained in 8 lever arch files. His approach has been to examine the topsides system layout adopted for Roncador and to review the process design parameters (including analysis of process flow diagrams), heat and mass balances and piping and instrumentation diagrams. He concludes that the design for South Marlim and Roncador in relation to the unit operations and their sequence are the same and that therefore the South Marlim topsides layout would have been the same for South Marlim as it was for Roncador.
102. In assessing the South Marlim layout in his first report, Mr Fogg considers four compression scenarios spanning four possible findings of the court on Issues 1 and 3. These are: (i) 3 compressor trains and a spider deck; (ii) 3 compressor trains and no spider deck; (iii) 2 compressor trains and a spider deck; and (iv) 2 compressor trains and no spider deck. In his Supplemental Report, Mr Fogg opines that under scenarios (i) & (ii), the gas turbines would more likely have been LM 2500s than GT 35s, and under scenarios (iii) and (iv) the gas turbines would have been LM5000s rather than RB211-24Gs. Mr Fogg also expresses the view in his Supplemental Report that if the compression specification under the ASMS was as set out in the compression deviation the aft deck extension area would have been approximately 715 m².
103. Petromec's position is: (i) the compression specification set out in the compression deviation is what the ASMS called for; it was open to Petrobras to specify a different compression arrangement and to agree a variation in respect thereof, but until this occurred (and it never did), the compression deviation held sway; and (ii) the compression system specified in the compression deviation would have occupied the space shown in a drawing produced by its expert, Mr Utley, a turbo machinery engineer, scaled up from a drawing of 23 December 1996 produced by OFD and labelled "Base Case". On this basis, the compression trains would run port/starboard and require a deck extension of circa 28.7m x 13m starboard-rear quarter plus 27.5m x 8.25m port-rear quarter – totalling 600m².
104. I have accepted the correctness of position (i) when dealing with Issue 1. The first question is therefore whether the deck extension would have been 715 m² or 600 m² . Petrobras submitted that Mr Fogg's figure should be preferred because: (i) Mr Utley had "scaled up" from the Base Case drawing, which he accepted was a "non-preferred option"; (ii) the Base Case drawing showed a concept design which took no account of changes to the system which (as Mr Utley accepted) would have inevitably occurred during detailed design; and (iii) Mr Fogg had done the design work that accounted for his larger figure of 715 m² .
105. Although Mr Fogg has indeed done some design work, this is based on the existing compression train being modified which is not part of the specification contained in the compression deviation. Further, his figure is not based on a re-engineering of South Marlim but results from working back from the Roncador layout that accommodated 3 x 2.4 million compression systems powered by LM2500 turbines and is on the mistaken basis that the LM2500 turbine was smaller than the GT35 turbine, when the reverse was the case. For these reasons I prefer Mr Utley's figure which is based on a drawing produced specifically for South Marlim and showing the very compression systems identified in the compression deviation.
106. Turning to the remaining question posed by Issue 2, the Base Case drawing shows a transverse piperack running port/starboard to the right of the existing turbine. It inevitably follows that if the compression system required under the ASMS is that set out in the compression deviation, that pipe rack would not have had to be moved but would have been installed as shown in the Base Case drawing. There was a dispute as to whether the piperack would have had to be moved in the case of Mr Fogg's four scenarios, but given my answer to Issue 1, it is unnecessary to deal with this question.

Issue 4

To what extent would the existing cooling arrangements have required upgrading for South Marlim? How did that differ from the cooling arrangements required for Roncador?

107. This issue has been agreed by Mr Fogg and Mr Utley, see Item B4 in their joint memorandum. It is accordingly agreed that if P 36 had to be designed for South Marlim for either 3 x 50% trains (each capable of processing 2 million m³/day) or 2 x 100% trains (each capable of processing 4 million m³/day), additional seawater lift pump capacity would be required whereas, if the platform had to be designed for one new 2 million m³/day train plus the existing compressor, no additional lift pump capacity would have been necessary. It is also common ground that each new compressor would have required three new discharge coolers.

