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INTERNATIONAL CENTRE FOR SETTLEMENT OF INVESTMENT DISPUTES
WASHINGTON, D.C.

In the arbitration proceedings between

NIKO RESOURCES (BANGLADESH) LTD.
(Claimant)

and

BANGLADESH PETROLEUM EXPLORATION & PRODUCTION COMPANY LIMITED (“BAPEX”)
(Second Respondent)

BANGLADESH OIL GAS AND MINERAL CORPORATION (“PETROBANGLA”)
(Third Respondent)

(jointly referred to as Respondents)

ICSID Case No. ARB/10/11
and
ICSID Case No. ARB/10/18

DECISION ON LIABILITY

Members of the Tribunals
Mr Michael E. Schneider, President
Professor Campbell McLachlan QC
Professor Jan Paulsson

Secretary of the Tribunals
Ms Frauke Nitschke

Date of Decision: 28 February 2020

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GLOSSARY AND ABBREVIATIONS

(see also Section 8.1)

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1. INTRODUCTION

1. This is the sixth decision by the two Tribunals, referred to as “the Tribunal”, in the two proceedings brought by Niko Resources (Bangladesh) Ltd. (Niko), the Claimant, against the Bangladesh Petroleum & Production Company, Limited (BAPEX), the Second Respondent, and Bangladesh Oil Gas and Mineral Corporation, the Third Respondent (Petrobangla), the two being hereinafter referred to as “the Respondents”; with respect to the First Respondent, the Government of Bangladesh, the Tribunal decided that it did not have jurisdiction.

2. The proceedings relate to a Joint Venture Agreement for the Development and Production of Petroleum from the Marginal/Abandoned Chattak and Feni fields of 16 October 2003 between BAPEX and Niko (the JVA) and a Gas Purchase and Sale Agreement for gas from the Feni field of 27 December 2008 between Niko/BAPEX Joint Venture and Petrobangla (the GPSA).

3. The present decision concerns specifically the liability of Niko for the blowout that occurred on 7 January 2005 during Niko's drilling in the Chattak field and a second blowout that occurred on 24 June 2005 during the drilling of the first relief well that was intended to extinguish the first blowout.

4. Following Legal Notice of 27 May 2008, Petrobangla and the Government of Bangladesh commenced on 15 June 2008 legal action in the Court of District Judge, Dhaka, against Niko and others, seeking compensation on the order of Tk746.5 crore as damages for the two blowouts (the Money Suit). To the knolwege of the Tribunal, these proceedings are still pending.

5. In the present ICSID arbitrations the Claimant seeks, among other relief, a declaration that it was not liable for damages in relation to the two blowouts and, in case liability were found, the determination of the amount of that liability (the Compensation Declaration).

6. The proceedings related to the liability for the two blowouts had advanced through Hearings in November 2015 and February 2016 and were ready for the Tribunal's decision when, on 25 March 2016, the Respondents raised a claim that both contracts had been obtained by corruption and

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that, consequently, no claims of the Claimant could be entertained in international arbitration (the Corruption Claim). The Tribunal suspended all proceedings other than that on the Corruption Claim. It heard evidence and argument with respect to that claim, ultimately dismissing it by a Decision of 25 February 2019.

7. The Tribunal has thereafter resumed its examination of Niko's liability and now renders its decision on that issue, reserving matters of quantum for the remaining stage of the two arbitrations.

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2. THE PARTIES AND THE ARBITRAL TRIBUNAL

2.1 The Claimant

8. The Claimant in both cases is Niko Resources (Bangladesh) Ltd. It is a company incorporated under the laws of Barbados. The Claimant and its nationality were discussed in Section 5 of the Decision on Jurisdiction.

9. Since August 2013, the Claimant is represented in these arbitrations by

Mr Barton Legum and Ms Anne-Sophie Dufêtre
Dentons Europe LLP
5, boulevard Malesherbes
75008 Paris, France

and

Mr Gordon Tarnowsky, Q.C.
Dentons Canada LLP
850 – 2^nd Street SW
15^th Floor, Bankers Court
Calgary, Alberta T2P 0R8, Canada

and

Mr Rokanuddin Mahmud and Mr Mustafizur Rahman Khan
Delta Dahlia (level 8)
36, Kamal Ataturk Avenue
Banani, Dhaka 1213
People's Republic of Bangladesh.

During the initial phase of the proceedings up to the Decision on Jurisdiction, the Claimant was represented by

Mr Kenneth J. Warren QC, Mr James T. Eamon QC, Mr John R. Cusano and Ms Erin Runnalls
Gowlings
1400,700 - 2^nd Street S.W.
Calgary, Alberta
Canada T2P 4V5

and

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Mr Ajmalul Hossain QC
A. Hossain & Associates
3B Outer Circular Road
Maghbazar, Dhaka 1217
People's Republic of Bangladesh

2.2 The Respondents

10. The Respondents remaining in these arbitrations are

(a) Bangladesh Petroleum Exploration & Production Company Limited (“BAPEX”), the Second Respondent
and
(b) Bangladesh Oil Gas and Mineral Corporation (“Petrobangla"), the Third Respondent.¹

11. Petrobangla is a statutory corporation created by the Bangladesh Oil, Gas and Mineral Corporation Ordinance 1985.²

12. BAPEX is a wholly owned subsidiary of Petrobangla incorporated under the Bangladesh Companies Act 1994.³ By Notification issued on 8 June 2003 the Ministry of Power, Energy and Mineral Resources granted to BAPEX “complete administrative and financial freedom by the Government".⁴

13. The legal status of these two corporations and their relationship with the Government of Bangladesh was discussed in Sections 6 and 7 of the Decision on Jurisdiction.

14. While the Joint Venture partner of Niko is BAPEX and the case concerning liability essentially has been argued in the name of that company, the Tribunal continues to refer jointly to the Respondents, except where a specific identification of BAPEX appeared necessary.

¹ The sequence in which the three Respondents are presented is that adopted by the Claimant in the First Request for Arbitration, even though a different sequence was adopted in the Second Request for Arbitration. ↩
² Request for Arbitration, dated 16 June 2010 (RfA II), Attachment G. ↩
³ Hearing on Jurisdiction, HT 2011.10.13 (Day 1), page 42. ↩
⁴ Exhibit 2, Appendix B to Respondents' Counter-Memorial on Jurisdiction, 16 May 2011 (R-CMJ.1). ↩

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15. The Respondents are represented in these arbitrations by

Mr Md. Ruhul Amin and Mr Syed Ashfaquzzaman
Petrobangla
Petrocentre
3 Kawran Bazar C/A
Dhaka 1215, GPO Box 849
People's Republic of Bangladesh

and

Mr Md. Abdul Hannan
BAPEX
Level-6, BAPEX Bhabon
4 Kawran Bazar C/A
Dhaka 1215
People's Republic of Bangladesh

and

Mr Paul S. Reichler, Mr Derek C. Smith, and Ms Tafadzwa Pasipanodya
Foley Hoag LLP
1717 K Street NW
Washington, DC 20036
United States of America

16. Between June and July 2015, the Respondents' external counsel were

Mr Kay Kian Tan
Watson Farley & Williams (Thailand) Limited
Unit 902, 9th Floor
GPF Witthayu Tower B
93/1 Wireless Road
Patumwan,
10330 Bangkok
Thailand

17. Between 2011 and June 2015, the Respondents were represented in these proceedings by

Mr Luis Gonzalez Garcia and Ms Alison Macdonald
Matrix Chambers, Griffin Building, Gray's Inn
London WC1R 5LN
United Kingdom

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18. Between 2011 and December 2014, the Respondents were also represented in these proceedings by

Mr Tawfique Nawaz, Senior Advocate,
and Mr Mohammad Imtiaz Farooq,
Juris Counsel
59/C, Road #4
Banani, Dhaka 12 13
People's Republic of Bangladesh

2.3 The Arbitral Tribunal

19. The Arbitral Tribunal constituted on 20 December 2010, is composed of Professor Jan Paulsson, appointed by the Claimant, Professor Campbell McLachlan QC, appointed by the Respondents, and Mr Michael E. Schneider, President of the Tribunal, appointed per the agreement of the Parties.

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3. THE PROCEEDGINGS LEADING TO THE PRESENT DECISION

20. The present proceedings were started by two successive Requests for Arbitration against the two Respondents and the Government, one filed with the International Centre for Settlement of Investment Disputes (ICSID or the Centre) on 1 April 2010 (the First Request or RfA I) and registered as ARB/10/11; the other filed with ICSID on 16 June 2010 (the Second Request or RfA II) and registered as ARB/10/18. In these requests Niko sought an award for payment of the outstanding invoices for the gas delivered (the Payment Claim) and a declaration that it was not liable for damages in relation to the blowouts (the Compensation Declaration).

21. Because of some common features of the cases in these two requests, identical tribunals were formed in the two arbitrations and the proceedings were conducted together as agreed during the Joint First Session on 14 February 2011 in Geneva. While related, the disputes arising out of each of these contracts nevertheless raise very different issues. In addition to the substantive questions arising in the context of these disputes, a number of other issues arose during the course of the proceedings, in particular issues concerning the jurisdiction of the Tribunal, the interrelation of the present proceedings and proceedings before the courts of Bangladesh, and allegations of corruption. The Tribunal addressed these issues in subsequent stages and issued decisions on them.

22. A detailed account of the procedural history in the two arbitrations up to the Third Decision on the Payment Claim is set forth in the Decisions of 19 August 2013, 11 September 2014, 14 September 2015 and 16 May 2016. The subsequent procedural history concerned essentially the Respondents' allegations of corruption and was set out in the Tribunal's decision of 25 February 2019.

23. These accounts need not be repeated here. The Tribunal at this stage recapitulates only those parts of the past proceedings which are relevant for its present decision concerning the requested Compensation Declaration and specifically the Liability for the two blowouts in January and June 2005.

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3.1 The proceedings up to the Decision on Jurisdiction

24. The Claimant seeks a declaration that “Niko breached no obligation or law as concerns the two blowouts in 2005 at Chattak field and is not liable to BAPEX, its predecessors, assignors, successors or assigns”.⁵

25. The Joint First Session of the two Tribunals was preceded by a Preliminary Procedural Consultation. It was agreed that the two cases were to proceed in a concurrent manner and that the two Tribunals could issue their decisions in the two cases in a single instrument.

26. In the two arbitrations the three Respondents objected to the Tribunal's jurisdiction under the ICSID Convention. In a first phase of the arbitrations, the Tribunal ruled on their jurisdictional objections in a decision of 19 August 2013 (the Decision on Jurisdiction). The Tribunal held that it had jurisdiction with respect to the Claimant's claims against BAPEX and Petrobangla but not with respect to the Government, which was hence no longer a party to these arbitrations. The Tribunal refers to this decision for a detailed account of the initial phase of these arbitrations and the underlying facts.

27. Specifically, with respect to the Claimant's request for the Compensation Declaration and the liability for the blowouts, the Respondents had reserved at the Preliminary Procedural Consultation of 14 February 2011 the possibility of presenting a counter-claim for damage compensation related to the blowouts. In view of this possibility, the Respondents were not required to present in the Counter-Memorial on Jurisdiction for the Payment Claim any objections to jurisdiction with respect to the Claimant's Compensation Declaration. At that time, the Respondents did not avail themselves of the possibility of making such a counter-claim. The Claimant therefore specified in its Second Memorial on Jurisdiction of 30 June 2011, as required under the Preliminary Procedural Consultation and Procedural Order No. 1, that it continued to seek the Compensation Declaration and presented its position in respect to the corresponding request.

28. In the Procedural Consultation of 15 September 2011, the Respondents requested authorisation to file a submission setting out their objections to

⁵ Relief requested in successive submissions, last in its Post-Hearing Brief of 22 January 2016 (see below Section 4.1). ↩

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jurisdiction concerning the Compensation Declaration; they were authorized to do so by Procedural Order No 2 of 19 September 2011. On 28 September 2011 they submitted their Response to the Claimant's Presentation of its Position with Respect to the Request for the Compensation Declaration.⁶ They argued that the blowouts were not covered by the JVA and that the dispute over these blowouts “is not a contractual dispute under the JVA”.⁷ The Claimant replied on 10 October 2011, addressing the Respondents' arguments specific to the Compensation Declaration and arguing that the well blowouts were within the scope of the Arbitration Clause.⁸

29. In the Decision on Jurisdiction, the Tribunal held that it had jurisdiction also with respect to the Compensation Declaration. The Tribunal noted that the Arbitration Clause provided for arbitration of disputes “arising in connection with the performance or interpretation” of the JVA. It also noted that Article 26.2.4 required that Niko as the Operator must:

... conduct all Petroleum Operations in a diligent, conscientious and workmanlike manner, in accordance with the applicable law, this JVA and generally accepted standards of international Petroleum industry designed to achieve efficient and safe development and production of Petroleum and to maximize the ultimate economic recovery of Petroleum from the JVA Area.

30. This contractual provision concerning Niko's performance as the Operator included its obligation to conduct Petroleum Operations “in accordance with the applicable law”. The Tribunal held that its jurisdiction ratione materiae included not only compliance with specific contractual obligations but had to be understood in a wider sense including

sources of liability other than the agreement itself. The question what these sources are and which obligations, contractual or other, fall to be considered concerns the substance of the dispute and is not determined at this stage of the arbitration.⁹

⁶ Referred to as R-CMJ.2 ↩
⁷ R-CMJ.2, title at page 7. ↩
⁸ Claimant's Reply to the Respondents' Response with respect to the Compensation Declaration, 10 October 2011 (C-MJ.3). ↩
⁹ Decision on Jurisdiction, 19 August 2013, paragraph 505. ↩

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31. Thereafter, the proceedings were divided into two tracks, running partly in parallel, one dealing with the Payment Claim, the other with the Compensation Declaration. The proceedings on the Payment Claim are summarized in the Tribunal's respective decisions of 11 September 2014 and 14 September 2015 and need not be repeated here.

3.2 The Proceedings on Liability

32. Following its Decision on Jurisdiction the Tribunal consulted the Parties with respect to the organisation of the further proceedings. It then gave directions on 19 September 2013 and fixed the Procedural Calendar, including the proceedings concerning the Compensation Declaration. The directions then were confirmed in Procedural Order No 3 of 15 November 2013.

3.2.1 The Parties' initial submissions

33. The Claimant was invited as a first step to file a short initial submission

(i) specifying the scope of the liability concerning the two blowouts which it wishes the Declaration to cover and
(ii) stating whether and by whom any such liability has been invoked.

34. The Claimant addressed these points in its Memorial Concerning the Compensation Declaration (C-CD1), which it produced on 27 September 2013, together with factual exhibits (C-1 to C-6) and legal authorities (CLA-1 to CLA-2). The Claimant specified that it was seeking, in particular, an award that it was “not liable to BAPEX, its predecessors, assignors, successors or assigns”, and, in the alternative, that the Tribunal fix the amount of such liability. The Claimant also specified that it was seeking a declaration that Niko is entitled to compensation for the damages caused by the Money Suit. The details of the requested relief are reproduced below in Section 4.

35. The Procedural Calendar had identified as the next step concerning the Compensation Declaration the submission of BAPEX's Counter-Memorial concerning this declaration (B-CD1), to be filed by 30 January 2014. The Tribunal gave the following directions on 19 September 2013 and confirmed them by Procedural Order No 3 of 15 November 2013:

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BAPEX shall file a First Memorial addressing the scope of liability to which the Declaration may extend and the particulars of the claims concerning Niko's alleged liability for the two blow-outs and damage allegedly caused by Niko, including its quantum. If BAPEX intends to rely on expert reports these reports must be included in the First Memorial. If BAPEX relies on the testimony of witnesses, it must include short written statements setting out the essential points of this testimony. Any documentary evidence on which BAPEX intends to rely and which has not yet been produced, must accompany this memorial.

36. BAPEX filed its Counter-Memorial on 30 January 2014, accompanied by exhibits (R-1 to R-6), legal authorities (RLA-1 to RLA-17), and an annex entitled “Investigations into the blowouts and their consequences” together with appendices 1-5.

37. In this submission, BAPEX addressed the Tribunal's decision on jurisdiction, the factual background of the two blowouts, and BAPEX's understanding of its obligations under the JVA. BAPEX did however not discuss the Claimant's liability, nor did it file any fact witness testimony or expert opinions. It requested the relief reproduced below in Section 4.2, seeking a declaration that there was no dispute between BAPEX and Niko and, in the alternative, that BAPEX has no obligations to indemnify Nico for any damage resulting from the Money Suit.

38. Further to the Procedural Timetable, the Claimant filed its Reply on 29 May 2014 (C-CD2). In its Reply, the Claimant discussed at length the factual, technical and legal issues relating to the two blowouts and responded to BAPEX's Counter-Memorial. The Reply was supported by exhibits (C-7 to C-91) and legal authorities (CLA-3 to CLA-8), as well as the witness statements of Brian Adolph, Randal Glaholt and William Hornaday, and expert reports of William Cline, Robert Kemp and John Wright. The Claimant repeated its request for relief as stated in its Memorial.

39. On 25 September 2014 BAPEX filed its Rejoinder (B-CD2). The Rejoinder was accompanied by exhibits (R-7 to R-13) and legal authorities (RLA-18 to RLA-31).

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40. BAPEX stated in this submission inter alia that it “ha[d] never invoked Niko's liability for the two blowouts” and that “this case involves no dispute between Niko and BAPEX concerning the blowouts”. BAPEX further declared that it had no involvement in the findings of the Committee Reports which dealt with the blowouts and added that “it has little or nothing to add in response to Niko's description of the facts”. As in the Counter-Memorial, BAPEX did not discuss the factual and legal issues related to the question whether Niko breached any obligation or law and whether Niko has any liability with respect to the blowouts. No witness testimony or expert opinions were attached to BAPEX's submission.

3.2.2 Procedural Order No 7 and Appointment of the Tribunal's Expert

41. As a consequence of the position stated in the Respondents' Rejoinder, the Claimant's argument and evidence in support of its request for a Compensation Declaration had not been contested by the Respondents in any substantive manner; at the same time BAPEX continued to request the Tribunal to dismiss the Claimant's request for a declaration of non-liability based on other grounds. In addition, neither party had identified in its written pleadings with specificity the applicable laws and standards based on which the Claimant's non-liability under the JVA or otherwise was to be assessed by the Tribunal.

42. Against this background, the Tribunal issued on 17 October 2014 Procedural Order No 7, in which it dealt with this situation in the following terms:

The question whether Niko complied with these obligations under the JVA clearly must be determined according to the procedure prescribed by the JVA itself, i.e. ICSID arbitration. The Tribunals considered this matter in their Decision on Jurisdiction under the heading “Jurisdiction ratione materiae” (section 10.2) which may also be referred to as subject matter jurisdiction. The Tribunals found that they have jurisdiction to decide whether Niko is liable under the JVA for the two blowouts (paragraph 497). In addition the Tribunals also found that “it may well be possible that [they] can make findings concerning liability on grounds other than the JVA” (paragraph 506), but left the question open for further consideration.

[...]

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In these circumstances, the Tribunals must continue with the examination of Niko's request for the Compensation Declaration and the issues which are raised by that request. In particular, they must examine the question whether Niko is liable for the two blow-outs and the damage caused by them.

Given the technical nature and the complexity of many of the issues arising in this context, the Tribunals do not wish to proceed in the absence of a critical review of the technical issues arising from the Claimant's case. In the circumstances the Tribunals require the opinion of an independent expert or, given the diversity of the relevant substance matters, several experts.

43. The Tribunal identified three subject matter areas in which it intended to seek assistance in examining the evidence put forth by the Claimant in the absence of experts produced by the Respondents:

(a) the well design and drilling of the Chattak-2 well and the design and execution of the relief well operation for Chattak-2A;

(b) the quantum of gas lost as a result of the Chattak-2 and Chattak-2A blowouts; and

(c) the air quality and greenhouse gas emissions due to these incidents and resulting monetary loss or damage.

44. By Procedural Order No 7, the Tribunal invited the Parties jointly to propose the names of experts in these three subject matter areas, and informed the Parties that the dates for the merits hearing on the Compensation Declaration, originally scheduled to be held in November 2014, were vacated.

45. Procedural Order No 7 also allowed the Respondents one final opportunity to submit within three months a written, substantive submission in the Compensation Declaration proceedings. The Tribunal specified that in the event the Respondents availed themselves of this opportunity, the Tribunal would reconsider its rulings in Procedural Order No. 7. The Respondents however did not seize this opportunity.

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46. The Parties were subsequently unable to jointly propose the names of independent experts for the subject matter areas identified by the Tribunal. On 7 November 2014, the Tribunal issued Procedural Order No 8, providing directions to the Parties regarding matters the Tribunal wished to discuss during a procedural consultation which included, inter alia, the procedure designed to elicit the contributions of the Tribunal appointed expert, as well as the further procedure in relation to the Compensation Declaration.

47. The Procedural Consultation took place on 12 November 2014 by telephone and video conference during which the President discussed with the Parties inter alia: (i) the expert appointment procedure, (ii) the expert(s)' mandate(s), (iii) the documents to be reviewed by the expert(s), (iv) communications between the expert(s), the Parties and the Claimant's experts, (v) the expert(s)’s reporting obligations, and (vi) the conduct of the expert(s)'s examination during the oral procedure. The scope of a hearing on the Compensation Declaration and possible hearing dates were also discussed.

48. As previously indicated by the Tribunal in Procedural Order No. 7 and as discussed with the Parties during the Procedural Consultations, the Tribunal intended to seek assistance from the International Centre for Expertise of the International Chamber of Commerce (ICC) to identify a pool of qualified experts. A draft request for proposals addressed to the ICC was sent to the Parties in November 2014 for their comments. Taking the Parties' observations into account, a finalized request for proposals of experts in the three subject matter areas was sent to the ICC Center for Expertise on 4 December 2014.

49. On 22 January 2015, the ICC Centre for Expertise provided the Tribunal with the names of nine experts. On 26 January 2015, the Tribunal invited the Parties to indicate whether any of the experts so proposed should be excluded from the Tribunal's consideration, requesting the Parties further to rank the remaining experts according to each party's preference.

50. Having received these rankings, the Tribunal informed the Parties by letter of 31 March 2015 that it had decided to select the following three experts from the persons proposed by the ICC:

(i) Gas Well and Relief Well Design and Execution: Mr Leo William Abel;

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(ii) Quantification of Gas Lost: Mr Keith Brian Masters; and
(iii) Air Emissions: Mr Ian Wallis.

51. Taking into account the discussions with the Parties during the November 2014 Procedural Consultation and subsequent correspondence, the Tribunal also provided the Parties with draft terms of reference for each expert for the Parties' comments. In terms of procedure, the Tribunal proposed that each expert prepare a written report which would be sent to the Parties for their observations, allowing each party subsequently, in a second round, to comment on the other party's observations. The experts would be available for examination during the evidentiary hearing. By the same letter, the Tribunal provided the Parties with an estimate of each expert's budget to complete the anticipated work and attend a hearing. The Parties were given an opportunity to comment on (i) the draft terms of reference, (ii) the further expert procedure, and (iii) were invited to propose mutually agreeable hearing dates for a 6-day hearing during the month of November 2015.

52. Having received the Parties' comments, the terms of reference for each of the three experts were finalized on 14 April 2015, and sent to each expert. Each of the three experts subsequently signed the terms of reference, provided a disclosure statement and was given access to the documents which the Parties and the Tribunal had agreed should be made available to each of them, i.e. the Parties' pleadings, the Committee Reports and the expert reports and witness statements filed by the Claimant in relation to the Compensation Declaration proceedings.

53. In accordance with the procedural calendar for the expert procedure as agreed between the Parties and the Tribunal, the three experts appointed by the Tribunal were given 5 weeks to prepare their reports. The reports so prepared, were provided to the Parties on 10 June 2015. The Parties were given until 15 July 2015 to file their observations.

3.2.3 Appointment of New Counsel by the Respondents

54. By letters of 28 May 2015, 8 June 2015 and 15 June 2015, the Respondents informed the Secretariat that Ms Alison Macdonald and Mr Luis Gonzalez Garcia no longer represented BAPEX and Petrobangla in these arbitrations and that the Respondents would thenceforth be represented by Mr Syed Ashfaquzzaman of Petrobangla, Mr Md.

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Atiquzzaman of BAPEX and Mr Kay Kian Tan of Watson Farley & Williams (Thailand) Limited.

55. On 9 July 2015, the Respondents informed the Secretariat that Mr Kay Kian Tan no longer represented BAPEX and Petrobangla in these proceedings. They informed the Secretariat that Messrs Paul S. Reichler and Derek C. Smith of Foley Hoag LLP would be added as external counsel for BAPEX and Petrobangla.

3.2.4 Continuation of the Tribunal Experts' procedure

56. On 9 July 2015 the Respondents' newly appointed counsel requested an extension of the 15 July 2015 deadline for the Parties to file observations on the three reports prepared by the Tribunal appointed experts. By the same letter, they also indicated that they intended to transmit together with their observations their own expert evidence.

57. In response, the Tribunal invited the Respondents to clarify the scope of their intended submissions on the three reports prepared by the Tribunal experts, while also recalling the scope of the Parties'observations as previously determined. The Tribunal further invited the Claimant to comment on the Respondents' request. The Tribunal subsequently received the Respondents' clarification on 17 July 2015 and the Claimant's comments on 27 July 2015.

58. Having considered the Parties' 17 and 27 July 2015 letters, the Tribunal issued on 19 August 2015 Procedural Order No. 11,¹⁰ extending the time period for the Parties'observations on the three expert reports to 31 August 2015. At the same time, the Tribunal recalled the relevant procedural history which preceded the Respondents'9 July 2015 request,¹¹ specifically referencing the multiple counsel changes, the many opportunities afforded to the Respondents to file expert evidence in relation to the Compensation Declaration proceedings, and concluding that the Tribunal did not see sufficient justification for revising the previously agreed procedure and its scope as requested by the Respondents in their 9 an 17 July 2015 letters.

¹⁰ Procedural Order Nos. 9 and 10 dealt with matters related to the Payment Claim proceedings. ↩
¹¹ Procedural Order No. 11, paragraphs. B.3 to B.15. ↩

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59. The Tribunal also explained that the expert procedure had been added to the procedural calendar to seek a critical review of the technical issues raised by the Claimant's case through independent experts, particularly given the absence of a substantive presentation by the Respondents. The Tribunal pointed out that the expert phase was designed in the interest of ensuring that the Tribunal heard “more than one side of the argument and thus afforded an additional protection to the Respondents, even in the absence of their own argument and evidence”. With regard to the scope of the Parties' observations on the three expert reports, the Tribunal ruled that the Parties' observations on these three reports may be accompanied by observations of the Parties' own experts, provided that these observations remain within the limits of each expert's terms of reference and within the limits of their report.

60. On 31 August 2015, both Parties filed their Comments on the Reports of the Tribunal Experts (C-CD3 and B-CD3). The Respondents' submission was accompanied by observations from Dr Neal Adams, Mr Ian Borthwick and Mr Parthasarathi Bandyopadhyay.

61. On 30 September 2015, each party filed Responsive Comments on the other Party's 31 August 2015 observations (C-CD4 and B-CD5).

3.2.5 BAPEX's Provisional Measures Request and subsequent withdrawal of evidence and redaction of expert opinions

62. On 13 August 2015, BAPEX filed a request for provisional measures (B-CD/PM), together with one new exhibit (R-14), two video recordings (Exhibits R-14 and R-14 B) and two legal authorities (RLA-32 and RLA-33). The request referred to gas seepages in the area of the Chattak 2 Well and asserted that they were due to the failure of the Second Relief Well to halt the flow of gas caused by the blowouts; produced the Chattak Present Seepage Report of July 2015 and two videos showing gas seepages;¹² asserted in particular health risks to the local population and relied on Niko's obligations under the JVA; and requested provisional measures in the following terms:

¹² Exhibits R-14, R-14A and R-14B. ↩

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(i) that Niko provide for the immediate relocation as needed of the people affected by a continued flow of gas from the Chattak reservoir, and

(ii) that Niko take all necessary steps, in a safe and prudent manner under the supervision of an internationally recognized shallow gas well control specialist approved by BAPEX, to stop the flow of leaking gas caused by the 2005 blow-outs.

63. Following an invitation by the Tribunal, the Claimant filed its Opposition to BAPEX's Request for Provisional Measures on 21 August 2015 (C-CD/PM). The Claimant objected that there was nothing either provisional or urgent about the request, which in the Claimant's view was in fact a “counterclaim for specific performance”. The Claimant asserted that the gas seepages existed before Niko undertook any drilling and that, in any event, BAPEX knew about them long before. According to the Claimant, BAPEX had prevented Niko from taking measures to reduce the seepages. The Claimant requested the Tribunal to reject the request and to order that the three exhibits produced with the request “shall not be considered in the merits of the Compensation Declaration”.

64. On 4 September 2015, BAPEX withdrew its 13 August 2015 request for provisional measures without any explanations.

65. The Claimant took note of the withdrawal on 10 September 2015. It reiterated its position that the new evidence filed by the Respondents with the request for provisional measures be excluded from consideration. It further asserted that the Respondents' comments on the report of the Tribunal appointed Experts had relied on new evidence and expert opinion and that the comments set out “an entirely new case theory”. The Claimant concluded that its objections to the new evidence also extended “to the merits submission based on such experts".

66. In a letter of 10 September 2015, BAPEX commented on certain points of Procedural Order No 11 concerning the organisation of the hearing, in particular the timing of legal argument and the examination of the experts. The letter referred to the Procedural Consultation of 12 November 2014 and statements by the President that the hearing would include “legal points that have been raised” and would allow “argument about the legal issues which both parties have raised”. The letter requested inter alia that

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three days be set aside at the hearing for legal argument and made reference to “arguments that BAPEX had not developed before on legal issues raised by Niko” and asserted that it was “common for parties to expand on and make new legal arguments at the hearing”.

67. On 17 September 2015, the Claimant addressed certain issues concerning the Pre-Hearing Conference and the organisation of the November 2015 Hearing. The Claimant objected to the Respondents' announcement of new legal argument and stated that it did not accept “that BAPEX should be permitted to present at the hearing new legal arguments for the first time”.

68. Commenting on the Claimant's Opposition, BAPEX wrote on 17 September 2015 to express agreement with the Claimant insofar as the issues relating to gas seepage “do not relate to the subject matter of the dispute” and “are outside the jurisdiction of the Tribunal”. BAPEX announced that it withdrew Exhibits R.14, R-14A and R-14B and “those aspects of its arguments and expert observations relating to damage caused by gas seepage". BAPEX declared that it withdrew the Observations of Mr Bandyopadhyay and that it struck “any reference to the continued seepage from the Observations of Dr Neal Adams and Dr Ian Borthwick”. ВАРЕХ informed the Tribunal that it had filed a Notice of Dispute with Niko and its parent company as required by the JVA “in order to pursue its claims arising from gas seepage caused by Niko's blowouts at the Chattak field after 9 October 2005”; a copy of the that Notice was attached to BAPEX's letter.

69. With their letter of 17 September 2015, the Respondents submitted redacted versions of the Observations of Dr Adams and Dr Borthwick; and on 22 October 2015 a redacted version of their comments of 31 August 2015 on the Reports of the Tribunal Experts.

70. By letter of 23 October 2015, the Tribunal communicated its position on the Respondents' withdrawal and redactions, stating “documentary evidence, once produced in the arbitration, cannot be withdrawn from the record without the consent of the Parties and the Tribunal. This also applies to reports that have been produced in support of certain factual allegation, even if the party having made these allegations no longer wishes to rely on” the allegations or wishes to redact the report. The Tribunal decided that

all submissions of the Respondents, including expert reports and documentary evidence remain on the record in an unredacted form.

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3.2.6 The Ministers’ Meeting Request and scheduling of the Pre-Hearing Conference

71. In Procedural Order No 11, the Tribunal announced that it envisaged to hold a procedural consultation during the week of 19 October 2015 prior to the hearing that had been fixed for the period 2 to 6 November 2015. The Parties jointly agreed to request that the Pre-Hearing Conference be held at an earlier date and, if it were more convenient for the Members of the Tribunal, “the President may conduct the pre-hearing conference alone, on behalf of the Tribunals”.¹³

72. During the course of the exchanges in preparation of this consultation and the hearing, counsel for the Respondents wrote on 10 September 2015 conveying a message from the Honourable Nasrul Hamid MP, State Minster, Ministry of Power, Energy and Mineral Resources and the Honourable Anisul Huq, Minster for Law, Justice and Parliamentary Affairs:

While the Government of Bangladesh is not a party to the proceedings instituted by Niko against BAPEX, the decision of the Tribunal will inevitably affect the interests of the Government. The Government thus has an interest in the conduct and outcome of these proceedings. In accordance with this interest, the Honorable Ministers respectfully request that the Tribunal hold the procedural consultation in person in London the week of 5 October 2015 in order that they be able to attend and address the Tribunal.

73. The requested date for such a meeting was subsequently modified to a date during the week of 10 October 2015. The Claimant responded, noting that, since the Government was not a party to the proceedings, the presence of the Ministers was admissible only if no party objects. “In deference to the position that they hold, however, Niko does not object to the Ministers being present as observers”. The Claimant added:

The ICSID rules permit the Tribunals to hear only “the parties, their agents, counsel and advocates, and ... witnesses and experts.” While the rules require these persons to respond to questions from the

¹³ Claimant's letter of 17 September 2015, presenting organisational points on which the Claimant and BAPEX had agreed and those on which they had not agreed. BAPEX confirmed its agreement with the joint proposal by email of 18 September 2015. ↩

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Tribunals, they impose no such obligation on non-parties. BAPEX has not designated the Ministers as its agents, counsel or advocates. Absent such a designation, the rules provide no scope for non-parties such as these to address the Tribunals. The Ministers' request that they address the Tribunals must be denied on the current record.

74. On 21 September 2015, the Tribunal proposed a number of solutions for holding the pre-hearing conference in some form before the week of 19 October, but had to inform the Parties that the Members of the Tribunal were unable to find a date prior to the week of 19 October 2015 at which all three could be available for a pre-hearing conference. On 22 September 2016, BAPEX withdrew the request, “taking into account the proximity of the hearing and the difficulty in scheduling an in-person pre-hearing conference".

3.2.7 BAPEX's new procedural requests and the expansion of the case

75. By a submission of 25 September 2015 (B-CD4), BAPEX requested an opportunity to file an additional pleading and to present counter-claims.¹⁴ BAPEX asserted that its “prior counsel made grave errors in judgment and material omissions that resulted in the deprivation of BAPEX's right to be heard and an inequality of arms”. According to BАРЕХ. previous counsel “failed to understand the nature of these proceedings and the consequences of his actions on the rights of his clients”.

76. Relying on Article 45 of the ICSID Convention, BAPEX argued that it thus found itself in the position of a party that has failed “to appear or to present his case at any stage of the proceedings”. BAPEX recognised that, in Procedural Order No 7, the Tribunal had offered BAPEX an opportunity to request within a period of three months from the notification of that Procedural Order, another occasion to submit a substantive reply to the Claimant's request for relief in the Compensation Declaration; but BAPEX had failed to seize this opportunity. In the letter of 25 September 2015, BAPEX stated that the “circumstances have now changed” and, quoting Schreuer, the “hitherto uncooperative party is about to cooperate”.¹⁵ BAPEX requested the Tribunal to “restore party equality of arms and

¹⁴ BAPEX responsive Comments on the Tribunal-Appointed Expert Reports, 30 September 2015 (B-CD.5). ↩
¹⁵ BAPEX's letter of 25 September 2015, page 11, quoting Schreuer et al, The ICSID Convention: a Commentary, paragraph 10, page 711. ↩

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BAPEX's right to be heard,” and to provide BAPEX with an opportunity to file an additional pleading and present counter-claims.

77. On 28 September 2015, the Tribunal wrote to the Parties, explaining that, from the submissions, expert reports and recent correspondence, it had concluded that the central issue to be addressed was the scope of the arbitrations, an issue that also impacted the November 2015 Hearing and a number of related issues. The Tribunal noted that these communications “have introduced aspects of possible liability of the Claimant which seem to exceed substantially the scope resulting from the request as initially defined." Moreover, BAPEX's Notice of Dispute of 17 September 2015, concerning separate but possibly related claims, and its request to file an additional submission and counter-claims, made it “critical for the further conduct of the present proceedings that their scope be clearly defined and, if required, be distinguished from actual or possible other proceedings concerning the same or related substance matters”.

78. The Tribunal therefore requested the Claimant to “clarify with precision the declaration it seeks in these proceedings and to specify whether any of the issues arising from the submissions and requests by BAPEX and its experts do not in its view fall within the scope of the present arbitrations.”

79. On 30 September 2015, the Claimant confirmed the requests set forth in its 2013 Memorial, i.e. that it was seeking a broad declaration in the Compensation Declaration proceedings, asking the Tribunal to

a. Declar[e] that Niko breached no obligation or law as concerns the two blowouts in 2005 at Chattak field and is not liable to BAPEX, its predecessors, assignors, successors or assigns;

b. In the alternative, and in the event that the Tribunals find liability on the part of Niko, [fix] the amount of any compensation due for any damages to BAPEX, its predecessors, assignors, successors or assigns ...

3.2.8 The 1 October 2015 Pre-Hearing Conference and the “Full Scope of Liability Approach”

80. Further to the Parties' joint request of 17 September 2015, the date for the Pre-Hearing Conference was fixed as 1 October 2015, and was conducted

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as a telephone conference between the Parties and the President on behalf of the Tribunal.

81. The telephone conference was recorded, and sound recordings were subsequently provided to the Parties and the Members of the Tribunal. On the day following the telephone conference and given the tight schedule for the procedure leading up to the November 2015 Hearing, the President summarised the procedural choice that Claimant had to make. The Tribunal prepared Summary Minutes of this conference call which were distributed to the Parties on 5 October 2015. The Respondents made comments, in letters dated 6 and 19 October 2015, on the President's summary and the Summary Minutes and objected to certain passages thereof.

82. Considering recent developments and procedural requests, the Tribunal noted at the Pre-Hearing Conference that

The Respondents agreed that they had ample opportunity to present their position during the course of these arbitrations. They also accepted that the recent submissions and their expert reports exceeded the scope set by Procedural Order No 11.¹⁶

83. Concerning the scope of the case to be decided, the Claimant confirmed that it sought a “broad declaration”, in the terms quoted above. The Claimant accepted that aspects of its potential liability included matters which had been newly introduced into the arbitrations by recent submissions and expert observations filed by the Respondents.

84. Against this background, the option was put to the Claimant whether the Tribunal was to determine the Claimant's non-liability

(i) within the limited scope in which it had been pleaded by the Claimant thus far (this approach was then referred to as “the base approach”) or
(ii) by extending the proceedings to the full scope of possible liability as it had been described in BAPEX's submissions of September 2015

¹⁶ Summary Minutes of the Pre-Hearing Conference held on 1 October 2015, paragraph 4; in its letter of 19 October 2015, BAPEX contested that its submissions and experts reports exceeded the scope of Procedural Order No 11 and asserted it “understood at the time it filed its Comments on the Reports of the Tribunal Experts that it did so in accordance with the Tribunal's instructions in Procedural Order No 11". ↩

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(this approach was then referred to as the “alternative approach” and the "Full Scope of Liability Approach”).

85. It was pointed out that applying the “base approach” would permit the Compensation Declaration proceedings to proceed as envisioned by Procedural Order No. 3 and the November 2015 Hearing dates would be preserved. No additional evidence would be admitted, and the hearing would be limited to the examination of witnesses and experts within the confines previously identified. The resulting decision by the Tribunal would thus be limited considering the requested declaration of non-liability in these limits. The “alternative approach”, dealing with the full scope of possible liability would require a further round of submissions, as BAPEX had requested. BAPEX had stated that it required five months to prepare its full submission, including the quantification of the damage resulting from the two blowouts and its counter-claim. Adopting this request would result in the postponement of the November 2015 hearing.

86. The President therefore examined with the Parties the possibility of bifurcating the proceedings on the Compensation Declaration. The alternatives were summarised as follows:

If the proceedings in a first phase would be limited to the question of possible breaches of the obligations and the law in relation to the blow-outs, the November 2015 hearing could be preserved, the Claimant could be given an opportunity to respond to the newly alleged breaches, including new evidence and expert explanations, with possible responses by BAPEX at the opening of the hearing.

[...]

Determining the damage possibly flowing from any breaches determined by the Tribunals and the counter-claim would then be considered in a further phase of the arbitration. At the present stage, BAPEX declared that it was not in a position to substantiate its counter-claim.¹⁷

¹⁷ Summary Minutes of the Pre-Hearing Conference held on 1 October 2015, paragraphs 12 and 14. ↩

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87. The discussion on this alternative approach was concluded by the following observations, as recorded in the Summary Minutes:

Recognising that the need for these modifications to the procedure was the result of their failure to make their submissions in due time, the Respondents undertook to make every reasonable effort in this alternative approach, to limit the disruptive effects of these modifications. They stated that this alternative approach as discussed at the Pre-Hearing Conference satisfied the request, as it had been made in BAPEX's letter of 25 September 2015. The Claimant accepted that such a modification was feasible in theory, but reserved its position as to whether such a change should be admitted at this late stage of the proceedings.¹⁸

88. At the Pre-Hearing Conference, the President also considered with the Parties the programme of further submissions and evidence in preparation of the November hearing, assuming the “alternative approach” were adopted. Matters of hearing organization for the hearing scheduled from 2 to 7 November 2015 in London were also considered and certain directions were given in this respect.

3.2.9 The Further Pre-Hearing Written Procedure, in particular concerning the scope of liability to be considered, the Money Suit, and a request for cost

89. On 5 October 2015, the Claimant informed the Tribunal that it chose the "alternative approach,” and specified the time limits by which it would be able to make the submissions relating to it. It also addressed certain legal issues, in particular the limitation of liability under the JVA, BAPEX's alleged breach of warranties, and the costs of the proceedings.

90. Subsequent correspondence between the Parties and the Tribunal dealt with: the decision on the scope of liability to be considered by the Tribunal, the identification of the relevant sources of liability, related evidence, and other issues in preparation of the hearing. The principal submissions and rulings in this respect were:

¹⁸ Summary Minutes of the Pre-Hearing Conference held on 1 October 2015, paragraph 15. In its submission of 19 October 2015, page 27, BAPEX contested that it had identified all possible sources of liability prior to the Pre-Hearing Conference. It also stated that it did not accept that its request in its 25 September letter for an additional pleading had been satisfied. ↩

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(i) Two submissions from BAPEX, dated 6 October 2015 objecting to the Full Scope of Liability approach and related issues (first letter, B-CD6) and certain legal issues and the schedule leading to the November hearing (second letter, B-CD.7);

(ii) Two letters from the Tribunal dated 7 October 2015, addressing issues concerning the scope and standards of liability (first letter) and questions of further submissions and presentation of evidence prior to the hearing (second letter, B-CD.8);

(iii) Further to BAPEX's request of 6 October 2015 the Tribunal instructed the Claimant on 7 October 2015 to provide an outline in "sufficient detail to permit BAPEX to begin to prepare a response and to make informed decisions on the required scope of its response"; this outline was presented by the Claimant in the form of Niko's Defence in Principle to New Allegations raised by BAPEX's Expert, filed on 9 October 2015 (C-CD.6). On 16 October 2015, the Claimant provided information about additional evidence which it intended to produce;

(iv) A submission from BAPEX dated 12 October 2015 (B-CD.8), responding to the Tribunal's invitation to identify additional obligations and breaches by the Claimant; the submission also addressed issues concerning to the Money Suit;

(v) BAPEX's submission of 19 October 2015 (B-CD.9) on legal issues, in particular in response to the Claimant's letter of 5 October 2015, details on the Money Suit, the cost allocation, and certain issues concerning the hearing organisation;

(vi) The Claimant's objection to the scope of BAPEX's letter of 19 October 2015, which it described as an “unauthorised submission” and a “second rejoinder”.

(vii) The Tribunal's Procedural Order No 12 of 21 October 2015 addressing some of the issues raised in these submissions from the Parties;

(viii) The Claimant's pre-hearing submission of 23 October 2015, entitled "Niko's Submission on Newly Alleged Breaches” (C-CD.7), accompanied by a second witness statement of Mr William Hornaday and a supplemental expert report by Mr John Wright (Wright 2); and

(ix) Bapex's 23 October 2015 communication, indicating its intention to have Md Abdul Baqi testify at the November 2015 Hearing. The Claimant subsequently objected. The Tribunal considered his testimony possibly relevant and instructed the Respondents to

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inform the Claimant and the Tribunal forthwith of the tenor of Mr Baqi's testimony, in the form of a witness statement or otherwise. On 27 October 2015, the Respondents filed Mr Baqi's witness statement, and on 30 October 2015 introduced a further document into evidence (Exhibit R-38).

91. With respect to the scope of further proceedings, BAPEX objected to the Full Scope of Liability Approach in its first letter of 6 October 2015, stating that the "Parties' pleadings have not addressed in any substantive manner the breaches under laws or legal instruments other than the JVA”. BAPEX mentioned that “the standard of tort liability under Bangladesh law" and “liability under the environmental laws of Bangladesh” as examples for breaches under laws and legal instruments other than the JVA. Contrary to its submission of 17 September 2015, BAPEX submitted that

... the scope of the upcoming hearing must be limited to a determination of Niko's liability under the independent JVA standard.

92. The Tribunal responded on the following day, by the first of its 7 October 2015 letters. It summarised the situation in which the issue arose, starting by recalling the Claimant's request for a declaration that it “breached no obligation or law as concerns the two blowouts and is not liable to BAPEX, its predecessors, assignors, successors or assignees”. The Tribunal then continued:

The Respondents were given ample opportunity to present a full defence to this petition. They failed to do so pursuant to the schedule for these arbitrations established in Procedural Order No. 3. The Respondents' present counsel have explained that this failure was due to the failings of prior counsel and have requested a new opportunity to present a defence. (The Tribunals take no position as to this evaluation of the work of the Respondents' prior counsel, but observe that the Respondents not only chose their original counsel, but also had time to monitor their performance over the course of several years.) Without waiting for a ruling on this extraordinary request, and in disregard of the directions in Procedural Order No 11, the Respondents produced argument and expert reports which sought to expand the scope of the arbitration by identifying obligations which, in their opinion, Niko had breached; they also identified damage allegedly caused by such breaches, beyond the breaches and

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damage previously referred to by the Claimant. The Respondents requested that their statements be admitted in the arbitrations and that they be allowed to make additional submissions.

93. The Tribunal added that the approach that emerged from the Procedural Conference on 1 October 2015 allowed the Respondents a full opportunity to present their defence as requested, without causing excessive disruption to the proceedings. This was possible by dividing the Respondents' presentation of the issues of liability and damages. The Respondents said they were ready to argue the liability issue but required additional time for the quantum. The Tribunal accommodated this concern by reserving the quantum to a later phase in the arbitrations and thus afforded the Respondents yet another opportunity to present the argument and evidence which they had previously failed to present in accordance with the procedural calendar. The Tribunal concluded:

Having accepted the change in the scope of the procedure requested by the Respondents and the resulting expansion of the arbitrations, the Tribunals will decide the Claimant's request for a declaration on the basis of the obligations identified by the parties and will consider the obligations so identified as complete for the purpose of the requested declaration. They will not accept that for the purposes of their decision on the Claimant's request for a non-liability declaration any issues concerning breach and liability be reserved.

94. BAPEX then wrote on 12 October 2015, responding to the Tribunal's invitation to “identify additional obligations and breaches by the Claimant, specifying the source of each obligation and its precise content”. BAPEX wrote:

BAPEX provides the requested information to indicate further areas where Niko might be liable, on which Niko would have the burden to prove that it is not liable under the extremely broad scope of its requested relief, not as claims against Niko. In addition to the breaches of the JVA identified in the expert reports before the Tribunal, BAPEX identifies the following sources of liability resulting from the blowouts ...

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95. BAPEX then mentioned specifically "General Tort Liability", “Environmental Liability” and “Fraudulent Misrepresentation"; and it insisted that Niko had the burden of proof. Then BAPEX concluded:

[i]n these circumstances, BAPEX respectfully submits that the Tribunal must either refuse to address the matters that are not before it or find that Niko has not met its burden to prove it is not liable under these standards and issue an award denying the relief sought. While questions of Niko's liability under the JVA have been addressed in the pleadings, it is irrefutable that Niko has not pleaded, much less proven, its lack of liability under Bangladeshi tort and environmental law.

96. The Tribunal addressed the issue in Procedural Order No 12. It explained:

In their letter of 12 October 2015 the Respondents insisted that it was the Claimant which had the burden of proof but added that “BAPEX will meet [the Tribunal's] request”. The Respondents then stated that, in the courts of Bangladesh and specifically in the Money Suit, Niko is pursued under general tort liability and environmental liability; but the Respondents did not identify with specificity any additional Laws or Standards which Niko's operations had breached, and thereby caused the damage flowing from the blow-outs. The Tribunals must conclude that the Respondents have no further Breaches to add which the Tribunals must consider when examining whether to make the requested declaration.

For the avoidance of doubt, the Tribunals add that identifying the Applicable Laws and Standards does not affect the burden of the Claimant to establish that it has complied with these Laws and Standards or that they are not applicable in the circumstances. The Tribunals further add that the question concerning such alleged breaches of the Applicable Laws and Standards is different from that relating to the legal basis for any liability flowing from any such Breaches.

97. In these circumstances and in light of these considerations, the Tribunal concluded in Procedural Order No 12:

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The list of Breaches of Applicable Laws and Standards that must be considered by the Tribunals when making their determination concerning the requested declaration is now complete. The Tribunals will examine by reference to the Breaches alleged until now the Claimant's request for a declaration according to which “Niko breached no obligation or law as concerns the two blowouts in 2005 at Chattak field”.

98. With respect to the Money Suit, the Claimant asserted in its submission of 5 October 2015 that

For the first time, Niko faces in two different forums affirmative claims for precisely the same liability as concerns the two blowouts: the claims of BAPEX for lost gas production and environmental damages before these Tribunals; and the claims asserted by Petrobangla and the Government for precisely the same liability and damages in the Money Suit. The present situation is irreconcilable with Article 26 of the ICSID Convention, pursuant to which “[c]onsent of the parties to arbitration under this Convention shall ... be deemed consent to such arbitration to the exclusion of any other remedy.

99. The Claimant argued that “the Tribunals' early clarification of this question will be critical to the effectiveness of the ultimate award and the preservation of procedural rights”.

100. BAPEX objected on 6 October 2015 (second letter) and rejected “the extension of the hearing to cover legal issues that are not directly related to the question of whether Niko is liable for the blowouts"; it defined the issue of liability as the question of “whether or not Niko is liable for the blowouts - that is, did Niko breach the standard of care under the Joint Venture Agreement (JVA) and thereby cause or contribute to the blowouts?". BAPEX added that the decision now sought by Niko concerned “issues on which Niko and BAPEX's prior counsel did not provide adequate briefing. The only issue that is ripe for decision is the question whether Niko breached the standard of care under the JVA”.

101. The Tribunal addressed the issue of the Money Suit in their second letter of 7 October 2015 by inviting BAPEX to provide a precise indication of

(i) the status of the proceedings on the Money Suit,

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(ii) the progress made in the Money Suit proceedings during the time since the Tribunals' 2013 Decision on Jurisdiction and

(iii) the anticipated duration of the Money Suit proceedings until a decision by the court, assuming that the Respondents decide to pursue the Money Suite despite the explanations in the Decisions of the Tribunals.

102. ВАРЕX responded on 19 October 2015. It stated that it was not party to the Money Suit and that the claims made in that suit were not based on the JVA but on “tortious liabilities” pursued as “independent rights of the people of Bangladesh vested in the Republic and being protected by the actions of the Government and the Ministry in the Money Suit”. BAPEX provided information about these proceedings, commenced on 15 June 2008, stating in particular that Niko had applied for their stay. BAPEX also provided a forecast of the time that might be required to complete those proceedings, including appeals before the High Court Division and the Appellate Division of the Supreme Court of Bangladesh.¹⁹

103. As discussed at the Pre-Hearing Conference,²⁰ the Claimant included in its submission of 5 October 2015 (C-CD.5) a Request for costs, seeking that the following “heads of cost should be paid by BAPEX as a result of its very late assertion of breaches by Niko, and this regardless of the outcome of the Compensation Declaration”:

the entirety of Tribunals' fees and expenses and the Centre's charges, and the related expenses, relating to the Tribunals Experts (which would have been completely unnecessary had BAPEX complied with the Tribunals' orders), as well as the legal and expert costs incurred by Niko in this respect; and half of all of the preceding categories of costs as concerns the written phase of the Compensation Declaration (which in material part addressed claims of breach that BAPEX later did not press).

104. BAPEX responded to the request in its 19 October 2015 submission (B-CD.9) in the following terms:

¹⁹ BAPEX's Submission on Various Procedural and Legal Issues, 19 October 2015 (B-CD.9), pages 22 and 23. For further details on the Money Suit see in particular below Section 5.4. ↩
²⁰ Summary Minutes of the Pre-Hearing Conference held on 1 October 2015, paragraph 19. ↩

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BAPEX hereby informs the Tribunal that it agrees to reimburse to Niko its share of the Tribunals' fees and expenses and the Centre's charges, and the related expenses, relating to the Tribunal Experts, as well as the reasonable legal and expert costs incurred by Niko specifically attributable to the Tribunal Expert process. As is customary in legal proceedings, BAPEX understands that any award of costs resulting from BAPEX's agreement herein may be set off against any eventual award on the merits or of other costs in favour of BAPEX.²¹

3.2.10 Procedural Order No 12 and the Tribunal's Note on the Scope of Examination at the November 2015 Hearing and Questions for Consideration

105. In Procedural Order No 12 the Tribunal summarised the recent exchanges concerning the scope of the proceedings and, as quoted above, noted that the "List of Breaches of Applicable Laws and standards that must be considered by the Tribunals when making their determination concerning the requested declaration is now complete”. Further to a request expressed by the Parties at the Pre-Hearing Conference, the Tribunal endeavoured to provide guidance as to the issues arising in the context of its examination of the Claimant's requested declaration and to be considered in the hearing, in particular concerning the introductory presentations by the experts. The Tribunal provided this guidance in the form of a “Note on the Scope of Examination and Questions for Consideration”, attached to Procedural Order No. 12. The Tribunal emphasised:

... this Note is preliminary and provisional in nature, prepared on the Tribunal's present understanding of the issues. It does not prejudge in any manner the Tribunal's decision.

106. In the Note itself, the Tribunal further clarified:

The questions and issues outlined below were drafted by the Tribunals in light of the Parties’ written submissions and expert reports filed to date. They are provisional and may not be taken as prejudging any of the issues that remain to be decided; nor do they

²¹ BAPEX's Submission on Various Procedural and Legal Issues, 19 October 2015 (B-CD.9), pages 1 and 2. ↩

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restrict the Tribunals with respect to questions and issues the Tribunals may raise at the hearing.

107. The Tribunal identified what it had understood as the overall principles governing Niko's obligations concerning the conduct of the operations under the JVA and other obligations relating to such operations. It referred to all obligations under the applicable law, the JVA and generally accepted standards of the international Petroleum Industry as the “Applicable Laws and Standards”. It added:

The Tribunals understand that, in order to rule on the Claimant's request for a declaration of non-liability, they will have to examine and, following that examination and the Parties' argument, decide in the first phase of this part of the arbitrations

(i) whether, in the conduct of drilling the Chattak 2 well and the relief operations following the first blow-out, Niko breached any of the Applicable Laws and Standards (“Breaches");

(ii) whether any such Breaches are causal for the blow-outs; and

(iii) to the extent to which they were causal for the blow-outs, whether such Breaches could have caused any damage (loss of gas, damage to the population and the environment or otherwise).

(iv) The questions whether any such damage actually did occur, the importance of such damage, and its quantification, are reserved for a subsequent phase of the arbitrations.

108. In the remainder of the Note, the Tribunal explained that it wished to identify the sources of the Applicable Laws and Standards, identified factual aspects and assumptions which it had identified as possibly relevant and alleged Breaches that had to be examined. The Tribunal invited the “Parties and their experts to correct, or complement, where necessary, the identification and description of these Breaches”.

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3.2.11 Organisation of the November 2015 Hearing

109. As the Parties had expressed diverging views on the organisation of the November 2015 Hearing, the Tribunal provided the Parties with an indication of the approach it intended to adopt. It did so in the form of a Preliminary Note on the Organisation of the November 2015 Hearing of 27 October 2015. The Note confirmed that the principal objectives of the hearing were:

... to determine

(i) the nature and content of the laws and standards which apply to Niko's conduct of the drilling and the relief operations (the “Applicable Laws and Standards”);

(ii) whether any breaches of these Applicable Laws and Standards occurred which caused or contributed to the blow-outs and the damage caused by them (the “Breaches”).

When considering these two issues, a distinction should be made between (a) the drilling of the Chattak 2 well and (b) the relief operations.

(iii) In addition, both Parties have raised issues concerning the rules governing Niko's liability for any Breaches that may have occurred.