Issue 5

In relation to ascertaining the cost that Petromec might reasonably have incurred in upgrading the Vessel for South Marlim in accordance with the Original South Marlim Specification is the cost to be evaluated by reference to the cheapest contract-compliant notional South Marlim rig, as Petromec contends, or the design which was most likely to have been adopted, as Petrobras contends?

108. This was one of the issues ordered to be determined by Cooke J but he declined to do so on the ground that the question was fact-sensitive and ought to be decided by the trial judge on the evidence presented at trial. Things have moved on since the judgement of Cooke J, in particular the parties have served detailed Scott Schedules, but no concrete examples of how this issue arises in practice have been adduced. In these circumstances I do not think it wise or appropriate to attempt to determine this issue. Instead, it should be determined by the trial judge or at a further pre-trial hearing where the court is given ample detail as to how the issue arises in practice.

Issues 6 and 7

Issue 6

When did Petrobras' obligation to pay sums under clause 12 of the Supervision Agreement fall due?

Issue 7

Is Petromec entitled to recover from Petrobras the interest it has been ordered to pay on sums advanced under the DPI:

i) Under clause 12 of the Supervision Agreement;

ii) As damages for failure to pay sums due to Petromec in breach of clause 12 of the Supervision Agreement; and/or

iii) In the Court's discretion?

109. By way of background it needs to be stated that the DPI was entered into between Petromec and Brasoil on 21 May 1999 at a time when Petromec was experiencing cash flow difficulties that had begun in 1998. Between 21 January 1999 and 6 April 1999, Petrobras had advanced weekly payments of US$1.5 million. Under the DPI, Petrobras through Brasoil lent in excess of US$50 million to Petromec at a rate of 14.25% p.a. by making payments direct to subcontractors and suppliers on the basis that it would recover the sums lent by setting them off against amounts due to Petromec under variation orders, with sums not so recovered being paid on specified dates out of instalments of charter hire. In the proceedings tried by Moore-Bick J, judgement was awarded against Petromec under the DPI for US$56,457,788.08 by way of principal and US$53,913,708.27 by way of interest. In the underlying proceedings, Petromec seeks to recover the interest it was ordered to pay on three different bases: (i) the DPI interest is a "reasonable extra cost" of the Roncador upgrade under clause 12 of the Supervision Agreement; (ii) as damages for the failure by Petrobras/Brasoil to make payments under clause 12 when they should have been; and (iii) as discretionary interest pursuant to statute.
110. Petromec submitted that Issue 6 does not arise because it does not pursue its claim for interest as damages but Petrobras contended that it is not clear whether Petromec intends to pursue its pleaded case that the additional costs referred to in clauses 12.1 and 12.2 become payable on the production by it of evidence of expenditure and Petrobras being satisfied that such expenditure was reasonable and properly incurred.
111. Petrobras further submitted in its closing oral submissions that Issue 6 goes also to the question whether in fact Petromec could say that it should not be required to pay interest under the DPI at a time when in truth it was only paying money because it had done extra work for which it had not been paid. Petrobras also argued that Issue 7 should be left open because: (i) it is common ground that the Court cannot answer the question why Petromec had to borrow money originally: was it necessary to do so because of the Roncador upgrade; and (ii) there is substantial material which is not before the court which has a bearing on the question whether Petromec did not repay the DPI loan in 2001 because it actually thought that they were still owed money under clause 12.
112. In my judgement, for the reasons advanced by Petrobras, the Court ought not to embark on the determination of either Issue 6 or Issue 7. Those issues will therefore remain open.

Note 1   In his oral evidence he said he was on the same arrangement as he disclosed in evidence in 2003, namely, a fee of 1.25% of revenue, but in a letter to the Claimant’s solicitors sent after he had given evidence and dated 18 May 2011, he stated that he had mistakenly mis-described the arrangement: instead of being entitled to 1.25% of revenue (ie charter hire) he was entitled under an oral agreement to 1.25% of all sums paid by Petrobras to Petromec, plus a possible success fee.    [Back]

Note 2   It is common ground that this word was misspelt and that the intended word was “draw”.    [Back]