110. The Tribunal explained that it wished to examine issues (i) and (ii) first and suggested to reserve the first four hearing days for these issues, followed by issues of liability. The Tribunal also explained the proposed sequence of expert and factual presentations and questioning, as well as the time for submissions by counsel.

3.2.12 The 2 to 7 November 2015 Hearing

111. The hearing in the Compensation Declaration proceedings took place from Monday 2 November 2015 to Saturday 7 November 2015 in London. Besides the three Members of the Tribunal and the Secretary, the following persons attended the hearing:

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For the Claimant:
Mr Barton Legum, Ms Anne-Sophie Dufetre, Ms Brittany Gordon, Ms Ananya Mitra, and Ms Leonor Vincens of Dentons, Paris; Mr Gordon Tarnowsky, Mr Anthony Cole, and Mr Frank Alexander (as from 4 November 2015) of Dentons, Calgary, counsel for the Claimant;
Messrs Rokanuddin Mahmud and Mustafizur Rahman Khan of Rokanuddin Mahmud & Associates, Dhaka, co-counsel for the Claimant;
Messrs William Hornaday and Brian Adolph of Niko Resources Ltd.;
Mr John Wright of Wild Well Control and Mr Rawdon Seager of Gaffney Cline & Assocs (present 3 to 6 November 2015), as experts.

For the Respondents:
Mr Derek Smith, Ms Tafadzwa Pasipanodya, Ms Erin Argueta, Ms Oonagh Sands, Ms Alejandra Torres Camprubi, Ms Anna Aviles-Alfaro, and Ms Aundry Padilla of Foley Hoag LLP, Washington, D.C., counsel for the Respondents;
Messrs Moin Ghani and Mr Imtiaz Uddin Ahmad Asif, Dhaka, co-counsel for the Respondents;
Mr Md. Atiquzzaman, Managing Director of BAPEX and Mr Abdul Baqi (present as from 4 November 2015);
Mr Istiaque Ahmad, Petrobangla, identified as shareholder of BAPEX;
Dr Neal Adams of the University of Houston, as expert;
Ms Melinda Bruce of DOAR Litigation Support.
and
Minister Nasrul Hamid, Government of Bangladesh, presented as shareholder of BAPEX
No objections were raised against the presence of a representative of the Government of Bangladesh which, as a result of the Tribunal's decision on jurisdiction, is no longer a party to the arbitration proceedings.

Tribunal's Expert
Mr William Abel of Theon.

112. In their opening statements the Parties presented their respective position and also addressed the issues which the Tribunal had outlined prior to the hearing. In the course of the Opening Statements and subsequently during the hearing, it was clarified that the Claimant was seeking a declaration of

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non-liability only in respect of those breaches of Applicable Laws and Standards which were causal for the two blowout incidents, and not an assessment of the Claimant's operation in general terms.

113. The Tribunal explained that, before examining the specific factual aspects of the two blowouts, the arbitrators wished to obtain from the experts a better understanding of the technical issues as they arise in the context of drilling and relief operations and the relevant laws, standards and practices. After the Parties' opening statements, the Tribunal therefore invited Mr Abel, the expert appointed by the Tribunal, to deliver a presentation on these matters and to answer specific questions from the arbitrators. The two experts appointed by the Parties then commented on Mr Abel's explanations and provided their own views in an open discussion among the three experts.

114. Subsequently, Mr Wright delivered a presentation on drilling operations and answered questions from the Tribunal, with Mr Abel and Dr Adams also being requested by the Tribunal to provide their views on various issues in the form of an interactive discussion. This was followed by a presentation by Dr Adams, with questions from the Tribunal and a discussion in the same format. Subsequently, Mr Wright was cross-examined by counsel for the Respondents, followed by cross-examination of Dr Adams by counsel for the Claimant, who then also posed questions to Messrs Abel and Wright. This was followed by further examination by counsel for the Respondents, the Claimant and the Tribunal.

115. After this initial clarification of the technical issues concerning drilling and relief operations and the relevant laws, standards and practices, the Tribunal turned to the factual questions of what actually happened when the blowouts occurred. The Tribunal started by examining Mr Adolph, who was also examined by counsel for the Claimant and cross-examined by counsel for the Respondents. Thereafter Mr Hornaday and Mr Baqi were examined by the Tribunal and counsel of the Parties.

116. Having completed the fact witness testimony, the Tribunal turned to issues specific to relief operations and sought clarification from the three experts. The three experts addressed specific issues related to the relief well operations identified by the Tribunal and were examined by the arbitrators and the Parties' counsel, following the same procedure of an interactive discussion under the direction of the Tribunal.

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117. The three experts had disclosed in their written reports that they knew each other well. This was apparent at the hearing. They also stated that they knew Mr Grace well, who had been engaged by Niko for the relief operations. It was understood that all four were included in the small number of industry specialists who had experience in drilling relief wells. They had worked with each other in one form or another on other projects; some of them also were engaged in the context of the Moulavi Bazar blowout in Bangladesh. No objection was raised against any of the experts and their qualifications to provide expert opinions in these arbitrations.

118. It was agreed during the hearing that legal argument regarding breaches and bases for liability would be addressed in written submissions, followed by a two-day hearing. Agreement was also reached regarding the procedural calendar for a) the further written and oral procedure on liability and b) the further written and oral procedure on damages. At the conclusion of the hearing the Parties agreed on the schedule for the remainder of the proceedings on the Compensation Declaration, providing for simultaneous Post-Hearing Briefs on Liability, addressing in particular the Applicable Laws and Standards, identifying breaches and bases for liability, followed by a hearing in Paris on liability. Thereafter, the Respondent was scheduled to present its Memorial on Damages, followed by the Claimant's Counter-Memorial and a hearing on damages in Paris.

119. At the end of the November 2015 Hearing, the Tribunal enquired whether the Parties were satisfied with the conduct of the oral procedure and if there were any complaints they wished to raise. No such complaints were raised by the Claimant and the Respondents.

120. Transcripts of the hearing were prepared by Ms Georgina Ford and Mr Ian Roberts of Briault Reporting Services. A copy of the transcript was sent to the Parties and the Members of the Tribunal on each hearing day. They were subsequently corrected by the Parties. Sound recordings were made of the hearing and uploaded to the electronic file sharing account created for this proceeding for access by the Parties and the Tribunal.

121. The Tribunal prepared Summary Minutes of the Hearing which were sent to the Parties on 12 January 2016, together with three sketches prepared by the experts during the course of the Hearing (Exhibits RH-6 and TEH-3 and TEH-4).

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3.2.13 Post-Hearing Briefs and the Tribunal's note on Possible Issues

122. Further to a request by the Parties, on 6 January 2016 the Tribunal provided them with a note on Possible Issues for the Post-Hearing Briefs, setting out the arbitrators' understanding of the competing contentions which the Tribunal had gained from the hearing. The Tribunal emphasised that the arbitrators' understanding was provisional, that they kept an open mind in anticipation of the Parties' forthcoming submissions, and that they did not wish to restrict the Parties' explanations and choice of issues to highlight.

123. In this note the Tribunal also described the provisional understanding it gained concerning the factual circumstances of the first blowout and possible causes, as well as the possible actions that could have prevented it and the distinction between design and operational causes. The Tribunal invited the Parties to specify points where they disagreed and the evidence which supported each side. It also invited the Parties to address the question on which grounds a blowout caused by the circumstances so identified would justify any liability of Niko.

124. The Tribunal's note provided a similar presentation with respect to the blowout at the relief well 2A. These points and the manner in which the Parties dealt with them will be addressed in further detail below in Sections 8 and 9 in the context of the two blowouts and Niko's responsibility for them.

125. In accordance with the schedule agreed at the close of the November 2015 hearing, each party filed its Post-Hearing Brief on 22 January 2016, together with accompanying legal authorities.

3.2.14 Matters following the November 2015 Hearing: Pre-Hearing Conference of 28 January 2016, Niko's Well Control Manual and Information on other cases

126. On 28 January 2016, the Tribunal, represented by the President, held a Pre-Hearing Conference with the Parties by telephone. In the course of the conference, questions of hearing procedure and general organizational matters relating to the February 2016 Hearing were discussed and agreed upon, including an agreed tentative agenda for that hearing. Certain other matters that had arisen after the November 2015 Hearing also were discussed and resolved in part.

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127. The telephone conference was recorded and the recording was subsequently provided to the Parties and the Tribunal. The Tribunal further prepared Summary Minutes of this conference call which were distributed to the Parties and the other Members of the Tribunal on 3 February 2016.

128. One of the issues discussed at the Pre-Hearing Conference concerned Niko's Well Control Manual. At the November 2015 Hearing, reference had been made to a passage in CPTDC's Technical Proposal (Exhibit C-100) where it was stated in Section 5.3, entitled “HSE management system", that “Niko's document for well control manual will be the ruling Project document”.²² At that occasion Mr Adolf confirmed that such a manual existed and explained that the manual “was constantly updated"; he said that the current version could be produced without difficulty but that he was not sure about the availability of the version to which the CPTDC proposal in 2004 referred. The Tribunal requested that this Well Control Manual be produced in the available version and, if possible, also in the version in force at the end of 2004.²³

129. At the Hearing, the Claimant produced a document entitled “SHEMS Drilling and Workover SWP Manual”, first edition, dated February 2005 (referred to as the “2005 SWP Manual").²⁴ As this manual is dated February 2005, i.e. after the award of the contract to CPTDC, and deals primarily with HSE issues, the Respondents queried whether this manual was indeed the one to which the CPTDC proposal referred. The Claimant's counsel pointed out that the reference to the Niko manual in the CPTDC proposal was contained in a section on HSE;²⁵ he promised, however, that Niko was looking for any manual that was meeting the description in the CPTDC proposal.²⁶

130. After the Hearing, the Respondents wrote on 9 December 2015, referring to the discussions at the November 2015 Hearing, and requesting that the Claimant provide “any version of its well control or ‘drilling control’' manual from before 2005 through 2015 in its possession or control”.

²² Exhibit C-100, Section 5, page 8 of 17, pdf page 143. ↩
²³ HT 2015.11.06, pages 1033 – 1035, 1044 – 1046. ↩
²⁴ Exhibit C-110; HT 2015.11.06,page1163. ↩
²⁵ HT 2015.11.06, page 1380. ↩
²⁶ HT 2015.11.06, page 1342. ↩

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131. The Claimant responded on 12 December 2015, explaining that the 2005 SWP Manual contained a specific chapter on “well control” and that the reference in the CPTDC proposal was contained in the section on Health, Safety and Environment. The Claimant concluded that “the 2005 SWP Manual is the document that best responds to the Tribunal's request", adding that the current version of this manual was that of 2014. The Claimant stated that this version was “wholly irrelevant” but that it was prepared to provide it if so directed by the Tribunal.

132. The issue was discussed at the 28 January 2016 Pre-Hearing Conference; the Parties reiterated their positions. As announced at this conference, the Tribunal communicated its decision on 14 February 2016. It noted that the Claimant had asserted that, despite substantial efforts, it was unable to locate a copy of an earlier version of the manual produced as Exhibit C-110 and specifically the version that was in force in 2004. The Tribunal considered the request for a pre-2005 version of the manual as moot, since it saw no purpose in ordering the Claimant to produce a document which it was unable to locate. Concerning the 2014 version, the Tribunal invited the Respondents, if they still wished the Tribunal to order its production, to state why this version would be relevant for the Tribunal's decision.

133. The Respondents pointed out, in their letter of 17 February 2016, that Mr Adolph had referred to the 2014 version of the SWP Manual and confirmed that it was readily available and that the Claimant had offered to provide it. The Respondents explained the manual was “evidence of Niko's current practice" and

... could be relevant evidence of what is considered diligent conduct. In addition, the manual may include mention of the blowouts or an indication of lessons learned and the impact on Niko's operating procedures. Niko has questioned the existence of standards, and the manual may provide relevant information of how Niko directs its operators to plan and conduct operations.

134. At the February 2016 Hearing, the issue of the 2014 version of the SWP Manual arose again. The Tribunal noted that the Claimant considered this version as irrelevant but was prepared to deliver it to the Respondents, if so ordered by the Tribunal. The Tribunal requested the Claimant to deliver the document to the Respondents without taking any position with regards

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to its relevance.²⁷ On 21 March 2016 the Respondents informed the Tribunal that their request for the production of this manual still had not been complied with. In another letter of the same day, however, the Respondents requested the Tribunal to defer its decisions until after their submissions on the alleged bribery by Niko had been filed.

135. By its letter of 14 February 2016, the Tribunal requested the Parties to address certain technical aspects related to casing and drilling operations at the forthcoming February 2016 Hearing. It also requested information about other cases concerning well blowouts and to provide copies of such decisions. The Tribunal asked:

Has any decision ever been issued anywhere by a court, an arbitral tribunal or other legal or regulatory body, which relates to a well blow-out and the operator's responsibility for such blow-out?

136. In response, the Claimant wrote on 19 February 2016, stating that it had "identified in excess of 20 authorities meeting the stated criteria”. It excluded “authorities addressing blowouts allegedly resulting from defective equipment and authorities lacking substantial discussion of the drilling operations conducted before the blowout” and transmitted five authorities from US courts.²⁸ The Respondents also “found a number of cases of varying relevance to the present case that met the stated criteria”. In addition to the cases presented by the Claimant, the Respondents presented on 20 February 2016 a court decision in the Deepwater Horizon case and filed it as Exhibit RLA-115.

3.2.15 The Respondents' Document Production Request and the Site Visit of 5 and 6 February 2016

137. On 8 January 2016, the Respondents filed a request for production of documents, requesting (i) data from a 2004 seismic survey undertaken by the Claimant, (ii) data from the wells drilled by the Claimant on Chattak field, and (iii) environmental monitoring reports. The Respondents explained that they had unsuccessfully requested the documents from the

²⁷ Summary Minutes of the 21-22 February 2016 Hearing (see below), paragraph 13.3 and HT 2016.02.22, pages 509 - 510. ↩
²⁸ These decisions were admitted in the record at the February 2016 Hearing with the reference numbers CLA-59, CLA-60, CLA-61, CLA-67 and CLA-69. ↩

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Claimant on 23 December 2015 and needed them urgently for BAPEX submission on damages.

138. Following an invitation by the Tribunal, the Claimant filed its observations on these requests on 18 January 2016. The Claimant stated that the request concerned 35 categories of documents or specific documents and objected to it. The Claimant argued that (i) a document production phase had not been agreed in this phase of the arbitrations, (ii) ordering production of the requested documents was not necessary for the outcome of the case and (iii) the request was “overly broad and otherwise inadmissible under standards that apply when Parties do agree to document disclosure”.

139. The issue was addressed during the pre-hearing telephone conference on 28 January 2016. The Respondents were invited to clarify whether their request was made under the JVA, and if not to respond to the Claimant's objections concerning grounds and modalities of document production in ICSID proceedings.²⁹ It was agreed that the Respondents would be given one further opportunity to clarify its 8 January 2016 request for document production.

140. The Respondents responded in a letter of 4 February 2016. They relied on the provision in the JVA concerning geological and drilling information obtained or compiled by Niko regarding the Chattak field. The Respondents stated that under the JVA Niko controlled all information related to operations at the Chattak field, but did not regularly provide all that information to BAPEX. The Respondents also argued that Niko “wanted the broadest possible finding by the Tribunal” and that for the damage phase the Parties could present argument and evidence which they had previously failed to present. The Respondents explained that "principles of fairness and due process” required that the Tribunal order the production which “is essential to BAPEX's right to marshal evidence and fully present its case”. The Respondents presented in detail their view on the relevance of each document or category of documents.

141. On the days following this letter, on 5 and 6 February 2016, a site visit took place at the Chattak field in the absence of the Tribunal. The Claimant informed the Tribunal on 10 February 2016 about this event, stating that “beginning on 5 February 2016 Niko hosted a site visit by the Respondents

²⁹ Summary Minutes of the 28 January 2016 Pre-Hearing Conference, paragraphs 14 to 16. ↩

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at Chattak” at which “Niko permitted inspection of all documents concerning Petroleum Operations that Respondents wished to review”. The Claimant wrote:

Over 70 persons visited the Chattak site, including the Minister of Energy, a score of personnel from BAPEX and its sister compапу Sylhet Gas Fields Limited, four representatives of Foley Hoag, numerous technical and/or environmental experts retained by BAPEX, an intelligence officer, two ambulance attendants, five fire service employees and 33 police officers. Niko made available to BAPEX's team all documents on site arising from Petroleum Operations as defined under the JVA. BAPEX's legal team scanned hundreds of pages of these documents.

142. The Claimant asserted the Respondents' letter of 4 February 2016 contained “a range of erroneous or misleading statements” and that “BAPEX assertions concerning the necessity of a Tribunal order have been overtaken by events”. It also stated that, following the search of its records requested by the President during the 28 January 2016 pre-hearing conference, it had identified letters transmitting to both BAPEX and the Department of Energy all but one of the Environmental Reports requested by BAPEX.

143. By letter of 14 February 2016, the Tribunal requested the Respondents to respond to the information provided by the Claimant regarding the 5 February 2016 site visit, specifying whether or not the Respondents maintained their 8 January 2016 document production request.

144. By letter of 17 February 2016, the Respondents provided a status update regarding the site visit. They confirmed that a site visit took place on 5 and 6 February 2016 and explained that “BAPEX exercised its rights under the Joint Venture Agreement to inspect documents on the site through its legal representative, Foley Hoag LLP”. The latter, they explained, had been granted access to inspect and copy some documents but not others. The Respondents pointed out that the “documents were by no means presented in an organised fashion”; many of the documents were irrelevant and their condition “was less than ideal having been exposed to the elements, dust, and pests for the past ten years”. The Respondents concluded

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... the documents obtained at the site visit do not obviate the Respondents' request for documents. Accordingly, BAPEX maintain its request for the documents listed in its letter of 23 December 2015.

145. With respect to the Claimant's explanations concerning the Environmental Reports, the Respondents added: “The fact that the documents were at one time transmitted to BAPEX does not negate BAPEX's request for these documents".

146. Following the Respondents' 17 February 2016 letter, the Tribunal invited the Claimant to provide a list identifying for each of the categories of documents requested by the Respondents those documents which, according to the Claimant, have been made available to the Respondents during the 5 February 2016 site visit. The Claimant responded by letter of 20 February 2016 that it was unable to prepare such document list given the absence of its counsel during this site visit.

147. On 20 February 2016, the Respondents supplemented their 8 January 2016 document production request, now also requesting documents related to Niko's investments in the Chattak field, documents related to payments to local inhabitants and medical records.

148. The Respondents' document request and the controversy related to it was then addressed at the February 2016 Hearing which was held on 21 and 22 February 2016. The Tribunal discussed each of the requests with the Parties and settled them as follows:

The Claimant confirmed its willingness to cooperate with BAPEX in the context of the JVA and invited representatives of BAPEX to its Dhaka office in order to examine whether any of the requested documents existed and would be required by BAPEX. This procedure applied to all document requests of the Respondents, except for the following:

• The 2004 3D seismic survey referenced in the Respondents' 23 December 2015 letter which the Respondents confirmed to be in their possession.
• With regard to the 11 Monthly Environmental Reports requested by the Respondents in their 23 December 2015 letter, the Claimant

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stated that it had been able to retrieve 10 of them, including the transmittal sheets evidencing that these 10 Monthly Environmental Reports had been delivered to the Department of Energy.³⁰ The Claimant nevertheless accepted to deliver an additional copy of each of these reports to the Respondents. As to the 11th report the Claimant undertook to conduct further research, including in Niko's offices in Dhaka and at the Chattak field. If and when this report will be retrieved, the Claimant will deliver it to the Respondents.

• With regard to the photo documentation prepared by Mr Glaholt (para. 12 of the 23 December 2015 letter), the Claimant undertook to follow up with Mr Glaholt and produce the documentation that can be retrieved.
• The Respondents confirmed that they were in the possession of the Geosyntec study referenced in paragraph 16 of the Respondents' 23 December letter.
• Documents related to payments to local inhabitants and medical records were considered irrelevant for the Tribunals' decision on the quantification of damage; the Respondents did not insist on their production.³¹

3.2.16 The February 2016 Hearing

149. On 21 and 22 February 2016, a 2-day hearing was held in Paris. The hearing was attended by the three Members of the Tribunal, the Secretary and the following persons:

For the Claimant:
Mr Barton Legum, Ms Anne-Sophie Dufetre, Ms Brittany Gordon, Ms Ananya Mitra, and Ms Tania Iakovenko-Grasser of Dentons, Paris; Mr Gordon Tarnowsky, Mr Anthony Cole, and Mr Frank Alexander of Dentons, Calgary, Counsel for the Claimant;
Mr Mustafizur Rahman Khan of Rokanuddin Mahmud & Associates, Dhaka, Co-Counsel; and

³⁰ In the letter of 18 January 2016 the Claimant referred to the Department of the Environment. ↩
³¹ Summary Minutes of the February 2016 Hearing, item 13.4. ↩

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Mr Brian Adolph of Niko Resources Ltd.

For the Respondents
Mr Derek Smith, Ms Tafadzwa Pasipanodya, Ms Oonagh Sands, Ms Alejandra Torres Camprubi, and Ms Anna Aviles-Alfaro of Foley Hoag LLP, Washington, D.C., Counsel for the Respondents;
Messrs Moin Ghani and Mr Imtiaz Uddin Ahmad Asif, Dhaka, co-counsel;
Mr Md. Atiquzzaman, Managing Director of BAPEX and Mr Syed Ashfaquzzaman, Secretary of Petrobangla;
Minister Nasrul Hamid, State Minister of Power, Energy and Mineral Resources, Ms Khadiza Nazneen, Ministry of Power, Energy and Mineral Resources, and
Ms Stephanie O'Connor of DOAR Litigation Support.

150. The Claimant stated that it had no objections to the presence of the representatives from non-parties.

151. The Parties presented on 21 February 2016 their Opening Statements, which, as agreed during the 28 January 2016 pre-hearing conference, consisted of their full legal argument on liability and answered questions from the Tribunal. Rebuttal presentations were delivered on the following day. Subsequently, each side presented its final observations in the form of a further rebuttal.

152. In response to an observation from the Respondents, the Tribunal reminded the Parties that the scope of the hearing and of the Tribunal's forthcoming decision had been described in Procedural Order No 12 and its accompanying annex. Accordingly, the scope included the question of the effect of Niko's operations on the long-term viability of the Chattak field, as it had been identified in item 4(vi) of the annex to that Procedural Order.

153. The following documents were entered into the record during the February 2016 Hearing:

• CH-8 – Outline of Niko's Oral Argument,
• CH-9 – Niko's Opening Presentation on the Legal Issues Relevant to Liability
• CH-10 – Niko's Rebuttal Presentation on the Legal Issues Relevant to Liability

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• CH-11 – Niko's Rebuttal Presentation on the Technical Issues Relevant to Liability
• RH-7 – BAPEX's Presentation on Legal Issues
• RH-8 – BAPEX's Rebuttal Presentation on Shallow Gas Reservoirs
• RH-9 – BAPEX'S Rebuttal Presentation
• RH-10 – BAPEX's Rebuttal Presentation on Classification of Damages
• RH-11 – BAPEX's Rebuttal Presentation on Reasonable Operator Standard.

154. The Claimant objected to the reliance by the Respondents on independent opinions expressed by Mr Abel, the expert appointed by the Tribunal, in his report and during the November 2015 Hearing. The Claimant further recalled its written submissions made in this regard in its 31 August 2015 comments on the reports issued by the three Tribunal appointed experts. The Tribunal pointed out that it had heard three qualified experts, i.e. Mr Wright, Dr Adams and Mr Abel, and that it did not consider it justified to generally give less weight to the views of Mr Abel than to those of the other two experts. The Claimant's counsel agreed with this position, confirming that the best evidence for the Tribunal to turn to when determining the liability questions is the evidence of these three experts. The Claimant's counsel emphasised the differences in the standards and certain calculations applied by Mr Abel in his report. The Tribunal reiterated that it did not consider itself bound by any particular opinion or calculation of any of the experts and that the Tribunal members would apply their own minds to the issues they have to decide.³²

155. During the afternoon of 22 February 2015, outstanding procedural questions were addressed. These included:

• The Respondents' 8 January 2016 document production request, as amended on 20 February 2016, was resolved.³³
• On 19 February 2016 the Claimant had filed additional legal authorities stating that they were in response to the Respondents' 22 January 2016 Post-Hearing brief. The Respondents objected to

³² See in particular Summary Minutes of the 21/22 February 2016 Hearing, item 13.2. The role of the Experts is discussed in further detail below in Section 7.5. ↩
³³ See above Section 3.2.15. ↩

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• the introduction of these documents by letter of 20 February 2016. At the Hearing the Tribunal allowed these decisions in the record.
• As pointed out above,³⁴ the Tribunal also addressed the Respondents' request for a 2014 version of exhibit C-110 (Well Control Manual) and requested the Claimant to deliver this document to the Respondents, without, however, taking any position with regard to its relevance.

156. All documentation introduced into the record in the course of the February 2016 Hearing were identified in the Summary Minutes, which were prepared by the Tribunal and distributed to the Parties after the hearing.

157. The hearing was recorded and the audio recording was uploaded subsequently to the file sharing account established for these proceedings. A verbatim transcript was also prepared by Ms Georgina Ford and Mr Ian Roberts of Briault Reporting Services Limited, which was distributed to the Parties and the Tribunal on each hearing day. As the hearing completed the proceedings on liability and no further submissions were foreseen, a simplified process for correcting the transcript, limited to checking references, was agreed at the end of the hearing.

3.2.17 Post-hearing developments: the Respondents' unsolicited submissions on shallow gas, open document production issues, and the suspension of the proceedings on Liability

158. Following the February 2016 Hearing, the Respondents wrote on 5 March 2016, asserting that, on the last day of the February 2016 Hearing, the Claimant had presented new arguments relating to “the definition of shallow gas and the extent to which Niko knew or should have known that it faced shallow gas risks prior to drilling the Chattak 2 Well”. The Respondents alleged that the Claimant had distorted the facts and requested leave to respond to the new arguments. The Respondents did, however, not await a decision from the Tribunal on the admissibility of such a response but developed their argument over several pages.

159. The Respondents' letter was accompanied by a document from Niko entitled “Chattak Field Development Plan, December 2004” which, as the Respondents asserted, “BAPEX encountered [...] two days ago when it was given access to documents in Niko's office in Dhaka”. They requested that

³⁴ Section 3.2.14. ↩

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the document be admitted into the record, identified as Exhibit R-47. They added that “this document is also relevant for the Damages phase of the proceedings", adding that they would enter it on the record with the forthcoming submission on Damages.

160. The Respondents concluded by requesting “that the Tribunal recognize [BAPEX's] right to respond by accepting the present submission in response to new arguments related to shallow gas raised by Niko at the second Hearing on Liability".

161. The Tribunal considered this submission and on 14 March 2016 gave the following instructions:

The Claimant is invited to comment on this new submission by Wednesday 16 March, limiting its comments to the admissibility of this submission. If the Tribunals decide to admit the Respondents' 5 March 2016 submission and the new evidence, the Claimant will be given an opportunity to respond to the submission and the evidence in substance at a later time.

162. In its submission of 16 March 2016, the Claimant objected to the Respondents' submission and described it as an “unsolicited post-post-hearing brief [and] an abuse of procedure that should be rejected". It asserted that the “new” points to which the Respondents referred had been argued previously and discussed in detail at earlier occasions where the issue of shallow gas had been addressed. The Claimant stated that the arguments in the 5 March 2016 submission could have been made at the February 2016 Hearing. “There is no justification for BAPEX's decision to wait until after the hearing to respond to points raised in Niko's Post-Hearing Brief and further articulated at the February Hearing.”

163. Concerning the new exhibit, the Claimant wrote:

The new exhibit sought to be introduced to justify its untimely rebuttal is nothing more than pretext. This exhibit adds nothing new to the record. There has also been no opportunity for this document to be analysed and addressed by the witnesses or experts in this proceeding.

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164. The Claimant also objected to what it described as “new factual allegations without the slightest evidentiary support” and indicated some such factual allegation. It concluded by requesting the Tribunal “to deny BAPEX's request and rule it inadmissible”.

165. By letter of 21 March 2016, BAPEX provided the Tribunal with a status update on the documents the production of which the Parties had agreed during the hearing at the February 2016 Hearing, specifying those documents that remained outstanding, and requesting the Tribunal to order the Claimant to produce the documents identified in that letter.

166. The request was overtaken by another request made by the Respondents, in a letter of 21 March 2016, by which they announced“new, recently obtained evidence of Niko's use of bribes and corrupt means to procure the JVA and GPSA”. They concluded that “the Tribunal should not issue any further decision or award in the two proceedings without considering that evidence and our statements on it” and requested the “Tribunal defer its decision until after the 25th [March] and after its review of our pleading on this issue”.

167. BAPEX and Petrobangla then filed their Corruption Claim in two separate documents on 25 March 2016, BAPEX's Memorial on Damages and a separate letter by Petrobangla. The Tribunal invited submissions from the Parties about the procedure for addressing this claim. The Tribunal issued Procedural Order No 13 on 26 May 2016. It decided to examine the Corruption Claim with priority and suspended all other proceedings, with the exception of a request for provisional measures that had been filed by the Claimant on 19 May 2016 in relation to the Payment Claim.³⁵

168. With respect to the two procedural requests pending in the proceedings on the Compensation Claim, the Tribunal ordered:

The suspension applies to the Parties' procedural requests concerning the Compensation Claim, in particular the Claimant's request of 16 March 2016 concerning the Respondents' submission of 5 March 2016 and the Respondents' request of 21 March 2016 concerning a drilling manual of Niko and other documents. If these requests are still

³⁵ Decision on the Corruption Claim, 25 February 2019, paragraph 66. ↩

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pertinent and pursued when the Tribunals'examination of the Corruption Issue has been completed, the Parties may renew them.

169. The Decision on the Corruption Claim was issued on 25 February 2019. When communicating that decision to the Parties the Tribunal informed them that:

The Tribunals will now resume their work on the decision concerning liability for the blowouts which had been put on hold by the Respondents' Corruption Claim. The Tribunals will then consult the Parties concerning further directions for the completion of the Arbitrations.

170. Since then neither Party has renewed the procedural requests that had been reserved in Procedural Order No 13, as quoted above. The Tribunal nevertheless considered the requests concerning the Respondents' submission of 5 March 2016 with Exhibit R-47 and the Claimant's objections of 16 March 2016 below in Section 8.4.2, in fine. Concerning the documents which the Respondents had identified as still outstanding in their letter of 21 March 2016 and the explanations that had been provided by the Respondents on their relevance and materiality, the Tribunal concluded that they were not of critical importance for its Decision on Liability. It was comforted in this conclusion by the absence of a renewed request from the Respondents.

171. The Tribunal concludes that there are no procedural requests outstanding and that the Parties had full opportunities to provide argument and evidence in support of their positions concerning the liability for the blowouts. It resumed its deliberations and now makes its decision on liability, within the scope set out below in Section 6.

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4. THE RELIEF REQUESTED

4.1 The Claimant

172. In its Notice to Arbitrate of 8 January 2010, Niko announced its intention to commence arbitration proceedings against BAPEX, Petrobangla and Bangladesh in respect to a dispute defined as follows:

(a) All claims held jointly or severally by any of Bapex, Petrobangla and Bangladesh to damages or losses alleged to arise from the blow outs of two wells which were then being drilled by Niko under the JVA in the gas field in Bangladesh known as the Chattak gas field (the “Compensation Claims”), including those arising from the matters alleged in either the Legal Notice dated May 27, 2005 issued on behalf of Petrobangla to Niko (a copy of which is attached) and/or in the pleadings filed on behalf of Petrobangla in the suit filed June, 2008 by Petrobangla and the Government of Bangladesh against Niko and others in the Court of District Judge, Dhaka, Bangladesh, no. 224 of 2008;

(b) Whether Niko is liable for any of the Compensation Claims in whole or in part, and if it is liable, determination of the amount of liability;

(c) [description relating to the Payment Claim]³⁶

173. In RfA I, dated 1 April 2010, Niko referred to the Notice to Arbitrate and quoted the definition of the Compensation Claim contained therein, stating its intent to have that Claim resolved by ICSID arbitration.

174. At the Preliminary Procedural Consultation and First Session on 14 February 2011, the Claimant's request for relief was defined as

... a declaration that it has no liability for any damage that may have arisen from the two well blow-outs which occurred on the Chattak wells and that it owes no compensation for such damage.³⁷

³⁶ Attachment D to the Request for Arbitration, dated 1 April 2010 (RfA I). ↩
³⁷ Procedural Order No 1, second paragraph. ↩

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175. The Claimant specified its requested relief in its Memorial concerning the Compensation Declaration of 27 September 2013, seeking an award by the Tribunal

a. Declaring that Niko breached no obligation or law as concerns the two blowouts in 2005 at Chattak field and is not liable to BAPEX, its predecessors, assignors, successors or assigns;

b. In the alternative, and in the event that the Tribunals find liability on the part of Niko, fixing the amount of any compensation due for any damages to BAPEX, its predecessors, assignors, successors or assigns;

c. Declaring, for the purposes of the preceding declarations, that BAPEX is in all relevant respects the successor and assignee of the Government of Bangladesh and Petrobangla;

d. In the event that BAPEX is not in all relevant respects the successor and assignee of the Government of Bangladesh and Petrobangla, declaring that BAPEX breached its warranty in the JVA that it had been assigned all relevant obligations and responsibilities of the Government of Bangladesh and Petrobangla;

e. Declaring that Niko is entitled to any and all damages resulting from the continued pursuit of the Money Suit by the Government of Bangladesh and Petrobangla in Dhaka court as a consequence of the breach of the arbitration clause of the JVA and/or the warranty that BAPEX had been assigned all relevant obligations and responsibilities of the Government of Bangladesh and Petrobangla in the JVA;

f. Ordering BAPEX to pay to Niko as compensation for said breach the amount corresponding to (i) all attorneys' fees, expert fees and other costs incurred by Niko in defending itself and its officers in the Money Suit; and (ii) any pecuniary difference between the findings of these Tribunals as to the extent of Niko's liability for the 2005 blowouts and the findings of any final judgment in the Money Suit;

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g. Ordering that all sums awarded be in freely transferable and exchangeable funds, in accordance with the requirements of Article 26.1.6 of the JVA;

h. Ordering BAPEX to pay to Niko the costs of this arbitration, including professional disbursements;

i. Ordering BAPEX to pay to Niko interest on all sums awarded; and

j. Ordering such other and further relief as the Tribunals deem appropriate in the circumstances.³⁸

176. In its Reply concerning the Compensation Declaration of 29 May 2014, Niko presented a slightly modified request for relief as follows:

Niko respectfully submits that the Tribunals should issue an award in its favor and against BАРЕХ:

(a) Declaring that Niko breached no obligation or law as concerns the two blowouts in 2005 at Chattak field and is not liable to BAPEX, its predecessors, assignors, successors or assigns;

(b) In the alternative, and in the event that the Tribunals find liability on the part of Niko, fixing the amount of any compensation due for any damages to BAPEX, its predecessors, assignors, successors or assigns;

(c) Declaring that BAPEX breached its warranties and misrepresented in the JVA that it had been vested with and assigned all relevant rights, obligations and responsibilities of the Government of Bangladesh and Petrobangla;

(d) Declaring that Niko is entitled to any and all damages resulting from the pursuit of the Money Suit by the Government of Bangladesh

³⁸ Niko's Memorial concerning the Compensation Declaration, 27 September 2013 (C-CD.1), paragraph 23 ↩

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and Petrobangla in Dhaka court as a consequence of the abovementioned breach of warranty and misrepresentation;

(e) Ordering BAPEX to pay to Niko as compensation for said breach and misrepresentation the amount corresponding to (i) all attorneys' fees, expert fees and other costs incurred by Niko in defending itself and its officers in the Money Suit; and (ii) any pecuniary difference between the findings of these Tribunals as to the extent of Niko's liability for the 2005 blowouts and the findings of any final judgment in the Money Suit;

(f) Ordering that all sums awarded be in freely transferable and exchangeable funds, in accordance with the requirements of Article 26.1.6 of the JVA;

(g) Ordering BAPEX to pay to Niko the costs of this arbitration, including professional disbursements;

(h) Ordering BAPEX to pay to Niko interest on all sums awarded; and

(i) Ordering such other and further relief as the Tribunals deem appropriate in the circumstances.³⁹

177. In the Post-Hearing Brief of 22 January 2016, Niko presented the relief requested as an award in its favour and against BAPEX in the following terms:

(a) Declaring that Niko breached no obligation or law as concerns the two blowouts in 2005 at the Chattak field and is not liable concerning the blowouts to BAPEX, its predecessors, assignors, successors or assigns;

(b) In the alternative, and in the event that the Tribunals find liability on the part of Niko, fixing in the hearing on quantum scheduled for

³⁹ Niko's Reply concerning the Compensation Declaration, 29 May 2014 (C-CD.2), paragraph 315. ↩

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August 2016 the amount of any compensation due for any damages to BAPEX, its predecessors, assignors, successors or assigns;

(c) Declaring that the Tribunals’determination of Niko's liability concerning the blowouts and any damages resulting therefrom is final and binding upon BAPEX and all of its predecessors, assignors, successors and assigns;

(d) Declaring that BAPEX breached its warranties and misrepresented in the JVA that it had been vested with and assigned all relevant rights, obligations and responsibilities of the Government of Bangladesh and Petrobangla;

(e) Declaring that Niko is entitled to be made whole for any and all damages resulting from the pursuit of the Money Suit by the Government of Bangladesh and Petrobangla in Dhaka court as a consequence of the above-mentioned breach of warranty and misrepresentation;

(f) Ordering BAPEX to pay to Niko as compensation for said breach and misrepresentation the amount corresponding to all attorneys’ fees, expert fees and other costs incurred by Niko in defending itself and its officers in the Money Suit;

(g) Ordering BAPEX to pay on Niko's behalf the full amount of any damages assessed against Niko by a final judgment or decree in the Money Suit;

(h) Ordering BAPEX to pay to Niko the costs of this arbitration, including professional disbursements;

(i) Ordering BAPEX to pay to Niko interest on all sums awarded to Niko;

(j) Ordering that all sums awarded to Niko be in freely transferable and exchangeable funds, in accordance with the requirements of Article 26.1.6 of the JVA; and

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(k) Ordering such other and further relief as the Tribunals deem appropriate in the circumstances.⁴⁰

178. The relief requested in the Post-Hearing Brief was confirmed and clarified at the February 2016 Hearing.⁴¹ In particular the Claimant confirmed that the "predecessors, assignors, successors and assignees” include Petrobangla and the Government.⁴²

4.2 The Respondents

179. In response to the Requests for Arbitration and during the initial phase of the Arbitrations, the Respondents denied the Tribunal's jurisdiction with respect to all claims and requested their dismissal.

180. Following the Tribunal's Decision on Jurisdiction, BAPEX requested in its Counter-Memorial concerning the Compensation Declaration of 30 January 2014, at paragraph 89 that the Tribunal:

a. Declare that there is no legal dispute between BAPEX and Niko under the JVA;

b. In the alternative, declare that BAPEX is not obligated to indemnify Niko for any damage resulting from the pursuit of the Money Suit by the Government of Bangladesh and Petrobangla in the Bangladesh courts;

c. Dismiss all of Niko's claims against BAPEX;

d. Award all costs, including legal representation, incurred by BAPEX in this proceeding.⁴³

181. In its Rejoinder concerning the Compensation Declaration of 25 September 2014, ВАРЕX continued to argue that Niko's real claim was against acts

⁴⁰ Niko's Post-Hearing Brief on Liability, 22 January 2016 (C-PHB), paragraph 431. ↩
⁴¹ HT 2016.02.21, page142 et seq. ↩
⁴² HT 2016.02.21, page 145. ↩
⁴³ BAPEX's Counter-Memorial concerning the Compensation Declaration, 30 January 2014 (B-CD.1), paragraph 89. ↩

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of third parties and that there was no claim for BAPEX to answer. It concluded:

... the Tribunal should dismiss the claim in its entirety and award costs in [BAPEX] favour.⁴⁴

182. In its Post-Hearing Brief of 22 January 2016, BAPEX concluded:

The evidence on the record and testimony at the hearing demonstrate that Niko has not met its burden to prove that it is entitled to the relief it seeks. This Tribunal should reject Niko's request for a declaration on non-liability and its request for a finding of breach of warranty.⁴⁵

183. In its Memorial on Damages of 25 March 2016, the relevant parts of BAPEX's request stated the following relief:

BAPEX requests that the Tribunal:

[...]

f. In the alternative, should the Tribunal determine that the JVA is not voidable or voided, declare that Niko must compensate BAPEX for the harms arising from Niko's breaches of the JVA, including all losses resulting from the two blowouts that occurred at the Chattak Field;

g. Order Claimant to pay damages of $118 million for BAPEX's losses;

h. Should the Tribunal make a determination of the Government's losses, order Claimant to pay damages of $896 million for the Government's gas losses and between US$ 8,461,463 and $8,642,493 to cover the expenses of monitoring, surveying and abatement and to hold this proceeding open until such time as a complete survey and monitoring of the Tengratila area can be

⁴⁴ BAPEX's Rejoinder concerning the Compensation Declaration, 25 September 2014 (B-CD.2), paragraph 103. ↩
⁴⁵ BAPEX's Post-Hearing Brief on Liability, 22 January 2016 (R-PHB), paragraph 308. ↩

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conducted and BAPEX can provide the fullest possible accounting of environmental and health related losses;

i. Order prejudgment and post-award interest on all sums awarded;

j. Order Claimant to pay all the expenses and costs associated with defending against these proceedings, including BAPEX's attorneys' and expert witnesses' fees and expenses, the fees and expenses of ICSID and the members of the Tribunal, and the charges for the use of hearing facilities;

k. Grant BAPEX any other remedy that the Tribunal considers appropriate.⁴⁶

184. On 29 April 2016 BAPEX modified its requests, making a change in item (f) and leaving items (g) to (k) unaltered:

f.) In the alternative, should the Tribunal determine that the JVA is not voidable or voided and proceed to adjudicate Niko's claims, declare that Niko must compensate BAPEX for the harms arising from amount it determines is owed by Niko for Niko's breaches of the JVA, including all losses resulting from the two blowouts that occurred at the Chattak Field.

⁴⁶ BAPEX's Memorial on Damages, paragraph 400. ↩

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5. SUMMARY OF THE RELEVANT FACTS

185. The facts of the disputes underlying these arbitrations have been broadly set forth in several of the Tribunal's earlier decisions. The brief summary below sets out the essential facts relating to the Chattak field and the present Decision, providing the background to the two blowouts which will be addressed in further detail below in Sections 8 and 9.

186. The Chattak field, sometimes also referred to by the name of the neighbouring village of Tengratila, in the Sylhet area in the far north-east of Bangladesh, was discovered in 1959 by Pakistan Petroleum Ltd., the predecessor of Petrobangla. The first well, Chattak 1 Well, was drilled in 1960, operated for some 25 years, producing some 26 bcf of gas. Increased water production forced Petrobangla to shut down the well in 1985.⁴⁷ This Chattak 1 Well is situated in the western part of the field, which is distinguished from the Eastern part, as described in particular in Section 9.5.1 of the Decision on the Corruption Claim.

187. In 1997, a blowout occurred in the Moulavi Bazar well, sometimes also referred to as Maguchora,⁴⁸ an exploration well drilled by Occidental Petroleum also in the Sylhet area.⁴⁹ The Parties disagree as to whether information concerning this well and this blowout was available to Niko before it drilled in the Chattak field.

188. Niko and its parent company Niko Resources Ltd (Niko Canada) were in contact with the Government of Bangladesh and the Respondents since 1997. In August 1999 Niko and BAPEX concluded a Framework of Understanding pursuant to which the produced in February a joint study on three marginal/abandoned fields, including the Chattak field. This study, entitled “Marginal Field Evaluation Chattak, Feni and Kamta”, gathered information on the three fields.⁵⁰ It was decided that the Chattak and the Feni fields were promising enough to proceed. After protracted negotiations in which the Government and Petrobangla were actively involved, BAPEX and Niko concluded the JVA on 16 October 2003 relating

⁴⁷ Marginal Field Evaluation (Annex B to the JVA)(MFE), page B-6. ↩
⁴⁸ E.g. in the Report on Environmental and Forrestry Losses (Annex R-1) ↩
⁴⁹ Expert Report of John Wright, 29 May 2014 (Wright 1), page 17 and cross section at Figure 3-4 at page 18; Witness Statement of Brian Adolph, 28 May 2014 (WS Adolph), paragraph 77; Witness Statement of Mohammed Abdul Baqi, 27 October 2015 (WS Baqi), paragraphs 19 to 21. ↩
⁵⁰ Both the Framework of Understanding and the Marginal Field Evaluation are attached to the JVA, Exhibit C-1. ↩

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to the Feni and the Chattak field. Niko was assigned the role of the Operator.

189. Following the conclusion of the JVA, the Joint Venture started its work in the Feni field where it drilled several wells, expecting that the Feni 3 Well could start production in July 2004. Production in the Feni field actually started on 2 November 2004.⁵¹

190. With respect to the Chattak field, Niko proposed, in addition to the agreed work programme, that a 3D Seismic Study be conducted during the dry season, starting in May 2004. The proposal was accepted at the 3rd meeting of the Joint Management Committee on 28 February 2004. On this occasion Niko also announced its intention to use for Chattak "the same drilling rig engaged for Feni [...] without demobilising the drilling rig from Bangladesh. This will save the joint venture over two million US dollars in mob and demob costs".⁵²

191. On 24 November 2004, Niko announced to BAPEX that the drilling rig was being moved from Feni to Chattak and that it was in a position to start drilling in Chattak in early January 2005.⁵³

192. On 14 December 2004 Niko sent to BAPEX the Chattak-2 Well Proposal. In its cover letter it stated that the proposal was “for your information and taking necessary actions”.⁵⁴ No reaction from BAPEX had been received when, on 31 December 2004, Niko started drilling the Chattak 2 Well.

193. When the depth of 305m was reached, 13 3/8” casing and a Blowout Preventor (BOP) were installed, and the casing shoe set at 305m. Drilling continued to 807m when, on 7 January 2005, the drilling crew performed a wiper trip. In the course of that trip, the first blowout occurred at 19:50h. Details will be discussed below in Section 8.2.

194. The loss and damage caused by the blowout will be considered in further detail in the next phase of the proceedings, when the Tribunal will quantify the damage. The brief explanations here provide an overview of the events

⁵¹ For details about the production from the Feni field see in particular Decision on the Corruption Claim, pages 146 et seq. ↩
⁵² Minutes of the Joint Management Committee (JMC) Meeting, 28 February 2004, Exhibit C-12. ↩
⁵³ Niko's Letter to BAPEX, 24 November 2004, Exhibit C-14. ↩
⁵⁴ Niko's Letter to BAPEX, attaching Chattak-2 Well Proposal, 14 December 2004 (Chattak-2 Well Proposal), Exhibit C-15. ↩

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that followed and are without prejudice to the findings of the Tribunal in that future phase.

195. During the night of the blowout gas mixed with debris erupted from the Chattak 2 Well and blew up to 100m in the air. The rig collapsed and fell into the crater that had formed. The gas ignited and burned for several days.

196. Niko's personnel escaped safely, and no persons were injured; but damage was caused to the surrounding habitats and environment.

197. Niko's report of 11 January 2005 stated inter alia:

There were no injuries or fatalities. The flow was sweet dry gas with no liquids of any description.

On 9 January 2005 at 09:30 am, flow diminished and extinguished.

Area inspection indicated small flares through fissures in and around the drill site.

Gas flare continues to decrease daily. The field is being monitored with daily site visits.

Full investigation is underway by all parties concerned.⁵⁵

198. The First Enquiry Report by the Committee set up by the Government to determine the causes of the blowout noted as follows in its report of 7 February 2005:

Information gathered from eyewitnesses indicate that the flare height was maximum during first 42 hrs. (9 pm at 7.1.05 to 3 pm of 9.1.05). The flare height occasionally decreased during this period. The main fire ceased in the afternoon of 9 January 2005 but there were number

⁵⁵ Chattak 2 Well Control Incident and Blowout – Draft Report, 11 January 2005 (Draft Report), Exhibit C-21. ↩

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of seepages where gas was burning. The height of these fire were 2 – 5 ft.⁵⁶

199. Niko engaged Safety Boss Inc., a Canadian well control and safety consultant, whose representatives arrived on site on 9 January 2005. They issued a summary report on 24 January 2005, recommending further action.

200. The report of Safety Boss concluded that surface intervention was no longer possible and that sub-surface intervention, i.e. a relief well, remained the only option.⁵⁷

201. Niko engaged GSM Consulting Petroleum Engineers (GSM) the company of Robert Grace by a consulting agreement dated 7 January 2005 (the date of the blowout⁵⁸) for the relief well design and operation.⁵⁹ GSM prepared a Relief Well Program which Niko submitted to BAPEX on 13 February 2005, requesting a meeting on 15 February and a meeting of the JV Joint Management Committee (JMC)on 22 February 2005.⁶⁰

202. The Joint Management Committee Meeting was held on 22 February 2005, but the revised minutes were completed only on 27 March 2005. In the meantime, BAPEX wrote on 16 March 2005, advising as to the desirability of an observation well and shifting the location of the position of the relief well; it requested that this comment be included in the minutes of the meeting of 22 February 2005.⁶¹ On 17 March Niko requested Mr Grace to comment on the requested observation well. Mr Grace advised against drilling such a well. This exchange was attached to the revised minutes of 27 March 2005 which concluded that “observation well will not be required prior to drilling of the relief well”.⁶²

⁵⁶ First Enquiry Report on Blowout of Well Chattak 2 on 7 January 2005, 7 February 2005 First (Enquiry Report), Exhibit R-3, paragraph 6.18. For a list of these reports, see below in this section. ↩
⁵⁷ Safety Boss, Summary Report Covering the Period from 9 to 12 January 2005, Exhibit C-23. ↩
⁵⁸ Mr Hornaday explained at the November 2015 Hearing that the date used was that of the blowout, but the contract was not signed on that date; HT 2015.11.05 (Day 4), page 1130. ↩
⁵⁹ Consulting Agreement between Niko and GSM Consulting Petroleum Engineers, 7 January 2005, Exhibit C-18. ↩
⁶⁰ Niko's Letter to BAPEX, attaching Relief Well Programme, 13 February 2005 (Relief Well Program), Exhibit C-28. ↩
⁶¹ BAPEX's letter to Niko, 16 March 2005, Exhibit R-36. ↩
⁶² Revised Minutes of JMC Meeting held on 22 February 2005, Exhibit C- 31. ↩

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203. The preparation of the relief well drilling required preparatory works and additional equipment which had to be brought to site, some of it from abroad. GSM prepared the drilling procedure for the relief well, referred to as Chattak 2A Well.⁶³ Drilling the relief well started on 30 May 2005 some 100m away from the blowout at the Chattak 2 Well. The Chattak 2 A Well also suffered a blowout on 24 June 2005. When the truck pumping water into the well ran out of fuel, the gas flow from the well ignited.

204. GSM then prepared drilling plans for (i) a Data Acquisition Well (referred to as Chattak 2C well) and, on the basis of the information from Chattak 2C and the previous wells and blowouts, for (ii) a further relief well, referred to the Chattak 2B Well. The drilling programmes for both wells was approved by the JMC at the meeting of 28 July 2005.⁶⁴

205. The second relief well eventually was successfully completed on 9 October 2005, as Niko reported to BAPEX at a meeting of 16 October 2005.⁶⁵ The Parties disagree, however, about the question whether the relief operation fully prevented all gas flowing from Sands 1 and 2.⁶⁶

206. Niko proposed to resume drilling in the Chattak field, drilling the Chattak 3 well. No agreement was reached between BAPEX and Niko in this regard.⁶⁷ Neither Chattak 3 nor any other well was drilled thereafter. The Claimant denies that the Chattak field was abandoned.⁶⁸

207. Following the blowouts, several investigations were performed in Bangladesh. BAPEX described them in the annex to its Counter-Memorial concerning the Compensation Declaration of 30 January 2014;⁶⁹ and the Claimant discussed them in its Reply of 29 May 2014.⁷⁰ They can be grouped according to the subject matters:

⁶³ Chattak 2A Relief Well Plan and Drilling Procedure, Exhibit C-86. ↩
⁶⁴ Minutes of JMC Meeting, 28 July 2005, Exhibit C-3, page 6, Decision 1. ↩
⁶⁵ WS Adolph, paragraphs 108 and 109. ↩
⁶⁶ See e.g. BAPEX letter of 22 November 2005, Exhibit C-4, paragraph V and page 4 and WS Adolph, paragraph 108. ↩
⁶⁷ WS Adolph, paragraphs 170 to 178; BAPEX's letter to Niko, 22 November 2005, Exhibit C-4. ↩
⁶⁸ HT 2016.02.22, page 515. ↩
⁶⁹ B-CD.1, Annex: Investigations into the blowouts and their consequences. ↩
⁷⁰ C-CD.2. ↩

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208. The causes of the two blowouts were examined by

(a) An Enquiry Committee that produced an “Enquiry Report on Blowout of Well Chattak No. 2 on 7 January 2005”, the report is dated 7 February 2005 (referred to below as the “First Enquiry Report");⁷¹

(b) A second Enquiry Committee examining the causes of the blowout of the relief well Chattak 2A; it produced a report on “The Blowout of Relief Well Chattak 2A (24th June 2005)”, dated 13 August 2005 (referred to as the “Relief Well Enquiry Report”).⁷²

209. The losses of gas were examined by:

(a) The Committee for Estimating Gas losses caused by Blowout in Chattak-2, which produced its report on 4 June 2005;⁷³

(b) The Committee for Estimating Gas Losses Caused by Chattak 2A Relief Well Blowout, which produced its report on 27 August 2005.⁷⁴

210. The environmental losses were examined by:

(a) The Committee for Estimation of Environmental and Forestry Losses caused by the fire created in Tengratila Gas Field in Sunamgonj which produced its report dated 17 January 2005;⁷⁵

(b) The Committee formed to estimate the amount of environmental losses caused by blowout explosion in Tengratila Gas Field, which produced its report dated 13 April 2005;⁷⁶

(c) The Committee formed to estimate the amount of environmental losses due to the second blowout in Chattak Gas Field (Tengratila)

⁷¹ Enquiry Report, Exhibit R-3. ↩
⁷² Report of the Enquiry Committee on the Blowout of Relief Well Chattak 2A, 13 August 2005, Exhibit R-6. ↩
⁷³ Report of the Committee for Estimating Gas Losses Caused by Blowout in Chattak 2, 4 June 2005, Exhibit R-2. ↩
⁷⁴ Report of the Committee for Estimating Gas Losses Caused by Chattak 2A Well Relief Well Blowout, 27 August 2005, Annex R-4. ↩
⁷⁵ Report of the Committee for Estimation of Environmental and Forestry Losses Caused by the Fire Created in Tengratila Gas Field, 17 January 2005, Annex R-1. ↩
⁷⁶ Report of the Committee Formed to Estimate the Amount of Environmental Losses due to Blowout Explosion in Tengratila Gas Field, 13 April 2005, Annex R-2. ↩

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of Doarabazar Sub-District of Sunamganj District, which produced its report dated 15 September 2005.⁷⁷

211. The local losses were estimated by the Committee formed to estimate the amount of local losses due to the fire incident in Tengratila Gas Field, which produced its report dated 8 June 2005.⁷⁸

212. Niko also engaged specialists to examine the consequences of the blowouts and for environmental monitoring, in particular Mr Randal Glaholt and his company TERA Environmental Consultants, Canada, and Crown Agents, UK. This activity has been described in particular in Mr Glaholt's witness statement and 20 Environmental Monitoring Reports, as listed in this witness statement, of which some have been produced in the arbitrations.⁷⁹

213. The Government of Bangladesh and Petrobangla, following a legal notice of 27 May 2008, initiated on 15 June 2008 legal action in the Court of District Judge, Dhaka against Niko and others. The proceedings, referred to as the Money Suit, and other court proceedings in Bangladesh related to Niko's contracts, have been discussed in previous Decisions of the Tribunal, most recently in Sections 2.5 and 2.6 of the Decision on the Corruption Claim.

214. In the Money Suit, the Government and Petrobangla claim compensation for "losses sustained due to burning of gas and destruction of mineral resources and natural resources which are mainly losses of movable property”.⁸⁰ These losses relate to the loss and damage caused by the two blowouts in the Chattak field which are the subject matter of the present arbitrations. They are then specified in four Schedules with the following titles:

Schedule A: Gas burnt at Chattak field,

⁷⁷ Report of the Committee Formed to Estimate the Amount of Environmental Losses due to 2nd Blowout in Chattak Gas Field, 15 September 2005, Annex R-5. ↩
⁷⁸ Committee Formed to Estimate the Amount of Local Losses due to Fire in Tengratila Gas Field, 8 June 2005, Annex R-3. ↩
⁷⁹ E.g. Tera's Environmental Site Inspection Report, 26 January 2005, Exhibit C-25, and Crown Agents and Tera Consultants Biweekly Reports, the first of which dated 28 February 2005, Exhibit C-29. ↩
⁸⁰ Complaint, People's Republic of Bangladesh v. NIKO Resources (Bangladesh) Ltd., Money Suit No. 224/2008 (2d Court of Joint District Judge) (Bangl.), Exhibit C-6, paragraph 65. ↩

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Schedule B: Sub-surface loss at Chattak field,
Schedule C: Additional sub-surface loss at Chattak field,
Schedule D: Environmental Losses at Chattak Gas Field.

215. The Respondents reported on the status of the Money Suit in their submission of 19 October 2015.⁸¹ By that time, an application for a stay of the proceedings by Niko was pending. The Respondents expressed the view that, given Niko's applications, “the Money Suit is unlikely to be completed within the next two years”.⁸²

216. Subsequently, the Claimant informed the Tribunal that Petrobangla was “actively and vigorously pursuing” the Money Suit and that the court was “currently hearing witness testimony from various officers and representatives from Petrobangla, the Government of Bangladesh, and BAPEX on the blowouts and the consequences of the blowouts at Chattak”. It added that on 25 July 2016, “Niko filed an application for adjournment based on the Tribunals' Decision on Exclusivity” and that this application was rejected on 8 August 2016. The Claimant also mentioned that on 24 May 2016 the High Court Division directed the Money Suit court “to proceed to complete the trial of the suit as expeditiously as possible preferably within 4 (four) months from the date of receipt of this order.”⁸³

217. The latest information made available to the Tribunal about these proceedings are references to the Money Suit contained in the written version of the Alam Judgment of November 2017. The judgment mentions information provided by counsel, stating that the case is “now pending".⁸⁴

⁸¹ B-CD.9, pages 24 – 28. ↩
⁸² B-CD.9, page 26. ↩
⁸³ Claimant's letter of 12 August 2016, quoted in the Decision on the Corruption Claim, paragraph 355. ↩
⁸⁴ See Decision on the Corruption Claim, paragraph 358. ↩

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6. THE SCOPE OF THE PRESENT DECISION

6.1 The issues relevant for the Compensation Declaration

218. On the basis of the Parties' requests for relief, in their latest versions as set out above in Section 4, the Tribunal has identified the following issues for determination in the proceedings related to the Compensation Declaration:

(i) Clarification of the Tribunal's jurisdiction concerning Niko's liability to BAPEX under the JVA;

(ii) Determination whether the Tribunal's findings on Niko's liability for the blowouts are final and binding also on the Government and Petrobangla;

(iii) Any breach of warranties by BAPEX as the party to the JVA and possible sanctions for such breach;

(iv) The obligations and laws applicable to Niko's operations relevant for the two blowouts;

(v) Any conduct by Niko in breach of such obligations and laws which is causal for the blowouts;

(vi) Determination of Niko's liability;

(vii) If liability is found, determination of the amounts of compensation owed by Niko;

(viii) Interest;

(ix) Cost of the arbitrations in relation to the Compensation Declaration proceedings.

219. The Tribunal will start by clarifying jurisdictional and related issues as set out in items (i) and (ii) above. It will then address the Claimant's related claim for breach of warranties (item iii). It will complete this section by determining the issues ready to be decided, specifically addressing items (iv) to (vi) above. Based on the Tribunal's conclusions, items (vii), (viii) and (ix) will be addressed in the next phase of these arbitrations.

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6.2 The Tribunal's jurisdiction with respect to Niko's liability to BAPEX under the JVA

220. In the Decision on Jurisdiction the Tribunal held:

There can be no doubt that the Tribunal has jurisdiction to determine whether Niko has any liability for the two blowouts under the JVA and to make the requested declaration if it deemed it to be well founded.⁸⁵

221. Subsequently, in the Counter-Memorial concerning the Compensation Declaration, the Respondents argued that the question of Niko's liability arose in the Money Suit only, outside of the Tribunal's jurisdiction. The Respondents denied that there was a dispute under the JVA. The Respondents were seeking in these arbitrations as relief a declaration "that there is no legal dispute between BAPEX and Niko under the JVA”. They argued that “the Money Suit litigation is the only source to establish which entity is invoking Niko's liability”.⁸⁶ They added:

BAPEX continues to express no opinion on [...] the alleged liability of Niko in connection with the blowouts.⁸⁷

222. In the Rejoinder concerning the Compensation Declaration, the Respondents confirmed this position in clear terms, asserting that BAPEX “has never invoked Niko's liability for the two blowouts”.⁸⁸

223. After the change of counsel, the Respondents reversed their position and applied on 13 August 2015 for Provisional Measures. They argued that, contrary to Niko's assertions, the second relief well, Chattak 2B, had not successfully arrested the flow of gas following the blowouts.⁸⁹ Relying on a recent visit to the Chattak field in 2015 they asserted that “large volumes of gas continue to escape from the Chattak gas deposit”.⁹⁰ They requested the Tribunal to order certain emergency measures for the protection of the local population and interventions to stop the gas flows.

⁸⁵ Decision on Jurisdiction, paragraph 497. ↩
⁸⁶ B-CD.1, paragraphs 89 (a) and 85. ↩
⁸⁷ B-CD.1, paragraph 86. ↩
⁸⁸ B-CD.2, paragraph 2. ↩
⁸⁹ BAPEX's Request for Provisional Measures, 13 August 2015 (B-CD/PM), paragraph 15. ↩
⁹⁰ B-CD/PM, paragraph 2. ↩

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224. The Respondents then commented on the Tribunal's experts' reports and filed their own experts' reports with their submission of 31 August 2015. Relying on the explanations of the Tribunal's experts and on those of their own experts, the Respondents now presented conclusions on Niko's liability under the JVA. In the August 2015 submission, the Respondents addressed Niko's alleged breaches of its obligations and the damage caused, concluding:

Pursuant to the express terms of the JVA, Niko is solely liable for these harms and must compensate all injured parties.⁹¹

225. On 17 September 2015, the Respondents reversed their position concerning their claim for seepages under the JVA in these arbitrations. They declared that “claims arising from gas seepage caused by Niko's blowouts at the Chattak field after 9 October 2005" did "not relate to the subject matter of the dispute” and withdrew the request for provisional measures.⁹²

226. In the subsequent phases of these proceedings, the Respondents continued to address Niko's alleged breaches and its liability. In their Post-Hearing Brief of 22 January 2016, the Respondents dealt in great detail with what it considered to be breaches of Niko's obligations concerning its “conduct of Petroleum Operations” as set out in Article 26.2.4 of the JVA and the relevant standards.⁹³ They asserted that Niko breached these standards when planning and drilling the Chattak 2 and 2A wells and that these breaches caused the blowouts⁹⁴ and thus caused injury to BAPEX.⁹⁵

227. In their Post-Hearing Brief of 22 January 2016, the Respondents included a section entitled “The Breaches Caused and Exacerbated the Effects of the Blowouts, Causing Injury to BAPEX”. In this section they addressed some aspects of the damage caused by the blowouts. They asserted again that "Niko is liable to BAPEX under the JVA for lost profit and lost production as a result of the two blowouts”⁹⁶ and concluded that "[m]ost

⁹¹ BAPEX's Comments on the Reports of the Tribunal Experts, 31 August 2015 (B-CD.3), paragraph 69. ↩
⁹² For details see above Section 3.2.5. ↩
⁹³ In particular in R-PHB, pages 7 – 38. ↩
⁹⁴ In particular R-PHB, pages 69 – 73 and 74 – 89. ↩
⁹⁵ R-PHB, pages 89 – 92. ↩
⁹⁶ R-PHB, page 103, title IV.A, also section III. ↩

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of this will be dealt with in the next stage of this proceeding, when BAPEX presents the quantum of harm caused”.⁹⁷

228. The Respondents nevertheless argued in the same Post-Hearing Brief that

BAPEX has only responded to Claimant's expert report and the Tribunal Expert Report to rebut the limited and specific evidence Claimant put forth for its assertion that it is entitled to a declaration of non-liability for the damages resulting from the two blowouts. BAPEX has not presented a full case for liability. If it had intended to make and prove claims against Niko, BAPEX would have submitted much more complete expert reports, witness statements, and documentary evidence on all issues, not just in response to what Claimant presented.⁹⁸

229. In its Memorial on Damages of 25 March 2016 BAPEX made several requests concerning the alleged corruption in the procurement of the JVA. In the alternative that the JVA were not voidable or voided, BAPEX made the following request:

Declare that Niko must compensate BAPEX for the harms arising from Niko's breaches of the JVA, including all losses resulting from the two blowouts that occurred at the Chattak field ...⁹⁹

230. It is thus abundantly clear that both the Claimant and the Respondents are of the view that there is indeed a dispute before this Tribunal about Niko's liability under the JVA for the blowouts and the resulting loss and damage. The Tribunal has noted elsewhere occasional prior statements by the Respondents which imply otherwise. What matters, however, is that the dispute between the parties in these arbitrations concerns Niko's liability under the JVA. Had there been any doubt in this respect, it was removed by the relief requested in BAPEX's Memorial on Damages of March 2016. In that submission, BAPEX made formal claims in the present arbitrations in relation to the JVA and accepted that the Tribunal is to determine Niko's liability for these claims under the JVA. The Tribunal's jurisdiction concerning Niko's liability to BAPEX under the JVA,

⁹⁷ R-PHB, paragraph 205. ↩
⁹⁸ R-PHB, paragraph 9. ↩
⁹⁹ BAPEX's Memorial on Damages, 25 March 2016 (B-MD), paragraph 400(f). ↩

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decided already in the Decision on Jurisdiction, is thus not questioned any longer.

6.3 The effect of the Tribunal's findings concerning Niko's liability on the Government and Petrobangla as assignors

231. The Claimant's principal request with respect to the Compensation Declaration is a statement of non-liability:

(a) Declaring that Niko breached no obligation or law as concerns the two blowouts in 2005 at the Chattak field and is not liable concerning the blowouts to BAPEX, its predecessors, assignors, successors or assigns;

232. This request concerns liability to BAPEX, expressly named in the request, and Niko's liability to the Government and Petrobangla, as BAPEX's predecessors and assignors.

233. The Respondents have insisted that the claims against Niko for loss and damage resulting from the blowouts are in fact pursued by the Government and Petrobangla in the courts in Bangladesh in the Money Suit, and are “unrelated to the JVA”. They thus contend, in essence, that these claims are outside the jurisdiction of this Tribunal.

234. The Claimant based the request for a decision concerning the Government and Petrobangla on the assignment of rights to BAPEX. The Claimant confirmed that, in its position,

... the Government and Petrobangla are predecessors and assignors of BAPEX and therefore the declaration that we are requesting does concern them.¹⁰⁰

235. The Tribunal considers first this assignment and its scope. In the subsequent sections, the Tribunal will examine the Claimant's argument based on the approval of the JVA by the Government and Petrobangla and then the rights which, according to the Respondents, the Government and Petrobangla had not assigned to BAPEX and on which they relied in the Money Suit.

¹⁰⁰ HT 2016.02.22, page 549. ↩

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6.3.1 The assignment of rights from the Government and Petrobangla to BAPEX (paragraph 12 of the JVA Preamble)

236. Reference to the assignment is made in Paragraph 12 of the JVA Preamble, which states the following:

BAPEX is vested with all rights free from all encumbrances and liabilities whatsoever to assign, develop, produce, process, refine and distribute 100% (One hundred percent) of all Petroleum resources from or within the territory of the Marginal/Abandoned gas fields of Chattak & Feni ...¹⁰¹

237. When referring to the rights “vested” in BAPEX according to paragraph 12 and “acquired” by BAPEX according to paragraph 14 of the JVA Preamble, the Parties have often use the term “assigned”.¹⁰² The Tribunal will do likewise, assuming that, for the issue to be decided here, there is no essential difference between these three terms.

238. Concerning the act of assignment and the instrument where it is recorded, the Claimant has stated that “the Respondents have produced no instrument effecting the vesting of rights and assignment of obligations represented in the warranties”,¹⁰³ as contained in the Preamble of the JVA.

239. The Tribunal sees no difficulty in the fact that no instrument of assignment has been presented in the arbitrations: paragraph 12 of the JVA Preamble reports that BAPEX was vested with the relevant rights and the Government and Petrobangla approved the statement. All three parties to the assignment thus confirmed that the assignment had taken place. For the issues to be considered here, no further evidence of the assignment is required.

240. The Parties differ with respect the scope of the assignment and the rights that were assigned to BAPEX. There is no difference, however, that, in the context of the present dispute, the question must be determined on the basis of the JVA.

¹⁰¹ JVA, Exhibit C-1, Preamble, paragraph 12. ↩
¹⁰² For the Claimant see, e.g. C-PHB, paragraph 336; for the Respondents see e.g. R-PHB, paragraph 283. ↩
¹⁰³ C-PHB, paragraph 291. ↩

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241. The Claimant relies on paragraphs 12 and 14 of the JVA Preamble and insists on “the comprehensive nature of the rights vested in BAPEX”.¹⁰⁴ In this context the Claimant has identified the rights to “develop” and to “produce” Petroleum resources as “key for petroleum operations".¹⁰⁵ For the issue to be considered here, these two rights do indeed seem to be the most relevant. The Tribunal therefore will use, unless otherwise stated, the right to develop and produce Petroleum resources as a shorthand expression for all rights listed in paragraph 12 of the JVA Preamble.

242. The Respondents accept the principle of the assignment of some rights to BAPEX, but contest its scope. They deny that the assignment of rights was of a "comprehensive nature” as argued by the Claimant. In a first phase of the arbitration, they sought to limit the scope of the assignment and the resulting role of BAPEX to that of a management company, monitoring Niko as the operator. They argued in the Counter-Memorial that BAPEX was “a management company”, to which the Government and Petrobangla assigned "the management of the petroleum operations in the country”; BAPEX's “primary role was to monitor the performance of the joint operations by the operator in order to secure a direct share of the produced petroleum for Bangladesh”.¹⁰⁶ The Respondents described the assigned rights as “the rights of the Government and Petrobangla to monitor – as a management company – the performance of the operations carried out by the operator”.¹⁰⁷

243. The Claimant responded by insisting on the “broad and encompassing” scope of the assigned rights. Considering paragraph 12 of the JVA Preamble, the Claimant wrote:

The provision's breadth is emphasized by the use of the word “all” two times as well as the term “one hundred percent”. “One hundred percent” of “all” leaves no room for doubt that every aspect of Petroleum resources at the fields were vested. The use of the term “vested”, particularly in conjunction with the phrase “free from all encumbrances and liabilities whatsoever”, emphasizes that BAPEX's

¹⁰⁴ C-PHB, paragraph 307. ↩
¹⁰⁵ C-PHB, paragraph 313. ↩
¹⁰⁶ B-CD.1, paragraphs 17 and 24 and FN23. ↩
¹⁰⁷ B-CD.1, paragraph 61(2). ↩

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rights to the Petroleum resources were present, unconditional and absolute.¹⁰⁸

244. In its Rejoinder, the Respondents then argued:

BAPEX has never disputed that certain rights and responsibilities of the Government and Petrobangla were assigned to BAPEX in order to achieve its objective, namely to explore, develop and produce gas in the JVA gas fields. It has never been BAPEXʻs position that the only right assigned to it was to “monitor” the performance of the operator. A plain reading of the JVA and the relevant laws in Bangladesh shows that the Government of Bangladesh and Petrobangla assigned to BAPEX the management of the petroleum operations in the JVA area. This is not in dispute.¹⁰⁹

245. Considering the question “what rights did the Government and Petrobangla assign to BAPEX”, the Respondents stated:

Bangladesh law and the JVA make clear that the Government and Petrobangla assigned to BAPEX the right to conduct exploration and production of natural gas in the JVA area. In addition, BAPEX has been assigned the right to carry out such operations in partnership with private companies. By granting Niko the right to become the sole operator of the JVA operations, BAPEXʻs residuary role in the JVA project was to monitor the performance of the JVA operations by Niko, the operator.¹¹⁰

and

... BAPEX had the responsibility to operate and manage oil operations and had the right to assign such management rights to private companies and form joint ventures with such companies.¹¹¹

246. The Tribunal does not believe that Niko's role as Operator under the JVA left BAPEX with a “residuary role” of monitoring the performance of Niko. In any event, later in the arbitrations the Respondents did not pursue the

¹⁰⁸ C-CD.2, paragraph 215. ↩
¹⁰⁹ B-CD.2, paragraph 6, emphasis in the original. ↩
¹¹⁰ B-CD.2, paragraph 34. ↩
¹¹¹ B-CD.2, paragraph 50. ↩

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theory of BAPEX's role as monitoring; instead they sought to identify specific rights that had not been assigned, an argument to be examined separately below in Section 6.3.3.

247. Before considering these excluded rights, the Tribunal will now examine the scope of the rights assigned to BAPEX, as they were listed in paragraph 12 of the Preamble. The examination concerns specifically the question whether this assignment of rights extended to the comprehensive regulation of Niko's activities in the Chattak field, including the definition of the rules to be observed and liability in the event of their breach.

248. Examining this question, the Tribunal considers first the legal basis on which the assignment took place, as reported in the Preamble to the JVA, which recalls in its paragraph 1 that “[a]ll mineral resources including Petroleum [in Bangladesh] are vested in the Peoples Republic of Bangladesh".

249. The Preamble continues, in paragraph 2, that the Government has “the exclusive right and authority to explore, develop, exploit, produce, process, refine and market Petroleum Resources within the territory [...] of Bangladesh". The Government also has “the exclusive right to enter into Petroleum Agreements with any person for the purpose of Petroleum Operations"; and, as confirmed in paragraph 3 of the Preamble, Petrobangla has the power to exercise these rights and powers of the Government.

250. Based on these rights and on this authority, the Government and Petrobangla vested in BAPEX these rights with respect to specified activities in a specific area. The rights concern“100% (one hundred percent) of all Petroleum resources” and apply in particular to the development and production of these resources in the Chattak field. This, too, is recorded in the Preamble of the JVA, and in paragraph 12, quoted above.

251. Vested with these rights, BAPEX concluded the JVA with Niko. This agreement regulates, as stated in its title, the “Development and Production of Petroleum from the Marginal/Abandoned Fields of Chattak and Feni”. In the context of the present dispute, the following areas of this regulation may be mentioned:

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• The JVA confers on Niko the role of the Operator and defines in particular in Article 26 of the JVA, the “Rights and Obligations of [Niko as the] Operator";
• Specifically in its Article 26.2.4, the JVA sets the standard for Niko's “conduct [of] all Petroleum Operations”.
• It regulates, in particular in Article 27.2 of the JVA, “responsibility in accordance with laws applicable in Bangladesh for any loss or damage to third Parties caused by the wrongful or negligent acts or omissions of the Operator ...";
• It provides for indemnification of BAPEX and the Government and for a limitation of liability; it prescribes, in particular in Article 27.1 of the JVA, responsibility for the environment;
• It regulates the production and sale of Petroleum and the allocation of the revenue from such sale; and
• It regulates, in Article 18 of the JVA, the settlement of “any dispute arising in connection with the performance or interpretation of any provision of this JVA ...”

252. The regulation established in the JVA extends to all aspects of the development and production of Petroleum resources in the Chattak field, in the same way as the Government and Petrobangla could have disposed in the absence of the assignment of rights to BAPEX.

253. The situation under the JVA can be compared to that under the PSC for Block 9 which the Claimant discusses in some detail in the context of Article 27.2 of the JVA and its limitation of liability. This clause in the JVA is indeed practically identical with Article 10.1.21 of the 2001 PSC.¹¹² The PSC was concluded in 2001, some two years before the JVA, by the Government, Petrobangla and BAPEX with three IOCs.

254. The Preamble of that PSC contains the same first three paragraphs as those of the JVA, describing the vesting of Petroleum Resources and the rights of the Government and Petrobangla. The remainder of the Preamble in the PSC is much shorter. In particular it does not contain any provision

¹¹² See in particular the discussion in C-CD.2, paragraphs 67 – 72, and C-PHB, paragraph 332. ↩

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similar to paragraphs 12 and 14 of the JVA's Preamble, relating to the assignment to BAPEX. Such provisions have indeed no place in the 2001 PSC since the Government and Petrobangla are directly committed by the contract as parties to it. In the JVA, however, the direct commitment by the Government and Petrobangla is replaced by the assignment of their relevant rights to BAPEX.

255. In other words, in the JVA BAPEX stepped into the shoes of the Government and Petrobangla as their assignee and regulated the development and production of Petroleum from the Chattak field as they could have done in the absence of the assignment. As a consequence of this assignment, BAPEX as the assignee assumed their role and exercises their rights. The Government and Petrobangla, the assignors, may not exercise the assigned rights; they are bound by the regulation determined by BAPEX, their assignee in the JVA.

6.3.2 The approval of the JVA by the Government and Petrobangla (paragraph 14 of the JVA Preamble)

256. BAPEX warranted in the JVA that the Government and Petrobangla had approved execution of the JVA. Paragraph 14 of the Preamble stated expressly:

BAPEX warrants that it has acquired from Petrobangla and the Government the requisite approvals to execute this JVA. The responsibilities and obligations of Petrobangla and the Government in all relevant Articles, Annexes and Amendments under this JVA has been assign[ed] to BAPEX.

257. The two sentences of this paragraph deal with different issues and are of unequal relevance for the issue of assignment.

258. In the first sentence of paragraph 14 of the Preamble, BAPEX warrants that it has acquired from Petrobangla and the Government the requisite approvals to execute this JVA. As the Tribunal noted in the Decisions on Jurisdiction and on the Corruption Claim, the evidence before the Tribunal confirms that this warranty is in line with the evidence produced in these arbitrations.¹¹³ As observed there, the text of the JVA had been negotiated

¹¹³ See in particular section 3.1 of the Decision on Jurisdiction and the Decision on the Corruption Claim, in particular sections 4.1 and 9.8. ↩

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under direct supervision and direction of the Government and Petrobangla and was approved before the JVA was executed by BAPEX and Niko.

259. The sentence is of particular importance for the ability of the Government and Petrobangla to assert claims for liability: this sentence confirms that the Government and Petrobangla had not just assigned to BAPEX the right to develop and produce gas from the Chattak field; they also had approved the specific terms of this development and production, as they were set out in the JVA. Nor did the Government and Petrobangla merely approve the execution of a JVA that remained to be negotiated; they endorsed a specific text, the execution of “this JVA”. The analysis of the evidence in the Tribunal's decisions on Jurisdiction and on the Corruption Claim shows the extent to which the Government and Petrobangla were involved in establishing the terms of the JVA.

260. In view of this approval of the very text of the JVA, the Government and Petrobangla may not argue that the regulations in the JVA exceed the scope of the rights assigned to BAPEX or that they do not agree with any of the terms of the JVA.

261. As to the second sentence of paragraph 14 of the Preamble, the Claimant stated that this paragraph “recognizes that the JVA contains provisions that specifically or implicitly refer to the Government or Petrobangla's obligations and responsibilities” and concluded that with respect to those obligations “BAPEX was to stand in the shoes of the Government and Petrobangla".¹¹⁴

262. The Respondents argued that paragraph 14 does not expand the rights “enumerated with specificity in paragraph 12” of the Preamble.¹¹⁵ They identify specifically “relevant Articles” in the JVA which contain the “responsibilities and obligations of Petrobangla and the Government” to which the second sentence refers. These concern in particular import licenses and taxes (Article 11.4) and Niko's money transfers and remittances (Article 19).¹¹⁶ These are indeed substantive matters which

¹¹⁴ C-PHB, paragraph 324. ↩
¹¹⁵ B-CD.9, page 14. ↩
¹¹⁶ R-PHB, paragraphs 280 – 283. The Respondents also list a number of other Articles in the JVA referring to Petrobangla and the Government which either have “purposes other than the assignment of responsibilities and obligations to BAPEX” or create obligations for Niko, rather than assign responsibilities and obligations to BAPEX, “none of which can be read to enlarge the scope of 'responsibilities and obligations' assigned to BAPEX” (R-PHB, paragraph 285). ↩

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might not necessarily be included in the assignment of rights concerning the development of Petroleum resources in the Chattak field. There might be circumstances where they merit separate regulation.

263. In any event, the Tribunal is satisfied that the assignment of rights concerning the development and production of Petroleum resources to BAPEX is recorded in paragraph 12 of the Preamble. It considers that there was no need for a separate confirmation in paragraph 14. The Tribunal therefore understands the second sentence of that paragraph to relate to other issues.

6.3.3 The rights allegedly excluded from the assignment

264. In the two preceding sections the Tribunal has explained that the rights assigned by the Government and Petrobangla to BAPEX, as they were listed in paragraph 12 of the Preamble, concern all aspects of the development and production of Petroleum from the Chattak field. It concluded from the approval of the JVA by the Government and Petrobangla that the substantive matters regulated in the JVA all are covered by the assignment of rights to BAPEX.

265. In their submission of 19 October 2015, the Respondents referred to their earlier submissions quoted above in Section 6.3.1 and maintained that the Government and Petrobangla had “assigned to BAPEX the right to conduct exploration and production of natural gas in the JVA area”. They went on to interpret paragraphs 12 and 14 of the JVA Preamble. Referring to the Claimant's assertion that “BAPEX had been assigned all relevant rights and responsibilities of the Government and Petrobangla”, the Respondents accepted that, in paragraph 12, “the phrase ‘all rights', if left unqualified, might have the meaning attributed by Niko”. They added, however, that the passage is “qualified with a limitation to specifically enumerated rights" and went on to explain:

The JVA does not refer to “all rights” or “all relevant rights” it refers to “all rights [...] to assign, develop, produce, refine and distribute” the petroleum in the fields subject to the JVA. Based on its plain meaning, this provision refers to only specific rights to explore, develop, and produce gas in the JVA gas fields. These rights correspond to BAPEX’s raison d'être expressed in its constitutive document. They also correspond to the object of the JVA: to carry out “Development and

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Production of Petroleum from the [...] gas fields Chattak and Feni [...].” Paragraph 12 does not mention any other rights of the Government or Petrobangla. This means it excludes all other rights. Expressio unius est exclusio alterius.¹¹⁷

266. The position was confirmed later in the arbitrations. In their Post-Hearing Brief, for instance, the Respondents confirm their understanding that the rights listed in paragraph 12 of the JVA Preamble “correspond to the object of the JVA" and to “BAPEX's raison d'être”. They argue that “all other rights not listed" in paragraph 12 are excluded from the assignment.¹¹⁸

267. The Respondents thus maintain that the development and production of Petroleum from the Chattak field was the object of the JVA. They argue, however, that, apart from the rights concerning the development and production of Petroleum, as regulated in the JVA, the Government and Petrobangla had other rights. These other rights were not included in the assignment and, according to the Respondents, justify separate action by the Government and Petrobangla invoking Niko's liability for the blowouts in the Chattak field.

268. The Respondents identify four rights which, according to them, were “not assigned to BAPEX in the JVA [and] remained with the Government, Petrobangla and/or the people and Republic of Bangladesh”.¹¹⁹ These rights allegedly excluded from the assignment were first enumerated in the submission of 19 October 2015. The list was then repeated and developed in the Respondents' Post-Hearing Brief in the following terms:

1. (i) the Government's and Petrobangla's right to choose the forum and consent or not to arbitration for resolution of their disputes, or the subject matter of their disputes, with Niko;
2. (ii) the Government's and Petrobangla's rights to seek compensation for torts against them committed by Niko;

¹¹⁷ B-CD.9, page 13, references omitted; in the same terms R-PHB, paragraph 277. ↩
¹¹⁸ R-PHB, pargraph 277. ↩
¹¹⁹ B-CD.9, page 14. ↩

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1. (iii) the Government's right to enforce its environmental laws and seek compensation for environmental harm; and
2. (iv) ownership rights over Bangladesh's natural resources in the subsoil vested in the Republic.¹²⁰

269. The Claimant addressed these issues at the February 2016 Hearing. Referring to passages of the Complaint in the Money Suit which described Niko's obligations as operator by reference to the standards defined in Article 27.2 of the JVA, the Claimant argued that the Government is seeking in the Money Suit “payment of money for Niko's alleged breach of the JVA".¹²¹ It then addressed each of the four excluded rights, describing them as an “attempt to redefine the rights relevant to this arbitration [which] amounts to little more than rhetoric”.¹²²

270. The Tribunal now examines the Respondents' argument as advanced in these arbitrations with respect to each of these allegedly excluded rights. The Tribunal's specific objective is to determine with respect to each of these rights whether it was indeed excluded from the assignment to BAPEX and, if it was, whether this exclusion justifies the conclusion that Niko's liability for loss and damage caused by the blowouts may be determined not (or not exclusively) under the JVA in the present arbitrations but, on the basis of different rights and rules, in the separate action of the Money Suit.

271. The right in the Respondents' list that has an apparently clear link to the Petroleum resources in the Chattak field is that of the Government's asserted ownership of subsoil resources (item iv of the Respondents' list of excluded rights).

272. The legal status of the Petroleum resources in the Chattak field have given rise to some controversy, as follows.

273. The Claimant quoted from the testimony of Mr Imam Hossain, the Secretary of Petrobangla, who had testified at the Jurisdiction Hearing that ownership of the field and of the gas in it had been transferred to

¹²⁰ R-PHB, paragraph 267; the list is repeated at paragraphs 278 and 286. ↩
¹²¹ RH 2016.02.21, page 136. ↩
¹²² RH 2016.02.21, page 139. ↩

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ΒΑΡΕΧ.¹²³ The Claimant took this as evidence that “during the jurisdictional phase the Respondents' position as to BAPEX's rights and responsibilities fully accorded with Niko's understanding that BAPEX had been vested with all relevant rights”.¹²⁴

274. Referring to the Constitution of Bangladesh and the Petroleum Act, the Respondents asserted that the Government remained the owner of the Petroleum resources in the Chattak field before they were extracted.¹²⁵ They added that “BAPEX is not the owner of the subsoil gas in the Chattak Field, and there is no contrary warranty in the JVA”.¹²⁶

275. The Claimant emphasised the difference between the asserted rights of ownership to the gas in situ on which the Respondents relied and the right to exploit the resource. It stated that “neither the Money Suit nor this arbitration is concerned with the ownership of subsoil resources”. Both are “concerned with economically valuable rights to gas from or within the Chattak field, not title to that gas, BAPEX warranted in the JVA that it was vested with 100 per cent of all economically relevant rights to that gas.”¹²⁷

276. The Respondents argue to the contrary that, despite the assignment of the right to develop and produce to BAPEX, the ownership right, which according to them remained with the Government, had a high value to the latter, distinct from that of the right to develop and produce; and that value was affected by the blowouts.¹²⁸ The Tribunal is not persuaded that the naked right of ownership of a resource, stripped of the rights to develop and produce the resource, has any commercial value. It is not readily apparent how an owner without the right to develop and produce the resource can turn that ownership right into a commercial value.

277. The question whether the Government's asserted ownership right had a commercial value may however remain unresolved in the dispute about Niko's liability for the blowouts. If there was such a value, any damage caused by Niko would be due to its action as Operator. Niko did not just enter the Chattak field and drilled a well. It was granted the right to do so

¹²³ C-CD.2, paragraphs 234 – 239 and C-PHB, paragraphs 345 – 350, quoting from Mr Hossain's testimony at the Jurisdiction Hearing in October 2011. ↩
¹²⁴ C-PHB, paragraph 350. ↩
¹²⁵ HT 2012.02.21, pages 183 – 192, specifically pages 188 and 192. ↩
¹²⁶ R-PHB paragraph 303, also B-CD.9, pages 19 - 22. ↩
¹²⁷ HT 2016.02.21, pages 135 et seq. and specifically pages 139 – 141. ↩
¹²⁸ In particular at HT 2016.02.21, page 195. ↩

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at conditions set out in the JVA with the express approval of the Government. Any loss or damage Niko may have caused by the blowouts were the result of its action under the JVA.

278. Consequently, if there was any loss or damage from the blowouts that the Government suffered as the owner of the Petroleum before its extraction, the damage originated from Niko's development of the Chattak field under the JVA pursuant to the assignment of rights as recorded in the JVA. Any liability for such loss or damage must be judged by that JVA.

279. Concerning alleged exclusion of the right related to the enforcement of environmental laws and compensation for environmental harm (item (iii) of the excluded rights list), the Tribunal notes that the Respondents' description encompasses two aspects that need to be considered separately: enforcement of environmental laws and compensation for environmental harm.

280. With respect to the first of these aspects, the Claimant stated:

[t]here is no question, either here nor in the Money Suit, of enforcement of environmental laws. No party has identified any environmental law that was allegedly breached by the blowouts and an action to enforce those laws could not be brought in the form of the Money Suit in any event.¹²⁹

281. The Tribunal notes that neither the present arbitrations nor, as far as the Tribunal has been informed, the Money Suit, are actions for the enforcement of environmental laws in general. What is in issue in both proceedings is the specific issue of liability for the two blowouts. The Government's right to enforce environmental law is not in issue and need not be considered here.

282. Concerning the specific issue of compensation for environmental harm, the Tribunal notes that compliance with environmental laws and regulation forms part of the regulation of Niko's conduct as operator under the JVA. The subject is regulated generally in the performance requirements which provide in Article 26.2.4 of the JVA that the standard of conduct must be “in accordance with the applicable law”. This standard

¹²⁹ HT 2016.02.21, page 140. ↩

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is prescribed specifically by Article 27, entitled “Health, Safety & Environment (HSE)”.

283. These matters concern the development and production of Petroleum from the Chattak field. They can thus not have been excluded from the rights assigned to BAPEX. Breach of the resulting obligations and compensation for environmental harm caused by the two blowouts, thus are clearly subject to the regulation in the JVA. Any claims for liability in this respect must be pursued under the JVA and the dispute settlement mechanism provided therein approved by the Government and Petrobangla.

284. Concerning compensation for torts committed by Niko against the Government and Petrobangla (item (ii) of the excluded rights list), the Respondents argue that the claims in the Money Suit were in tort and that rights to compensation on that basis had not been assigned to BAPEX and thus are not covered by the JVA:

It is particularly important for purposes of this arbitration to note that none of the articles that refer to the Government and Petrobangla, and in fact, no article in the JVA, refers to the right of the Government and Petrobangla to seek compensation for torts committed by Niko against the Government or Petrobangla under Bangladeshi law. If there is no reference to such rights anywhere in the text, there cannot be any assignment of these rights to BAPEX.¹³⁰

and

... the Money Suit does not make claims or seek compensation based on violations of the JVA. As explained in the Money Suit complaint,

the damages sought [...] are damages arising out of tortious liabilities [...]. [T]he plaintiffs are seeking damages caused by negligence, lack of skill and proper supervision, which come within the ambit of tortious liabilities and not breach of contract and therefore, the arbitration clause inserted in the JVA has no manner of application in this case. ‘Damages for tortious

¹³⁰ B-CD.9, page 17. ↩

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liabilities' are distinct and separate from the liabilities arising out of ‘Breach of Contract' [...].¹³¹

285. The Claimant argued that the claims in the Money Suit are “for precisely the same liability as concerns the two blowouts”.¹³² It stated that “causes of action for movable property are subsidiary rights that follow the property they concern. This is so whether the action for loss of movable property is in contract or in tort."¹³³

286. The Tribunal sees the issue that must be considered not as a question of an assignment of claims, in tort or in contract. The issue that must be considered concerns the assignment of rights to develop and produce gas from the Chattak field. The question is whether the rights so assigned leave room for the claims in tort presented in the Money Suit.

287. When considering these claims made in the Money Suit against Niko it is important for the Tribunal to bear in mind that the claims are not made by unrelated third parties. The claims are made by the parties that have assigned to BAPEX the right to develop the Petroleum in the field where the claimed loss or damage occurred and by the parties that approved the terms that regulated this development.

288. In view of this assignment and approval, the claimants in the Money Suit – the Government and Petrobangla – may not disregard the regulation they approved and claim for loss and damage arising from the regulated activity on different grounds, unrelated to the agreed and approved rules including the applicable dispute settlement procedures.

289. The Tribunal concludes that, insofar as the Government and Petrobangla are concerned, claims for loss and damage arising from the blowouts in the Chattak field must be dealt with within the framework of the JVA. Separate claims for such loss and damage by the Government and Petrobangla expressed in tort would be in conflict with the assignment and the terms agreed and approved by the Government and Petrobangla for the development of the Chattak field.

¹³¹ B-CD.9, pages 22 – 23, quoting from the Money Suit Complaint (Exhibits R-15 and C-6), paragraphs 67 – 69. Footnotes omitted. ↩
¹³² Niko's Submission concerning the Full Scope of Liability approach and related procedural issues, 5 October 2015 (C-CD.5), page 2. ↩
¹³³ HT 2016.02.21, page 140. ↩

[Page 87]

290. Finally, concerning the forum for disputes and consent to arbitration (item (i) of the allegedly excluded rights list), the Respondents argue that the Tribunal has jurisdiction over BAPEX alone, and not over the Government and Petrobangla, and moreover that Niko's liability was invoked by the Government and Petrobangla in the Money Suit but not by BAPEX in these arbitrations. They assert that the Tribunal

... only has jurisdiction over BAPEX for claims under the Joint Venture Agreement. There may be some overlap regarding the subject matter of potential claims by BAPEX and claims of the Government and Petrobangla but that does not extend the Tribunal's jurisdiction to the determination of Niko's liability to those third parties.¹³⁴

291. The Claimant responded:

For the first time, Niko faces in two different forums affirmative claims for precisely the same liability as concerns the two blowouts: the claims of BAPEX for lost gas production and environmental damages before these Tribunals; and the claims asserted by Petrobangla and the Government for precisely the same liability and damages in the Money Suit. The present situation is irreconcilable with Article 26 of the ICSID Convention, pursuant to which “[c]onsent of the parties to arbitration under this Convention shall ... be deemed consent to such arbitration to the exclusion of any other remedy.”¹³⁵

292. The Claimant also argues that the “abstract right of the Government and Petrobangla to choose a forum and consent to arbitration is not at issue”. What is at issue, in the view of the Claimant, is the question whether BAPEX had the right to the gas, as stated in the JVA. If it did, following the assignment, “the Government and Petrobangla could not bring a suit against Niko for loss of that very same gas".¹³⁶

293. The Tribunal agrees that there is no issue about the right of the Government and Petrobangla in general to choose a forum or to consent to arbitration. In the present case, they have assigned to BAPEX the right to develop and produce gas from the Chattak field; and they have approved the manner in which this was done in the JVA with Niko. The JVA includes

¹³⁴ HT 2016.02.21, page 166. ↩
¹³⁵ C-CD.5, page 2. ↩
¹³⁶ HT 2016.02.21, page 139. ↩

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Article 18, providing the methods for the settlement of all disputes related to the "performance or interpretation” of the JVA. As the Tribunal has determined in the Exclusivity Decision, the jurisdiction in this respect is exclusive.

294. The Tribunal has explained above that Niko's liability for the two blowouts in the Chattak field must be determined under the JVA and its dispute resolution provision. As a result of their assignment to BAPEX and their approval of the JVA, the Government and Petrobangla may not seek different remedies in different fora concerning Niko's obligations with respect to its conduct in Petroleum Operations and the liability for the breach of these obligations.

6.4 The claim for alleged breach of BAPEX's warranties

295. The Claimant relies on paragraphs 12 and 14 of the Preamble of the JVA as warranties by BAPEX that it had been “vested with and assigned all relevant rights, obligations and responsibilities of the Government of Bangladesh and Petrobangla”. It argues that “the very existence of the Money Suit confirms [the] discrepancy between the representation and reality". It concludes that “BAPEX is liable to Niko for breach of warranty".¹³⁷

296. The Claimant requests as relief several declarations concerning the alleged breach of warranty and a decision

(e) Ordering BAPEX to pay to Niko as compensation for said breach and misrepresentation the amount corresponding to (i) all attorneys' fees, expert fees and other costs incurred by Niko in defending itself and its officers in the Money Suit; and (ii) any pecuniary difference between the findings of these Tribunals as to the extent of Niko's liability for the 2005 blowouts and the findings of any final judgment in the Money Suit.¹³⁸

297. In the latest version of the relief requested, the Claimant seeks, in addition to the declarations of breach, an order concerning the costs in the Money Suit and a decision

¹³⁷ C-PHB, paragraphs 431, 352. ↩
¹³⁸ C-CD.2, paragraph 315. ↩

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Ordering BAPEX to pay on Niko's behalf the full amount of any damages assessed against Niko by a final judgment or decree in the Money Suit.¹³⁹

298. The Respondents have argued, as explained above in the previous section, that the rights pursued by the Government and Petrobangla in the Money Suit are different from those to which the warranties in the JVA applied. They maintain that BAPEX made no warranty with respect to these rights. The Money Suit, therefore, does not constitute a breach of warranty in their eyes.¹⁴⁰

299. At the February 2016 Hearing, the Respondents continued to insist that there was no warranty in the JVA concerning “the rights of the Government and Petrobangla related to dispute resolution” so that the pursuit of the Money Suit was no breach of warranty. They added:

Even if there is subject matter overlap, it does not make it a breach of warranty for the Government and Petrobangla to pursue claims. Even if those claims ultimately are unfounded or are founded, the mere pursuit of claims which they have for rights they have before Tribunals that have jurisdiction over them is not a breach of warranty and it is Niko's position that the mere pursuit of those claims is a breach of warranty. It is not.¹⁴¹

300. As explained in the preceding section, the Tribunal concludes that the JVA does indeed contain warranties that may be triggered by the claims made by the Government and Petrobangla in the Money Suit. The Tribunal finds that Niko's liability for the two blowouts in the Chattak field must be determined exclusively in the present proceedings.

301. From the information provided to it, the Tribunal concludes that until now the court in the Money Suit has not issued a decision on Niko's liability for the blowouts. The Tribunal is of the view that it would therefore be premature for it to make a decision on a breach by BAPEX of its warranties.

¹³⁹ C-PHB, paragraph 431(g). ↩
¹⁴⁰ E.g. R-PHB, section IV(B). ↩
¹⁴¹ HT 2016.02.21, page 201. ↩

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302. The Tribunal has also noted that, apart from declaratory relief, the order sought by the Claimant depends on a judgement against it in the courts of Bangladesh. At the February 2016 Hearing the Claimant stated its position in the following terms:

... we are pleading in the alternative both cases, either there has been a breach of warranty and the Money Suit is clearly inconsistent with the warranties that were given – there is no question about that – or there has not been a breach of warranty in which case this Tribunal is the exclusive forum for addressing these questions. But we do require a decision from the Tribunal on this point because obviously the Government and Petrobangla and BAPEX are still operating under the mistaken conclusion that this Tribunal is not the exclusive forum for resolving these questions.¹⁴²

and

On the topic of the requests for relief, if the Tribunals find that BAРЕХ was, as Niko submits, assigned all economically relevant rights to the gas at Chattak, it may, as was discussed yesterday, find that the mere pursuit of the Money Suit may not represent a breach of the JVA warranties. However, if the court in the Money Suit were to adopt a ruling different from that of the Tribunals that would amount to a breach of warranty. Niko therefore maintains its request for an order that, in the event of a judgment in the Money Suit inconsistent with the Tribunal's award, BAPEX make Niko whole by paying any portion of that judgment that is inconsistent with the Tribunal's award.¹⁴³

303. Having found that Niko's liability for the two blowouts in the Chattak field must be decided by this Tribunal under the JVA with binding effect on the Government and Petrobangla as the assignors, the Tribunal reserves its decision with respect to the question of a breach of warranties until further information about the Money Suit is provided.

¹⁴² HT 2016.02.21, pages 143 – 144. ↩
¹⁴³ HT 2016.02.22, pages 320 – 321. ↩

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6.5 Substantive issues ready to be decided

304. During the procedural consultations preceding the November 2015 Hearing, the proceedings on the Compensation Declaration were separated into two phases as follows:

(i) the Claimant's liability and in particular the alleged breaches by Niko, and

(ii) the damage said to have been caused by these alleged breaches and its quantification.¹⁴⁴

305. The first phase covers items (i) to (iii) of the list at the beginning of this Section 6. It was completed as of the February 2016 Hearing, ready for the decision on liability. The Respondents' first submission concerning the damage and quantum phase was filed thereafter on 25 March 2016.

306. The procedural steps leading to the end of this first phase were described above in Section 3. In view of certain ambiguities in the Respondents' position, the Tribunal adds the following clarifications.

307. From the very start of the proceedings on the Compensation Declaration, already in the Notice of its intention to commence arbitration proceedings and in the following Notice of Arbitration, the Claimant had identified as the subject of its request: “all claims held jointly or severally by any of BAPEX, Petrobangla and Bangladesh to damages or losses alleged to arise from the blow outs of two wells" in the Chattak field. In the course of the arbitrations the issue was then expressed in the form of a request for a declaration that the Claimant was “not liable to BAPEX, its predecessors, assignors, successors or assigns”.¹⁴⁵

308. Niko's liability to BAPEX, the Government and Petrobangla was therefore, from the very beginning of the proceedings on the Compensation Declaration, the principal issue of the case which the Respondents had to address and which the Tribunal had to decide.

309. The Tribunal fixed the procedure for the Compensation Declaration in Procedural Orders No 2 and 3, providing for two rounds of written

¹⁴⁴ Tribunal's letter of 7 October 2015; see also above section 3.2.9. ↩
¹⁴⁵ The successive requests are reproduced above in section 4.1. ↩

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submissions on Niko's liability and the quantum of any damage caused by the blowouts, to be submitted together with documentary evidence, witness statements and expert reports. This exchange was to be followed by a hearing and possibly post-hearing submissions.

310. As noted in Procedural Order No 11, by 25 September 2014 the written phase of the proceedings on the Compensation Declaration had been completed.

311. Throughout this period, the Respondents did not address the substance of the liability issue.

312. After the change of counsel in the summer of 2015, the Respondents recognised that “BAPEX failed to present its case during the written pleadings stage of these proceedings”¹⁴⁶ and blamed this failure on their previous counsel. In their submission of 25 September 2015 they stated that their prior counsel had failed to “provide evidence of Claimant's liability and the quantum of damages owed in the event the Tribunal decides these issues”; and that the former counsel “failed to understand the nature of these proceedings and the consequences of his action on the rights of his client”.¹⁴⁷ They explained that their prior counsel “failed to make key submissions on the merits, which is especially serious because Claimant's presentation of its claim effectively forces BAPEX to address claims against Claimant that BAPEX did non affirmatively assert in these proceedings”; and prior counsel “failed to quantify or provide any pleadings on the extent of the losses caused by Niko”.¹⁴⁸

313. BAPEX requested “an opportunity to present its case after a failure to do so". The Respondents concluded by affirming that “BAPEX has since demonstrated to the Tribunal that it intends to present its case”.¹⁴⁹

314. The Tribunal accepted further submissions and expert reports from the Respondents; it accepted that the proceedings be extended to the Full Scope of Liability approach and invited the Respondents specifically “to identify additional obligations and breaches by the Claimant". The Tribunal accepted to adjust the procedure, dividing it into two phases,

¹⁴⁶ BAPEX's Request for Leave to Submit One Additional Pleading and Counterclaims, 25 September 2015 (B-CD.4), page 9. ↩
¹⁴⁷ B-CD.4, page 7. ↩
¹⁴⁸ B-CD.4, pages 6 – 8. ↩
¹⁴⁹ B-CD.4, page 11. ↩

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providing additional opportunities for the Respondents to address issues of alleged breaches and liability, and deferring the quantification of loss and damage to a later phase.

315. The Tribunal heard the witness named by the Respondents in the November 2015 Hearing. The expert named by the Respondents for the liability issues made a written submission. He made a presentation at the November 2015 Hearing and, at that hearing, took part in the extensive discussion with the experts of the Claimant and of the Tribunal. Thus, the Respondents was afforded ample opportunity to present argument on Niko's liability in writing and orally at the two hearings; it allowed further evidence in particular with respect to the quantum of loss and damage caused by the blowouts.

316. The Respondents nevertheless stated in their Post-Hearing Brief:

... BAPEX has only responded to Claimant's expert report and the Tribunal Expert Report to rebut the limited and specific evidence Claimant put forth for its assertion that it is entitled to a declaration of non-liability for the damages resulting from the two blowouts. BAPEX has not presented a full case for liability. If it had intended to make and prove claims against Niko, BAPEX would have submitted much more complete expert reports, witness statements, and documentary evidence on all issues, not just in response to what Claimant presented.¹⁵⁰

and

BAPEX reserves all of its rights with respect to the determination of the facts. Quoting the Tribunal's summary of the facts should not be interpreted as acceptance of those facts or a waiver of BAPEX's position unless expressly stated herein.¹⁵¹

317. At the February 2016 Hearing, the Respondents continued to assert that "it continues to be BAPEX's position that the record is not what it would be had BAPEX had competent counsel that would have filed evidence”.¹⁵²

¹⁵⁰ R-PHB, paragraph 9. ↩
¹⁵¹ R-PHB, paragraph 90, FN 134. ↩
¹⁵² HT 2016.02.22, page 415. ↩

[Page 94]

318. The Claimant pointed out that in the proceedings relating to the Compensation Declaration, there “is no real dispute here about the basic facts concerning the blowouts. The evidentiary conflict there is over the interpretation of those facts and what might have been done differently". In response to the Respondents' assertion regarding the asserted limited presentation of their case, the Claimant stated at the February 2016 Hearing that any failure to present more evidence:

... is entirely a result of the twisted strategy that BAPEX has adopted in this arbitration. As Procedural Order 11 [of 19 August 2015] makes clear and recalls at considerable length, the Tribunals gave BAРЕХ repeated opportunities to present whatever case it wished to and even highlighted for BAPEX the opportunity to present expert reports in support of its position. BAPEX declined for its own reasons to avail itself of those opportunities on repeated occasions.

The record before the Tribunal today is a complete one on liability reflecting each parties' case after a full opportunity to present it. There is no basis for BAPEX's position that the result, if the record fails to establish liability on Niko's part, should be a denial of the declaration requested.¹⁵³

319. Indeed, whatever may have been their first counsel's failure to address the issues raised by the case brought by the Claimant, the Respondents were given repeated opportunities to present their case on Niko's liability; and after the latest change of counsel, the Respondents availed themselves of this opportunity.

320. The Tribunal concludes that the Parties had a full opportunity to argue all possible grounds of Niko's liability for all kinds of possible damage resulting from the two blowouts; and they had an equally full opportunity to address Niko's alleged breaches of its obligations under the JVA and the applicable law.

321. The Tribunal is therefore satisfied that issues (i) to (iii) from the list of issues set out above are now ready for determination in the present

¹⁵³ HT 2016.02.21, pages 20 – 21. ↩

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decision, just as issues (v), (vi) and (vii) were ready for the decisions made above in this section.

322. Issue (iv) concerning the quantification of any loss and damage for which Niko is found to be liable is reserved for the next phase of the arbitrations, together with the claims for interest and costs of the proceedings.

[Page 96]

7. NIKO'S OBLIGATIONS RELEVANT FOR THE LIABILITY ISSUE

323. The Tribunal is requested by the Claimant inter alia to issue a declaration that

Niko breached no obligation or law as concerns the two blowouts in 2005 at the Chattak field and is not liable concerning the blowouts to BAPEX, its predecessors, assignors, successors or assigns.

324. The Respondents object to this request and, to the contrary, assert breaches of the JVA by Niko.

325. The Tribunal has invited the Parties to identify the obligations in issue and their sources. In this section of the Decision, the Tribunal will set out in further detail the procedure by which the Parties have identified these obligations and then examine the various sources to which the Parties have referred, in particular: the principal contractual provisions, the standards in the international Petroleum Industry, other possible sources of Niko's obligations and the opinions of the experts.

7.1 The identification of Niko's obligations

326. The Claimant's request was first expressed in the terms quoted above at the beginning of this section in the Claimant's Memorial concerning the Compensation Declaration of 27 September 2013 and repeated in all subsequent requests for relief.

327. In response, BAPEX denied that it was concerned by the issue. It stated that it "has never invoked Niko's liability for the two blowouts" and that the dispute is plainly “a dispute between Niko and third parties”.¹⁵⁴ It referred, however, to Article 26.2.4 of the JVA and Niko's obligation as sole operator.¹⁵⁵ BAPEX mentioned the investigation by committees appointed by the Government¹⁵⁶ and the Money Suit by the Government and Petrobangla against Niko, adding that “the only entities invoking Niko's liability for the blowouts are the Government and Petrobangla”.¹⁵⁷

¹⁵⁴ B-CD.2, paragraph 2, referring also to its argument in B-CD.1. ↩
¹⁵⁵ B-CD.2, paragraph 15. ↩
¹⁵⁶ For a list of these committees and their reports, see above Section 6. ↩
¹⁵⁷ B-CD.2, paragraphs 16-18. ↩

[Page 97]

328. Following the appointment of their new counsel, announced on 9 July 2015, the Respondents submitted on 31 August 2015 comments on Mr Abel's report, containing a discussion of various breaches of Niko's obligations. The Claimant objected in its submissions of 30 September 2015, noting that these comments included new allegations of breaches of Niko's obligations. This issue was addressed during the Pre-Hearing Conference on 1 October 2015 and by the adoption of the Full Scope of Liability Approach as outlined at that occasion.¹⁵⁸ The Respondents were invited to complete the “identification of obligations and breaches” of Niko.¹⁵⁹ They did so in their submission of 12 October 2015, adding “to the breaches of the JVA identified in the expert reports before the Tribunal", general tort liability and environmental liability, in terms as they had been invoked in the Money Suit, and fraudulent misrepresentation.

329. In Procedural Order No 12 of 21 October 2015 the Tribunal referred to the identification of obligations and breaches in the Respondents' submissions of 12 October 2015, where they stated that Niko was pursued, in the courts of Bangladesh and specifically in the Money Suit, as a matter of its general tort liability and environmental liability. The Tribunal noted that:

... the Respondents did not identify with specificity any additional Laws or Standards which Niko's operations had breached, and thereby caused the damage flowing from the blow-outs. The Tribunals must conclude that the Respondents have no further Breaches to add which the Tribunals must consider when examining whether to make the requested declaration.¹⁶⁰

330. In view of this consideration the Tribunal held in Procedural Order No 12:

The list of Breaches of Applicable Laws and Standards that must be considered by the Tribunals when making their determination concerning the requested declaration is now complete. The Tribunals will examine by reference to the Breaches alleged until now the Claimant's request for a declaration according to which “Niko

¹⁵⁸ See above Sections 3.2.8 and 5. ↩
¹⁵⁹ Tribunal's first letter of 7 October 2015. ↩
¹⁶⁰ Procedural Order No 12, page 2. ↩

[Page 98]

breached no obligation or law as concerns the two blowouts in 2005 at Chattak field”.¹⁶¹

331. In order to focus the examination of the alleged breaches, the Tribunal sought to clarify the sources of the Applicable Laws and Standards invoked by the Parties. In the Note on the Scope of the Examination and Questions for Consideration, annexed to Procedural Order No 12, the Tribunal referred to Article 26.2.4 of the JVA and explained that, for reasons of simplification, it referred to “all obligations under the applicable law, the JVA and generally accepted standards of the international Petroleum Industry as the “Applicable Law and Standards”. The Tribunal invited the Parties to identify the “source of the Applicable Laws and Standards”, i.e. the relevant texts and

[...]

(iii) if such texts do not exist, how else can the Applicable Laws and Standards be determined?

(iv) to what extent are the Applicable Laws and Standards on which the experts' conclusions rely generally accepted in the industry or based on the specific experience of the expert opining or on that of the personnel conducting the operations?

(υ) Are there differences in the Applicable Laws and Standards depending on the circumstances under which the operations are performed, e.g. the location of the well, the characterisation of the well as “marginal” or “abandoned”, the revenue that can be expected from the well, the size of the operator coотрапу?

332. In its submission of 23 October 2015 on newly alleged breaches, the Claimant stated that the “prudent operator standard agreed in the JVA [...] is the only standard relevant to the circumstances of this case, whether under contract or under common law principles of negligence”.¹⁶² The Claimant confirmed the position at the November 2015 Hearing and in its Post-Hearing Brief: “The ultimate standard against which Niko's conduct

¹⁶¹ Procedural Order No 12, page 2, item 1. ↩
¹⁶² Niko's Submission on Newly Alleged Breaches, 23 October 2015 (C-CD.7), paragraph 2. ↩

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must be assessed is the applicable contractual standard"; and “Niko considers [Article 26.2.4 of the JVA] as the only relevant source”.¹⁶³

333. The Respondents confirmed at the November 2015 Hearing the JVA and specifically Article 26.2.4 as “primary source of the applicable standard".¹⁶⁴ The Respondents also relied on various texts which they considered as “generally accepted standards of the international Petroleum industry”, referred to in that article, and, in their Post-Hearing Brief, added other sources which they considered relevant, specifically the Bangladesh Petroleum Act of 1974,¹⁶⁵ as will be discussed below in Sections 7.3 and 7.4.

334. The Claimant takes the position that the applicable standard needs to be determined only insofar as it pertains to issues arising from the blowouts and Niko's responsibility for them. The Tribunal agrees: its task is to determine Niko's breaches in the context of Niko's alleged liability for the two blowouts. The performance of Niko's obligations under the JVA in general, independently of the liability for the blowouts, is not at issue in these arbitrations.

335. As the enquiry into the relevant obligations advanced, the Tribunal frequently used the terms applicable or relevant “standard” where previously the expression Applicable Laws and Standards was used to describe the legal reference by which Niko's conduct must be judged, including various sources of law, in particular both the JVA and the law. The Parties also adopted this shortcut use.¹⁶⁶

7.2 Article 26.2.4 of the JVA

336. The standard of conduct applicable to Niko's performance of its obligations, as the Operator, as specified in Article 26.2.4 of the JVA, reads as follows:

26.2 OPERATOR shall, in addition to OPERATOR's obligations under other provisions of this JVA, be obliged to:

¹⁶³ C-PHB, paragraphs 52 and 53. ↩
¹⁶⁴ HT 2015.11.02 (Day 1), page 40. ↩
¹⁶⁵ R-PHB, paragraph 26. ↩
¹⁶⁶ See e.g. HT 2015.11.02 (Day 1), page 40. ↩

[Page 100]

[...]

26.2.4 conduct all Petroleum Operations in a diligent, conscientious and workmanlike manner, in accordance with the applicable law, this JVA and generally accepted standards of the international Petroleum industry designed to achieve efficient and safe development and production of Petroleum and to maximize the ultimate economic recovery of Petroleum from the JVA Area.

337. The Respondents have identified in this provision of the JVA a “four part standard":

Niko had to conduct its operations:

(i) in a diligent, conscientious and workmanlike manner;

(ii) in accordance with the law,

(iii) in accordance with the JVA, and

(iv) in accordance with generally accepted standards of the international petroleum industry designed to achieve efficient and safe development and production of Petroleum and to maximize the ultimate economic recovery.¹⁶⁷

338. The Claimant approached the interpretation of this JVA provision in a different manner, identifying three elements:

(i) The obligation to conduct operations in a “diligent, conscientious and workmanlike manner” is the “general standard";

(ii) The "applicable law, this JVA and generally accepted standards of the international Petroleum industry”, are understood as “potential sources for additional content to the general standard"; and

(iii) The obligation to conduct operations in a manner “designed to achieve efficient and safe development and production and to

¹⁶⁷ R-PHB, paragraph 14. ↩

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maximise the ultimate economic recovery of Petroleum from the JVA Area", according to the Claimant “identifies the goals that Niko was obliged to achieve”.¹⁶⁸

339. For ease of reference the Tribunal will refer to Niko's obligation to conduct petroleum operations “in a diligent, conscientious and workmanlike manner" as the Diligence Standard and the “generally accepted standards of the international Petroleum industry" as the Petroleum Industry Standard.

340. The Claimant considered the Diligence Standard as a “general standard" and sought to give content to the three terms used in Article 26.2.4 by reference to their definitions in the Meriam-Webster Online Dictionary and on the basis of these definitions concluded that

... under the general standard of Article 26.2.4, Niko was required to act in a steady, earnest, conscientious, competent and skilful manner, but not necessarily in an outstanding or original one.¹⁶⁹

341. The Respondents turned to the Oxford English Dictionary and on that basis concluded:

The clear meaning of this triplet of requirements is to act in an “assiduous,” “scrupulous,” and “careful” manner to ensure that things are “well and thoroughly done.” This is above the level of ordinary care of the reasonable operator.¹⁷⁰

342. The Respondents insist that the three obligations are “cumulative requirements” and that “compliance with this standard is independent of complying with laws, other JVA provisions, and generally accepted standards of the petroleum industry”.¹⁷¹ For the Respondents it is “important to separate the diligence standard from the generally accepted industry standards”. If the Tribunal found that “there are no generally accepted standards with respect to particular conduct or their content is

¹⁶⁸ C-PHB, paragraphs 55 – 58. ↩
¹⁶⁹ C-PHB, paragraph 56, referring to quotations in Niko's opening presentation, Exhibit CH-4, slides 5-7. ↩
¹⁷⁰ R-PHB, paragraph 21, relying on quotations from the Oxford English Dictionary, RLA-107, RLA-108 and RLA-109. ↩
¹⁷¹ R-PHB, paragraphs 21 and 22. ↩

[Page 102]

not specific or mandatory or that Niko did not breach such standard” the compliance with the Diligence Standard must be assessed separately. “Niko may have failed to act diligently even in the absence of a breach of generally accepted standards”.¹⁷²

343. Concerning the relationship between the Diligence Standard and the Petroleum Industry Standard, the Respondents argue that the latter also may provide content of what is diligent, conscientious and workmanlike:

In addition, international standards such as those provided by the American Petroleum Institute (“API”) may provide an indication of what is diligent, conscientious, and workmanlike conduct of petroleum operations, even when the standards are not stated in mandatory language. The failure to follow non-mandatory standards may demonstrate a lack of diligence. Thus, the fact that a standard is set forth using “should” rather than “must” does not relieve Niko of its obligation to follow the standard if to follow the standard would be diligent.¹⁷³

344. The Claimant treated the different elements of Article 26.2.4 of the JVA together and referred to them as the standard of a “reasonable” or a “prudent” operator. In his first report, Mr Wright described the "reasonable operator” standard under the JVA:

The best practices and best available technology standards that might be applied to a Deepwater and/or HPHT (high pressure high temperature) well drilled by a super-major operator is not applicable in this situation. They have large budgets, a large team of multidiscipline technical professionals and technical process maps that must be followed for every activity, and are not appropriate for comparison with this situation.

My opinions in this regard for the Chattak 2 well are therefore based on the question: were the design practices and procedures followed by Niko Resources (Bangladesh) Ltd. and their contractors reasonable given generally accepted international standards for the petroleum

¹⁷² R-PHB, paragraphs 22, 23 and 24. ↩
¹⁷³ R-PHB, paragraph 25. ↩

[Page 103]

industry and other like operators in a similar context as the Chattak 2 marginal field development.¹⁷⁴

345. The Claimant also frequently used the expression “reasonable operator standard".¹⁷⁵ It referred to the explanations in Mr Wright's second report, considering the arguments of an asserted “shallow gas” risk, where he stated that the “reasonable operator standard” did not require Niko to plan for more extensive drilling operations than it had actually carried out:

these kinds of situations are not typical in development land drilling and would not be expected to fall within the experience of a typical operator not previously exposed to this circumstance.¹⁷⁶

346. The Claimant also used different expressions to define the contractual standard, such as “prudent and reasonable”, “reasonable or prudent”, “reasonable and appropriate”. At the February 2016 Hearing, the Claimant used the expression “reasonably prudent” and the “reasonable operator standard". In support the Claimant referred to articles and court cases in Canada and the United States relating to contracts using “the good and workmanlike language, practices in accordance with the good industry practice, in Canada and the US exist in the industry standard forms joint operating agreements and they have existed for decades in these agreements”.¹⁷⁷ It summarised the Claimant's position as follows:

The position of Niko is that the meaning of 26.2.4 is, in essence, applying the same standard as a negligence standard. It is the did you breach the reasonable operator standard.¹⁷⁸

347. The Respondents have firmly objected. They argue that Mr Wright's reliance on a “reasonable operator” standard and his understanding of that standard are an attempt to "empty" the contractual standards. They state:

¹⁷⁴ Wright 1, page 5. ↩
¹⁷⁵ E.g. at C-PHB, paragraphs 25, 26, 30, 167 etc. ↩
¹⁷⁶ Supplemental Expert Report of John Wright, 22 October 2015 (Wright 2), page 14, quoted in C-PHB at paragraph 119. ↩
¹⁷⁷ HT 2016.02.21, page 58. ↩
¹⁷⁸ HT 2016.02.21, page 56, lines 10-14. ↩

[Page 104]

While there is no doubt that Niko had the obligation to act as a reasonable and prudent operator would in the circumstances, the standards set forth in Article 26.2.4 are more specific and more stringent than α general standard of reasonableness. Reasonableness, defined as “being amenable to reason, or of acting or thinking in a sensible or fair manner” is the minimum standard of conduct of any actor under most legal systems. Reasonableness standards in law create an objective standard by which conduct is measured. Mr. Wright's “reasonableness standard” does not even reach this basic level of care because it allows an operator to “determine the best course of action for their situation.” Mr. Wright thus posits a purely subjective, legally meaningless standard, by which whatever an operator chooses to do in the circumstances meets the standard.¹⁷⁹

348. The Respondents insist that the Diligence Standard is an independent obligation. This standard

... does not depend on finding a violation of a specific regulation like a speed limit. The contract did not say that Niko had to set a casing at a particular depth or that it had to use a diverter or that it had to do anything specific. Instead, the contract requires Niko to act diligently and conscientiously and this requires Niko to do what is needed in the circumstances to have safe and efficient operations, whether they are mandated by law or regulation or not.¹⁸⁰

349. When considering specific actions by Niko the Respondents, too, use different terminology and assert that, in a specific situation, a certain action was “the diligent and prudent thing to do”.¹⁸¹

350. The Parties also differ with respect to the interpretation of the final passage of Article 26.2.4 of the JVA, i.e. the words “designed to achieve efficient and safe development and production of Petroleum and to maximise the ultimate economic recovery of Petroleum from the JVA Area”.

351. For the Claimant this passage "identified the goal that Niko was obliged to achieve in conducting Petroleum Operations at Chattak”. It emphasises

¹⁷⁹ R-PHB, paragraph 16, footnotes omitted. ↩
¹⁸⁰ HT 2016.02.21, page 277, line 24 to page 278, line 9. ↩
¹⁸¹ HT 2016.02.22, page 508. ↩

[Page 105]

the goal of maximising economic recovery and what it calls the "contractual requirement to limit costs, where possible”. The Claimant accepts that Niko was not “permitted to take unreasonable risks with regards to the safety of operations” but adds this:

However, where one or more reasonable alternatives existed for the conduct of a particular aspect of Petroleum Operations, such as in the design and execution of a development well at Chattak, Niko was expected, indeed obliged, to select the less costly option.¹⁸²

352. The Claimant combines these two aspects thus:

Whether Niko acted in a diligent, conscientious and workman-like manner must be viewed through the lens of the twin goals of achieving safe and efficient development and production and maximising the ultimate economic recovery of petroleum.¹⁸³

353. The Respondents read the last part of Article 26.2.4 of the JVA as one element of the clause and emphasise the passage “designed to achieve ...”, which they say modifies only “the general accepted standards ..” and not also other preceding parts of the clause, the applicable law, the JVA and the Diligence Standard. They also insist that the relevant standards are designed to achieve safe development and maximal recovery.¹⁸⁴

354. The Tribunal notes that Article 26.2.4 of the JVA does not prescribe specific action relevant for the well design and the blowouts, but sets out the standards of conduct.

355. When discussing these standards, the Parties attempted to subdivide the content of Article 26.2.4 of the JVA and to identify several distinct obligations or standards. This may be of some assistance; but the overall objective of the clause is to set a standard for all Petroleum Obligations. The resulting obligations thus must be seen as a whole and in their overall context.

356. The Tribunal also observes that Article 26.2.4 of the JVA applies to “all Petroleum Operations” under the JVA. The conduct of the Operator

¹⁸² C-PHB, paragraph 58. ↩
¹⁸³ HT 2015.11.02 (Day 1), page 115, lines 20-25. ↩
¹⁸⁴ R-PHB, paragraphs 19 and 18. ↩

[Page 106]

prescribed in this provision thus covers a broad scope of activities, subject to a variety of regulations and other texts of various types. The issues which the Tribunal must address, however, concern a more focused aspect, relating specifically to the two blowouts, i.e. to the design of the Chattak 2 Well, the performance of the wiper trip, and the manner in which Niko handled the blowout, as well as to the relief operations. The Tribunal will have to turn to other rules and practices for assistance in applying the general terms to the specific issues it must decide.

357. When considering the obligations prescribed by Article 26.2.4 of the JVA, and specifically by the Diligence Standard, the Tribunal has not found much assistance in dictionary definitions. It notes that this standard applies to Niko's performance of “Petroleum Operations”. The Tribunal considers therefore that the “generally accepted standards of the international Petroleum industry” must be taken as a principal reference for providing content for the Diligence Standard.

358. As the Respondents have rightly pointed out, the relevant industry standards are those designed to achieve “efficient and safe development and production of Petroleum”. The twin goals expressed in Article 26.2.4 of the JVA are thus efficiency and safety. Efficiency is understood by the Tribunal to extend for reasons of simplification to the words “to maximise the ultimate economic recovery of Petroleum from the JVA Area”, separately identified at the end of Article 26.2.4 of the JVA.

359. The Tribunal has also considered the controversy between the Parties concerning the terms used to describe the standard to be met by Niko. As the fluctuating use of the terms by the Parties shows, the terms reasonable and prudent, in the abstract, are broad and difficult to fill with sufficiently precise content. The Tribunal therefore uses in this Decision the terms “reasonable” and “prudent” interchangeably. It will use the term “prudent operator standard” to express the standard required by Article 26.2.4 of the JVA, as “shorthand for the contractual liabilities”,¹⁸⁵ including the Diligence Standard, the Petroleum Industry Standard and all other standard requirements that have been considered as prescribed by that article.

360. This being said, the general terms discussed by the Parties, must be filled with content adequate for resolving the present dispute. The Tribunal

¹⁸⁵ RT 2016.02.21, page197. ↩

[Page 107]

therefore must determine more precisely the standard that the Operator had to apply specifically with respect to the activities that had an impact on the blowouts, their origin and the way in which they were dealt with.

361. In this respect the Tribunal is aware that the work to be performed by the Operator concerned an abandoned well on land; considerations of efficiency may more reasonably come to the fore when designing and performing drilling operations there. As Mr Wright stated, “Deepwater and/or HPHT (high pressure high temperature) [methods applied] by a super-major operator” may not be relevant in all respects for the present situation.¹⁸⁶ Indeed, the Respondents have clarified: “No-one is trying to hold Niko to some higher standard to which ExxonMobil might hold itself."¹⁸⁷

362. These considerations apply in particular with respect to the efficiency of the operations where the range of the Operator's discretion may be greater. This discretion, however, finds its limits in the requirements of safety. These safety requirements form what may be called the “bottom line" for the Operator's discretion. The Claimant itself recognises this by stating, as quoted above, that it was not permitted “to take unreasonable risks with regard to the safety of operations”.¹⁸⁸ There is no binary choice between efficiency and safety; these two requirements apply to different aspects and, as the Respondents emphasise,¹⁸⁹ they must both be observed.

363. This conclusion applies also if one considers the final passage of Article 26.2.4 of the JVA, concerning the goal of maximising economic recovery, as an obligation distinct from that of efficiency, as the Claimant seems to do. Even if it is considered as a distinct goal, it nevertheless does not override the safety obligation. Maximal economic recovery may not be achieved at the expense of safety.

364. In the context of the present dispute there is no contention that Niko violated its obligations of efficiency or, if it were treated as a separate objective, of maximising economic recovery. The question is whether Niko's actions and omissions in relation to the blowouts violated relevant safety standards.

¹⁸⁶ Wright 1, page 5. ↩
¹⁸⁷ HT 2015.11.02 (Day 1), page 67, lines 17-18. ↩
¹⁸⁸ C-PHB, paragraph 58. ↩
¹⁸⁹ R-PHB, paragraph 18. ↩

[Page 108]

365. In light of these considerations, the Tribunal will therefore have to focus its examination on the question whether a failure of Niko to observe safety measures, specifically prescribed by any of the relevant standards or as they had to be observed by a reasonable and prudent operator in the given circumstances, caused or contributed to the blowouts.

7.3 Petroleum Industry Standards

366. Relying on explanations by Dr Adams, the Respondents state that “many generally accepted standards of the international Petroleum Industry are identified in API publications, academic writings and well control training materials”.¹⁹⁰ During the course of these arbitrations, the relevance of the API publications was recognised and their content was intensively discussed. Reference to other sources for determining International Petroleum Industry Standards also was considered.

367. Several of the texts considered by the Parties were issued in successive versions. The Parties agree that a version issued after the two blowouts that occurred in January and June 2005 may not be relied upon as an expression of Petroleum Industry Standards relevant for the determination in the present case. The Tribunal, nevertheless, asked the Parties whether during the period after 2005 substantial changes occurred with respect to such standards relevant for the design and operation of production and relief wells. No such changes were identified.

7.3.1 The American Petroleum Industry (API) Publications and their Relevance

368. The principal texts on which the Respondents rely are publications of the American Petroleum Institute (API). At the November 2015 Hearing the Respondents presented the role of the API in the international Petroleum Industry as follows:

There is no international petroleum legislator but there are recognised associations that issue documents setting forth industry standards based on years of accumulated study and practice. The primary

¹⁹⁰ R-PHB, paragraph 29. ↩

[Page 109]

organisation in the world for the petroleum industry is the American Petroleum Institute or the API.

Now, the API of course does not have legislative authority. It issues what it calls recommended practices but, in fact, these recommended practices are standards. The API standards set forth as recommended practices are followed worldwide by operators of all sizes. They have been adopted in many of the most important oil-producing regions such as Norway and the United Kingdom, as Dr Adams will discuss in more detail.¹⁹¹

369. Relying on statements of the API about its publications, the Respondents assert:

... regardless whether or not they are mandatory or prescriptive, the API's Recommended Practices are standards and are “generally accepted standards of the international petroleum industry”.¹⁹²

370. At the end of their explanations about the API “Procedures for Standards Development”, the Respondents conclude that

... the JVA mandates the operator [i.e. Niko] to conduct operations in accordance with the [API] standards, whether or not the standards themselves are written in prescriptive language.¹⁹³

371. The Respondents base this conclusion on a statement on the API website:

Since 1924, the American Petroleum Institute has been a cornerstone in establishing and maintaining standards for the worldwide oil and natural gas industry.¹⁹⁴

and on a statement in the API “Procedures for Standards Development” according to which in

¹⁹¹ HT 2015.11.02 (Day 1), page 43, lines 4-20. ↩
¹⁹² R-PHB, paragraph 34. ↩
¹⁹³ R-PHB, paragraph 35. ↩
¹⁹⁴ R-PHB, paragraph 35, referring in FN45 to American Petroleum Institute, “Standards: FAQs and Inquiries, What is the value of standards?” available at http://www.api.org/Publications-Standards-and-Statistics/Standards/FAQs-and-Inquiries (last accessed 17 January 2016). ↩

[Page 110]

some cases, third parties or authorities having jurisdiction may chose to incorporate API standards by reference, and may mandate compliance with all requirements and recommendations.¹⁹⁵

372. The Respondents go on to assert:

The Parties to the JVA are third parties who have incorporated the API standards by reference and mandated compliance by the Operator, Niko, with all standards, which by definition includes requirements and recommendations.¹⁹⁶

373. Responding to this assertion, the Claimant firmly contested that what the Respondents called “the API standards” was incorporated by reference in the JVA. It denied that this theory had any foundation in the evidence.¹⁹⁷ At the February 2016 Hearing, the Respondents stated their position in somewhat different terms:

[Article 24.2.6 JVA] binds the operator to follow generally accepted standards of the international petroleum industry whether they are binding or not and this is exactly what the API recommended practices establish.¹⁹⁸

374. The Respondents also asserted that “the API standards” were “followed" in Bangladesh.¹⁹⁹ They relied on the testimony of Mr Baqi, acting General Manager of the Geological Division of BAPEX from 1 January 2005 until May 2007. In his witness statement Mr Baqi writes:

The relevant standards of the international petroleum industry routinely followed by operators in Bangladesh include the standards of the American Petroleum Institute (“API”). Niko had to follow these recognized industry standards for drilling shallow gas to safely handle shallow gas in the Chattak field.²⁰⁰

¹⁹⁵ R-PHB, paragraph 35, referring to API Procedures for Standards Development, Exhibit R-38, at paragraph 3.9. page 2. ↩
¹⁹⁶ R-PHB, paragraph 35. ↩
¹⁹⁷ HT 2016.02.21, pages 72-73. ↩
¹⁹⁸ HT 2016.02.21, page 282, lines 5-9. ↩
¹⁹⁹ R-PHB, paragraph 31. ↩
²⁰⁰ WS Baqi, paragraph 6. ↩

[Page 111]

375. At the November 2015 Hearing, Mr Baqi was questioned about this testimony. He replied that he was a geologist who had not seen the API guidelines and relied on what he was told by those performing drilling operations. Mr Baqi testified in Bengali and the translation of his testimony gave rise to some discussion. The Tribunal summarised his explanations to verify whether its understanding reflected what he intended to say:

So you have no concrete evidence what standards are followed by drilling – by local companies or particularly BAPEX when drilling?

MR BAQI: The information that I have is that BAPEX follows the ONGC of India, Dehrdun India.²⁰¹

376. The Claimant commented at the February 2016 Hearing:

I submit that where the Managing Director of BAPEX had no personal knowledge of API and had never seen them, it strains credulity to suggest that any predecessor involved in the negotiation of the JVA had an intention expressly shared by Niko to be incorporating by reference the API standards by the language used in the JVA.²⁰²

377. Concerning the relevance of the API documents for determining the content of international standards, the Claimant also referred to the API Procedures for Standards Development and asserted that

... the API as an institution is a US industry association, and it does not have, or even purport to have, a mandate from competent authorities to set internationally applicable standards.²⁰³

378. The relevance of the API recommended practices has, however, not been denied by the Claimant. Mr Adolph accepted that

... API is something that operators consult to give them some guidance on how to conduct various operations.

²⁰¹ HT 2015.11.06 (Day 5), page 1158, lines 9-15; on the ONGC see below section 7.3.3. ↩
²⁰² HT 2016.02.21, page 73, lines 11-17. ↩
²⁰³ C-PHB, paragraph 69, referring to Exhibit R-38, paragraph 2. ↩

[Page 112]

MS PASIPANODYA: In Bangladesh?

MR ADOLPH: Worldwide I would say.²⁰⁴

379. At the November 2015 Hearing the Claimant's counsel stated that the scope of application of the API practice in various countries could better be explained by the experts, but then clarified:

There are other organisations but we do not dispute that the international petroleum industry would look to API as representing an authoritative organisation, so the question really is what are the practices that are before you.²⁰⁵

and

There is no doubt and we do not dispute and I believe your questions to the experts will highlight this, that API and API recommended practices are documents that the industry generally looks to for guidance.

The distinctive point that appears to be the difference between Niko and BAPEX and their respective experts is whether or not they establish a codification of practice that is mandatory.²⁰⁶

380. Similarly, at the February 2016 Hearing the Claimant stated:

MR TARNOWSKY: We accept that the API recommended practices are a publication, an industry publication that has some application as guidance for operations in the petroleum industry.²⁰⁷

and

... the API recommended practices are informative and they are materials that ought to be looked and considered in trying to understand or articulate whether they are applicable to the operations

²⁰⁴ HT 2015.11.05 (Day 4), page 952, lines 1-5. ↩
²⁰⁵ HT 2015.11.02 (Day 1), page 124, lines 14-19. ↩
²⁰⁶ HT 2015.11.02 (Day 1), page 134, lines 11-20. ↩
²⁰⁷ HT 2016.02.21, page 74, lines 16-19. ↩

[Page 113]

here is a matter of some dispute. So they do provide some potential guidance ...²⁰⁸

381. The Tribunal considers that, as the Respondents have recognised, the API recommended practices have no legislative force, not in the United States and not in Bangladesh.

382. The Respondents' theory of the API “standards” being somehow incorporated by reference has no evidentiary basis. The API is not mentioned in the relevant provisions and there is no evidence that any API texts were in the Parties' mind when they agreed on Article 26.2.4 of the JVA; Mr Baqi's testimony examined above, indeed points into a different direction. Nor can it be assumed that the term “generally accepted standards of the international Petroleum industry” meant specifically the API texts and the API recommended practices on which the Respondents rely.

383. This being said, it is clear from the Parties' argument that they accept the API recommended practices as a valuable source for determining "generally accepted standards of the international Petroleum industry”, as they are applicable to Niko's conduct according to Article 26.2.4 of the JVA.

384. The Tribunal, therefore must turn to the relevant API texts and examine how these texts can contribute to the understanding of the substance of the International Petroleum Industry Standards. When considering Niko's conduct concerning the blowouts, the Respondents refer specifically to two texts in the API series of Recommended Practices (RP), one concerning Well Control Operations (API RP 59),²⁰⁹ the other for Diverter Systems Equipment and Operations (API RP 64).²¹⁰

²⁰⁸ HT 2016.02.21, page 77, line 24 to page 78, line 5. ↩
²⁰⁹ API RP 59, Recommended Practices for Well Control Operations, first edition, 20 August 1987, Exhibit R-43. ↩
²¹⁰ API RP 64, Recommended Practice for Diverter Systems Equipment and Operations, second edition, November 2001, Exhibit R-42. ↩

[Page 114]

7.3.2 The relevant API publications relied upon by the Respondents: RP 59 and RP 64

385. From the information provided in these two RPs it appears that the principal document is API RP 59. The other publication relied on by the Respondents, API RP 64, concerning diverter systems, is presented as a “companion to RP 59”. Both publications also refer to another “companion” on which the Respondents do not rely: API RP 53 entitled “Recommended Practices for Blowout Preventor Equipment Systems for Drilling Wells".²¹¹

386. The foreword of the first of these recommended practices, RP 59, in the version of 1987, explains that the recommendations

... represent a composite of acceptable practices employed by various operating and drilling companies ...

Recommendations presented in this publication are based on industry experience and expertise involving worldwide operations.²¹²

387. The same foreword underlines that the “publication is not represented to be comprehensive as to all theories and practices utilized in industry well control operations”; and the section describing the Scope of the publication states:

Recommended practices set forth in this publication are considered adequate to meet specified well conditions. It is recognized that there are alternate procedures which can be utilized in well control that may be equally as effective in meeting the well requirements and promoting safety and efficiency.²¹³

388. Similar comments are contained in RP 64 in the version published in 2001, which develops some of the points addressed in the earlier version of RP 59. The foreword to RP 64 also explains:

The goal of this voluntary recommended practice is to assist the oil and gas industry in promoting personnel and public safety, integrity of the drilling equipment, and preservation of the environment for land

²¹¹ API RP 59, Exhibit R-43, paragraph 2.1, and API RP 64, Exhibit R-42, paragraph 1.2. ↩
²¹² API RP 59, Exhibit R-43, paragraphs 1.1 and 1.3. ↩
²¹³ API RP 59, Exhibit R-43, paragraphs 1.2 and 2.6. ↩

[Page 115]

and marine drilling operations. This recommended practice is published to facilitate the broad availability of proven, sound engineering and operating practices. This publication does not present all of the operating practices that can be employed to successfully install and operate diverter systems in drilling operations. Practices set forth herein are considered acceptable for accomplishing the job as described; equivalent alternative installations and practices may be utilized to accomplish the same objectives.²¹⁴

389. The voluntary application of the text in the nature of a "guide” is underlined also in RP 59:

1.3 It is intended that these voluntary recommended practices provide guidelines that will promote and maintain personnel safety, public safety, preservation of the environment, and preservation of drilling and well equipment. [...]

1.4 These recommended practices may be used by anyone desiring to do so. [...]

and

2.1 The purpose of these recommended practices is to provide information that can serve as a voluntary industry guide for safe well control operations.²¹⁵

390. Despite their voluntary nature as guidelines, the RPs use language that appears prescriptive. The foreword to API RP 64 explains:

This publication includes use of the verbs shall and should; whichever is deemed most applicable for the specific situation. For the purposes of this publication, the following definitions are applicable:

Shall: Indicates that the recommended practice(s) has universal applicability to that specific activity.

²¹⁴ API RP 64, Exhibit R-42, Foreword, page iii. ↩
²¹⁵ API RP 59, Exhibit R-43, paragraphs 1.3, 1.4 and 2.1. ↩

[Page 116]

Should: Denotes a recommended practice(s) a) Where a safe comparable alternative practice(s) is available; b) that may be impractical under certain circumstances; or c) that may be unnecessary under certain circumstances or applications.

Changes in the uses of these verbs are not to be effected without risk of changing the intent of recommendations set forth herein.²¹⁶

391. The RP also recognise the diversity of situations and of opinions on the most appropriate manner of dealing with specific situations. For instance, with respect to an issue central to the present case RP 59 states:

Casing setting depths vary according to well conditions.²¹⁷

392. Concerning another much-debated issue, RP 64 states:

Opinions differ throughout the drilling industry concerning well control involving shallow gas.²¹⁸

393. The Tribunal also notes that the recommendations underline the importance of analysing the circumstances of a specific situation and the use of sound judgment. The foreword of the API RP 59 states expressly:

This publication cannot be substituted for qualified engineering analysis and applicable sound judgment to fit a specific situation. An operator may be faced with a less demanding or more demanding operating situation for which alternative well control practices may be appropriate and which may provide equivalent safety and environmental protection.²¹⁹

394. A similar statement is made in the foreword to RP 64:

This recommended practice is not intended to obviate the need for qualified engineering and operations analyses and sound judgments

²¹⁶ API RP 64, Exhibit R-42, Foreword, page iii. ↩
²¹⁷ API RP 59, Exhibit R-43, Section 5, paragraph E, page 30. ↩
²¹⁸ API RP 64, Exhibit R-42, paragraph 1.2. ↩
²¹⁹ API RP 59, Exhibit R-43, paragraph 1.5. ↩

[Page 117]

as to when and where this recommended practice should be utilized to fit a specific drilling application.²²⁰

395. While insisting that the API “standards [are ...] known to the international community out there that tell you how to do something right", the Respondents also accept the importance of sound engineering judgment and an element of discretion in the application of API recommendations:

The API does recognise that sound engineering judgment must be used to determine when the standard should be applied. These are not a 55-mile an hour speed limit, you have to do this. These are the standards that should be used because they are time tested, used and vetted but that does not relieve you of the obligation to use engineering to see if the standards will work in your circumstances.

There is clearly an element of discretion in applying these standards. We do not deny that. The standards – the API does not make them absolute. It says this is what you should do in the circumstances as they have been done in the past and it says you have to apply engineering judgment in order to apply them, but it does not mean that you just get to do whatever you want because the API says that by applying engineering judgment you might come to another judgment. ²²¹

396. The Tribunal concludes that API RP 59 and 64 are relevant texts that can provide useful information when determining Petroleum Industry Standards applicable according to Article 26.2.4 of the JVA. These publications are recommendations based on broad industry experience; but they do not prescribe specific actions concerning well design or blowout control. In their application the specific circumstances of each well must be considered, using sound engineering judgment.

7.3.3 Other sources for Petroleum Industry Standards

397. Apart from the API RPs, the principal document on which the Respondents rely for determining Petroleum Industry Standards is the Well Control

²²⁰ API RP 64, Exhibit R-42, Page iii. ↩
²²¹ HT 2016.02.21, page 284, lines 1-19. ↩

[Page 118]

Training Manual of the Well Control School at the Institute of Drilling and Technology, Oil and Natural Gas Corporation Limited, Dehradun, India, ²²² sometimes referred to as the ONGC Manual.

398. In his witness statement Mr Baqi stated that “in Bangladesh, the operators follow" this manual,²²³ without providing any particulars and without explaining which operators, national or international, he had in mind and on what basis these operators “follow” the manual. At the November 2015 Hearing Mr Baqi clarified: “the information that I have is that BAPEX follows the ONGC of India, Dehradun, India”.²²⁴ He explained why this manual was followed by BAPEX:

The drilling workers of BAPEX are people of Bangladesh so they need to follow certain laws and they have followed the – they follow the Dehradun. ²²⁵

399. The Respondents refer to the ONGC Manual in particular as a support for their reliance on API RP 59. The Introduction of the Manual begins thus:

The successful detection and handling of threatened blowouts ('kicks') is a matter of utmost importance to any company in the business of oil and gas exploration and production. Standard guidelines for well control procedures are elaborated in API RP59. It is extremely important that all personnel involved in the working of a drilling rig have a thorough understanding of these procedures.²²⁶

400. The Tribunal sees in this reference to API RP 59 a confirmation of the relevance and broad recognition of the API publication beyond the borders of the US and in South Asia. The ONGC Manual also may be considered as a possible indication of practices in the international petroleum industry. The Tribunal, therefore, has considered the references to this manual occasionally made by the Respondents.

²²² R-PHB, paragraph 31, referring to Exhibit R-33. ↩
²²³ WS Baqi, paragraph 6. ↩
²²⁴ HT 2015.11.06 (Day 5), page 1158, lines 13-15. ↩
²²⁵ HT 2015.11.06 (Day 5), page 1160, lines 14-17. At the hearing some variations were proposed to the quoted translation; these did not change the meaning substantially: the reason for following the ONGC Manual is that as Bengali people they need to follow certain regulations. ↩
²²⁶ Exhibit R-33, paragraph 1.0. ↩

[Page 119]

401. In this context, the Respondents, relying on explanations by Dr Adams, referred to other “well school manuals on well control and other industry publications [that] also set forth industry standards”. The Respondents assert that these other sources confirm that the standards BAPEX has identified are the generally accepted standards of the international petroleum industry designed for safe, efficient and economic production”.²²⁷ In the Respondents' argument about Niko's conduct in relation to the blowouts such other manuals did, however, play no role.

402. The Respondents have also referred to the practice of operators and the manuals prepared by them: “We understand that operators worldwide publish their own well control manuals.” They further assert that these manuals “require conduct consistent with the API standards”.²²⁸ No such manuals were however produced.

403. At the November 2015 Hearing references were made to Niko's own manuals. Mr Adolph stated that Niko had a “drilling control manual” and that manual was “constantly update[d]”.²²⁹ Further to a request from the Tribunal, the Claimant's counsel enquired about this manual and informed the Tribunal that “a February 2005 edition of Niko's drilling and work over SWP [Safe Work Procedure] manuals" was located and that that version contained a chapter on well control. That document was produced as Exhibit C-110.

404. Counsel continued by stating that the Claimant was continuing to look for a version in force in December 2004 when drilling began.²³⁰ He added, however, that the SWP manual produced was a “safety manual” and that it was “company practice [...] not to have old manuals lying around ...”.²³¹ No further Niko manuals were produced and the Respondents argued:

Since then, however, counsel for Niko has insisted that Mr. Adolph was referring to the “Safe Work Procedure” Manual and that the current version is “wholly irrelevant.” If Niko in fact did not have a well control manual, but only an HSE manual, then this is clear

²²⁷ R-PHB, paragraph 37. ↩
²²⁸ R-PHB, paragraph 38. ↩
²²⁹ HT 2015.11.06 (Day 5), page 1045. ↩
²³⁰ HT 2015.11.06 (Day 5), page 1163. ↩
²³¹ HT 2015.11.06 (Day 5), page 1164. ↩

[Page 120]

evidence of their lack of diligence and conscientiousness in their operations.²³²

405. Finally, the Respondents referred to legislation in the Texas, US, requiring the installation of diverters. Dr Adams had not mentioned that legislative requirement in his report, but referred to it at the November 2015 Hearing. Dr Adams stated that no other regulations came to mind that he had not previously mentioned.²³³ The Respondents then produced as Exhibit R-39 the Texas Administrative Code of 1 January 2014, together with a document of the Standards Council of Canada, of November 2013.²³⁴

406. The Claimant considered the documents“completely irrelevant to the issues before the Tribunal”, given their date of issuance.²³⁵ It also argued that the diverter requirement in that regulation concerns a situation different from that in the present arbitrations.²³⁶

407. The Tribunal concludes that none of these texts are mandatory for Niko's drilling in Bangladesh in 2005 and for reasons stated by the Claimant, their relevance for the Tribunal's decision is doubtful. They may, however, be considered to the extent to which they provide information on Petroleum Industry Standards relevant with respect to Niko's obligations concerning the blowouts.

7.4 Other sources of Niko's obligations

408. Article 26.2.4 of the JVA includes among the sources of obligations for Niko's conduct as operator the “applicable law [and] this JVA”. The Respondents rely on obligations from these two sources.

7.4.1 The Laws of Bangladesh

409. Under the heading “Applicable Law”, Article 13 of the JVA provides: “The validity, interpretation and implementation of this JVA shall be governed by the laws of Bangladesh.” The Respondents state that

²³² R-PHB, paragraph 38. ↩
²³³ HT 2015.11.04 (Day 3), pages 577 – 580. ↩
²³⁴ HT 2015.11.06 (Day 5), pages 1132 – 1133. ↩
²³⁵ HT 2015.11.06 (Day 5), page 1132. ↩
²³⁶ C-PHB, paragraphs 159 – 162. ↩

[Page 121]

... the laws of Bangladesh were applicable ipso facto to Niko's conduct as an operator in the territory of Bangladesh. Niko was and continues to be, subject to criminal proceedings and civil liability under the laws of Bangladesh, and BAPEX has not asserted any violation of such laws outside the scope of Article 26.2.4 of the JVA.

410. The Respondents add, however:

The language of Article 26.2.4 makes violations of law also a breach of the JVA that could give rise to liability to BAPEX, if the breach of the law caused injury to BAPEX.²³⁷

411. In their submission of 12 October 2015, the Respondents identified environmental law as a source to be considered. They referred to the Bangladesh Environment Conservation Act, 1995 (ECA) and the Environment Conservation Rules, 1997 (ECR). They quoted Section 9 of the Act:

Where due to an accident or other unforeseen incident, the discharge of any environmental pollutant occurs or is likely to occur in excess of the limit prescribed by the rules, the person responsible and the person in charge of the place of occurrence shall take measures to control or mitigate the environmental pollution.²³⁸

412. As the Claimant pointed out, this provision “in no way addresses the legal issue before the Tribunal – the standard of care that a person should have taken to prevent the discharge. Section 9 has no application here.”²³⁹

413. A similar conclusion applies with respect to the Respondents' reference to Fraudulent Misrepresentation. ²⁴⁰ The Respondents' explanations in this respect do not identify standards by reference to which Niko's conduct in relation to the blowouts must be determined.

414. The Respondents also referred to general tort liability. They quoted from a recent decision of the Appellate Division of the Supreme Court of Bangladesh for the definition of the concept of tort in the law of

²³⁷ R-PHB, paragraph 26. ↩
²³⁸ Quoted at B-CD.8, pages 4 - 5. ↩
²³⁹ C-CD.7, paragraph 14. ↩
²⁴⁰ B-CD.8, page 6. ↩

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Bangladesh.²⁴¹ The Claimant identified negligence as the only relevant tort and argued that the relevant duty of care must be defined. It added:

(i) the JVA standard encompasses both Bangladesh and international law standards applicable to the petroleum industry and (ii) the negligence standard under Bangladesh tort law encompasses the JVA standard.

BAPEX has provided no authority to suggest that the negligence standard under Bangladesh law, for purpose of a case involving petroleum operations, is different from the JVA standard. Therefore the evidence and expert reports that Niko has submitted addressing liability under the JVA are equally applicable to liability under the tort of negligence under Bangladesh law.

415. The Tribunal agrees. It has not been demonstrated that the relevant standard under Bangladesh tort law is more exacting than that prescribed by the JVA.

416. As explained above, the Respondents thus failed, despite the Tribunal's formal invitation in October 2015, to indicate any laws of Bangladesh that Niko's operations had breached and thereby caused the damage flowing from the blowouts. When the Tribunal, in Procedural Order No 12, observed that the List of Breaches that it is to consider was complete, no Law of Bangladesh had been identified.

417. At the November 2015 Hearing, when addressing the sources of obligations set out in Article 26.2.4 of the JVA, the Respondents confirmed: “No specific question of the violation of applicable law has been presented to the Tribunal for consideration". ²⁴² The Tribunal concluded that “for the purposes of this case” the reference to the applicable law “falls away"; the Respondents did not object.²⁴³

²⁴¹ British American Tobacco Bangladesh Company Ltd. v. Begum Shamsun Nahar, Supreme Court of Bangladesh (Appellate Division), Judgment (13 October 2010), 66 DLR (2014) 80, paragraph 9, referred to at B-CD.8, page 4. ↩
²⁴² HT 2015.11.02 (Day 1), page 42. ↩
²⁴³ HT 2015.11.02 (Day 1), page 109; reference was made to point 2 of the Respondents' four-part standard, as recorded above in Section 7.2. ↩

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418. Indeed, relying on findings of the Government Commission enquiring into the causes of the first blowout, the Claimant stated that there was no regulatory regime in Bangladesh prescribing mandatory standards:

Several oil and gas producing jurisdictions in fact have in place regulatory regimes that prescribe specific mandatory standards with respect to the drilling of oil and gas wells. It is common ground that Bangladesh did not have such a regulatory regime in place at the times material to this arbitration. Indeed, it still has no such regulatory framework, or even an applicable set of “guidelines” pertinent to drilling.²⁴⁴

419. The First Enquiry Report by the Committee set up by the Government to determine the causes of the blowout on which the Claimant relies states:

Guidelines associated with such drilling should be adopted and enforced in Bangladesh for in future the country will produce many of its shallow gas. The necessity for an upstream regulator, therefore, may receive urgent attention.²⁴⁵

420. The Claimant concluded in its Post-Hearing Brief that the Respondents seemed to have abandoned additional grounds or recognised that such positions have no foundation.²⁴⁶

421. It was only with their Post-Hearing Brief of 22 January 2016 that the Respondents introduced a reference to specific Bangladeshi legislation creating a legal obligation in relation to the blowouts:

According to the Bangladesh Petroleum Act of 1974, any person engaged in petroleum operations must “control the flow, and prevent the waste or escape” of petroleum and “prevent damage to petroleum bearing strata in any area.” These obligations are also contained in the JVA and Niko's absolute obligations in respect of them are reinforced by this independent legal obligation.²⁴⁷

²⁴⁴ C-PHB, paragraph 65. ↩
²⁴⁵ Enquiry Report, Exhibit R-3, paragraph 6.22. ↩
²⁴⁶ C-PHB, paragraph 61. ↩
²⁴⁷ R-PHB, paragraph 26. ↩

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422. The Respondents quote sections 6 (1) and referred to 6 (2) (a) and (c) of the passages of the Bangladesh Petroleum Act on which they rely; they insist that “these are mandatory obligations without any reference to economic recovery”:

6. (1) It shall be the duty of any person engaged in any petroleum operation-

(a) to ensure that such petroleum operation is carried on in a proper and workmanlike manner and in accordance with good oil-field practice;

(b) to carry on petroleum operation in any area in a manner that does not interfere with navigation, fishing, and conservation of resources of the sea and sea-bed;

(c) to consider factors connected with the ecology and environment.²⁴⁸

(2) In particular, and without prejudice to the generality of the foregoing provision, a person engaged in any petroleum operation shall, in carrying out such operation in any area,

(α) control the flow, and prevent the waste or escape, in that area of petroleum or water;

[...]

(c) prevent damage to petroleum bearing strata in any area, whether adjacent to that area or not;

[...]²⁴⁹

423. At the February 2016 Hearing the Claimant objected to the newly introduced reference. It pointed out that no reference to any breach of Bangladeshi law had been made by the Respondents throughout the

²⁴⁸ The Bangladesh Petroleum Act of 1974, CLA-5, quoted by the Respondents in R-PHB, page 9, FN 22. ↩
²⁴⁹ The Bangladesh Petroleum Act of 1974, CLA-5; the references are identified but not quoted at R-PHB, page 12, FN34. ↩

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proceedings: after “multiple rounds of written submissions [...] after all of the evidence was submitted at the hearing, and after six days of hearing, BAPEX now seeks to raise a new theory of breach”. The Claimant submitted that “this cannot be countenanced by the Tribunal and that this alleged submission of BAPEX must be ignored”.

424. On the substance of the Respondents' reference, the Claimant emphasised the similarity of Section 6 (1) of the Petroleum Act with the “reasonable operator standard” of the JVA. It described the passages quoted from section 6 (2) as “merely a specific enumeration of particular duties that are intending to fall within the scope of the general standard articulated in section 6 (1) and [...] do not, as submitted by BAPEX, constitute some form of absolute obligation”.²⁵⁰ It also points out that, according to section 10 of the Petroleum Act, no action lies against a person having acted in good faith and that, despite the express provision of sanctions under section 9 of the Act, no proceedings against Niko or its personnel have ever been commenced under the Petroleum Act.

425. The Tribunal notes the Respondents' failure to invoke any breaches of the Petroleum Act at any time before the Post-Hearing Brief of 22 January 2016 and the absence of any action in Bangladesh under that Act in relation to the blowouts. This failure and absence raise doubt about the applicability of the Act to the circumstances of this case.

426. In any event, the Tribunal also notes that the terms of Section 6.1 of the Petroleum Act do indeed resemble in some respects the wording of Article 26.2.4 of the JVA. The Respondents have not pointed to any aspect of these terms which differ from the obligations under that Article or impose more stringent requirements; and the Tribunal has not been able to identify such amplifying requirements. It seems rather the case that the obligations flowing from Article 26.2.4 of the JVA subsume those of Section 6.1 of the Petroleum Act and are in some respects more far reaching.

427. The Tribunal concludes that Article 26.2.4 of the JVA encapsulates Niko's obligations as the Operator that must be considered in the present case. As the Respondents stated at the November 2015 Hearing in terms quoted above: “No specific question of the violation of applicable law” needs be

²⁵⁰ HT 2016.02.21, pages 83 - 84. ↩

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considered by the Tribunal when determining Niko's liability for the blowouts.

7.4.2 Other provisions of the JVA

428. The third part of the standard of Article 26.2.4 of the JVA identified by the Respondents requires the Operator to conduct Petroleum Operations in accordance with “this JVA”. The Respondents have focussed on Article 27.1 of the JVA, and rely specifically on subclauses (d) and (f) of that provision. ²⁵¹

429. The relevant passages read as follows:

While conducting Petroleum Operations, OPERATOR shall take necessary measures in accordance with generally accepted standards of the international petroleum industry, for conservation, safety of life, property, crops, fishing and fisheries, navigation, protection of environment, prevention of pollution and safety and health of personnel, including but not limited to:

[...]

d) preventing damage to any Petroleum and water bearing formations, and other natural resources;

[...]

f) taking all necessary precautions to prevent pollution of or damage to the environment;

430. The Respondents argue that “it does not matter if the standard is vague or non-mandatory, if there is something in accordance with this standard (i.e. not contrary to the standard) that Niko could do to protect the environment, prevent pollution, protect property, or ensure people's safety, Niko was obligated to do it.”²⁵² The Respondents conclude that Article 27.1 of the JVA creates an “absolute obligation to avoid harming the population,

²⁵¹ R-PHB, paragraphs 78 – 80 and FN126. ↩
²⁵² R-PHB, paragraph 78; similar at HT 2016.02.21, pages 294 – 296. ↩

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the environment, and the petroleum formation”. It characterises this obligation as expressing a “strict liability standard”.²⁵³

431. The Claimant sees no basis for inferring an “absolute obligation” and a "strict liability standard" from Article 27.1 of the JVA. It considers this provision “a more narrow application than the broadly applicable provision of Article 26.4 of the JVA which expressly addresses Niko's standard of care in conducting petroleum operations”. As Article 27.1 also makes reference to the “same qualifier that Niko is to take necessary measures in accordance with the generally accepted standards of the international petroleum industry", Niko argues that this article does not “impose any different standard on Niko than its general standard of care under 26.2.4".²⁵⁴

432. The Tribunal sees in Article 27.1 of the JVA a broad, general obligation of protection in terms similar to the reliance on the generally accepted standards of the international petroleum industry. There is no basis for assuming strict liability.

433. Moreover, Article 27.1 of the JVA prescribes the obligation in general terms but does not specify how the defined objective of protection is to be achieved.

434. The measures taken to meet this objective must be “in accordance with generally accepted standards in the international Petroleum industry”, as prescribed also in Article 26.2.4 of the JVA. The Tribunal concludes that the measures that the Operator must take for instance “to prevent pollution of or damage to the environment” under paragraph (f) of Article 27.1 do not require the application of a more demanding standard than those which the Operator must observe under Article 26.2.4 of the JVA.

7.5 The Experts

435. Both the Claimant and the Respondents emphasise the important contributions of the experts to the identification and understanding of the Petroleum Industry Standards. The Claimant explained:

²⁵³ R-PHB, paragraph 80. ↩
²⁵⁴ HT 2016.02.21, pages 30 - 33. ↩

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The experts' opinions. That is what you need to look to and that is what you need to rely upon and make your decision upon. That certainly, as I said earlier, the API recommended practices are informative and they are materials that ought to be looked [at] and considered in trying to understand or articulate whether they are applicable to the operations here is a matter of some dispute. So they do provide some potential guidance but at the end of the day the only evidence that you have before you as to generally accepted standards of the international petroleum industry are the opinions of the experts who are the participants in the international petroleum industry.²⁵⁵

436. The Respondents discussed the API documents and other sources of industry standards and then continued:

In addition to the written texts BAPEX identified, the three well control experts, in their written reports and at the hearing, confirmed the existence of the generally accepted standards identified by BAРЕХ regarding well planning, adequate training, shallow gas handling, setting the casing deep enough to withstand anticipated pressures, and the use of a diverter when faced with a shallow gas risk.²⁵⁶

437. Three experts on well design and drilling, including relief wells, appeared before the Tribunal.

438. The Claimant appointed Mr John Wright as expert and provided, together with its Reply of 29 May 2014 submitted Mr Wright's “independent opinion [also dated 29 May 2014] with respect to the well design and drilling of the Chattak 2 Well which suffered a loss of control incident (blowout) on January 7, 2005 and the subsequent design and execution of the relief well operations for Chattak 2A which also suffered a loss of control incident (blowout) during the course of the relief well operations on June 24, 2005."

439. Mr Wright's opinion describes his training and experience as a professional engineer registered in the Texas, US with different companies in the oil and gas industry since 1978. In 1989, he started his own company called John Wright Company and, after that company was acquired by Boots &

²⁵⁵ HT 2016.02.21, page 77, line 21 to page 78, line 10. ↩
²⁵⁶ R-PHB, paragraph 39. ↩

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Coots, established Bearco International LLC, focusing primarily on relief well design and execution. He stated that he worked on 83 relief well projects and designed and supervised 41 relief well or intersection projects around the world. The personnel of his company, Mr Wright and two others, “have more relief well experience than all other competitor companies combined”.²⁵⁷

440. Mr Wright also mentions that he designed the relief well and managed the relief well special services for the Occidental blowout at Moulavi Bazar in 1997,²⁵⁸ concluding that he has “first-hand experience in the types of problems encountered in the Chattak 2 blowout”.²⁵⁹

441. Noting that the Respondents did not contest in any substantive manner the Claimant's argument and evidence concerning the issue of Niko's liability for the two blowouts, the Tribunal issued Procedural Order No 7,²⁶⁰ explaining:

Given the technical nature and the complexity of many of the issues arising in this context, the Tribunals do not wish to proceed in the absence of a critical review of the technical issues arising from the Claimant's case. In the circumstances the Tribunals require the opinion of an independent expert or, given the diversity of the relevant substance matters, several experts.

442. Following the process described in Procedural Orders No 7 and 8 and after consultation with the Parties, the Tribunal appointed, by letter of 31 March 2015, Mr Leo William Abel as Gas Well and Relief Well Design and Execution Expert.

443. According to the report provided by him which was submitted to the Parties, Mr Abel is a Specialist Consultant – Drilling and Well Control; holding a BScE and an MBA, he is registered as Professional Engineer in the Texas, US. He started his career in 1977 as Drilling Superintendent / Drilling Engineer at Arabian American Oil Company. He continued working in this sector and, in 2015, became Managing Director of Abel Engineering LLP, describing its activity as follows:

²⁵⁷ Wright 1, Appendix A, paragraph 1.3. ↩
²⁵⁸ See below Section 8.2.1. ↩
²⁵⁹ Wright 1, Section 2.3. ↩
²⁶⁰ See Section 3.2.2. ↩

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Specialty engineering consulting business for pressure control projects including relief wells, capping operations, snubbing operations, well kill, firefighting and well control operations.

Specific responsibilities:

• Drilling engineering and completion operations (incl. HTHP well design) worldwide.
• Principal engineer for well control tasks: relief well drilling, dynamic two-phase flow modelling, blowout contingency planning, project management of well control incidents.

444. Mr Abel provided a report, dated 8 June 2015 (Abel 1) which was submitted to the Parties for comments.

445. After the Respondents had announced the appointment of new counsel in July 2015, the Respondents presented Comments on the Tribunals’ Experts Report, dated 31 August 2015, which were accompanied by Observations by an expert engaged by the Respondents, Dr Neal Adams, a Registered Professional (Petroleum) Engineer of 33 years' standing. (Adams 1).

446. With these Observations, Dr Adams presented detailed biographical information, to wit that he had

... worked in 33 countries over a 43 year career. He is an experienced drilling (land, offshore and deepwater), production and completion engineer specializing in, among other areas well and blowout control, drilling planning and operations, site supervision, rig and site safety, drilling rigs, drilling optimization and drilling problems, production impairment/restoration and fracturing.

His field work includes well site supervision and implementation of new drilling and well control techniques including the vertical intervention procedure from floating rigs, offset kills in shallow water, installation and operation of a subsea snubbing unit, relief well drilling from floaters, well intervention over live sour gas blowouts and shallow gas handling.

[Page 131]

Contributions in the field of drilling engineering address kick and blowout control, well planning, optimization of casing setting depth selection to prevent underground blowouts, stuck pipe and casing failures during fracturing operations.²⁶¹

447. The Tribunal accordingly had the benefit of the knowledge and experience of three experts having many years' experience in the international petroleum industry, and specifically with drilling and controlling petroleum wells as well as dealing with blowouts. In addition to the reports mentioned above, each of the experts provided extensive oral explanations at the November 2015 Hearing.

448. From the disclosures made by the experts, the Tribunal noted that the experts knew each other well and on occasion had worked together. The Tribunal drew the Parties' attention to this circumstance at the beginning of the November 2015 Hearing; no objection was raised.²⁶²

449. As will be seen from other explanations in this Decision, all three experts contributed greatly to the Tribunal's understanding of technical issues raised by the dispute and of the standards that have to be considered when deciding it. In addition to inviting relevant technical explanations, the Tribunal expressly invited the experts to inform the Tribunal “of any other texts which we would have to look to when we seek to identify the standards". ²⁶³

450. When considering the explanations given by the experts in their reports and at the November 2015 Hearing, the Claimant expressed a view about the manner in which the Tribunal should deal with the conflicting views expressed by the experts. It noted:

It is apparent from the reports filed by Mr. Wright and Dr. Adams, as well as from the extensive discussions at the hearing, that Mr. Wright and Dr. Adams have very different views on several matters. Where the evidence of Mr. Wright conflicts with the evidence of Dr. Adams, the Tribunals will have to decide which position is to be preferred in

²⁶¹ Neal Adams' Observations on the Tribunal's Experts Reports, 31 August 2015 (Adams), page 2 of the attached CV. ↩
²⁶² HT 2015.11.02, page 29, line 22 to page 30, line 4 and above section 3.2.12. ↩
²⁶³ HT 2015.11.02 (Day 1), page 125. ↩

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light of their assessment of the experts' respective skill, experience, credibility and demeanor at the hearing, the documentary and witness evidence of record, and the use and impact of any hindsight in the formulation of their respective opinions.²⁶⁴

451. The Claimant continued by submitting that “Mr Wright has far more applicable, relevant and extensive practical experience, spanning a broad range of jurisdictions and covering a comprehensive spectrum of drilling facets". It also submitted that Mr Wright's evidence was “robust, presented in a fair and balanced manner, and consistent”. The Claimant concluded that "far greater weight should be given to the opinions of Mr Wright and, where Mr Wright and Dr Adams differ in their opinions and conclusions, the Tribunal should be guided by the opinions of Mr Wright instead of Dr Adams."²⁶⁵

452. The Tribunal did indeed find the explanations of Mr Wright on many aspects very helpful; in the present Decision it refers to his opinions frequently. That does not mean that the Tribunal gave preference to his opinion generally, or as a matter of principle. The Tribunal considered the explanations given by the experts on industry standards, on the factual circumstances of the case and on other matters on which they opined; it weighed these opinions for their inherently persuasive value, without giving preference to any opinion on the ground that it was expressed by one expert rather than by another.

453. The Tribunal made this position quite clear to the Parties, addressing counsel at the February 2016 Hearing:

We are not bound [by] what one or the other expert says or to pick one or the other expert. We are getting opinion from different experts. We have our own mind. We apply our own mind to that and make our decision.

²⁶⁴ C-PHB, paragraph 44. ↩
²⁶⁵ C-PHB, paragraphs 45 – 47. ↩

[Page 133]

You as counsel and your other experts have the opportunity to criticise that and we take the criticism also into consideration. I think that should be clear.

We are not just saying because Mr Wright or Mr Abel or Mr Adams are experts we take what they are saying. We apply our own mind to it.²⁶⁶

454. A related issue arose with respect to the opinions expressed by Mr Abel, the Tribunal appointed expert, and the manner in which the Tribunal should consider them. In particular, the Claimant objected that Mr Abel expressed opinions beyond the scope of his Terms of Reference.

455. These Terms of Reference were issued in the spring of 2015, before the Respondents had decided to argue the case of the Compensation Declaration on the merits and before they had appointed experts in support of their defence. This left the Tribunal only with Mr Wright's opinion. In these circumstances the Tribunal defined Mr Abel's assignment in the following terms:

• examining the analysis and opinions concerning the design of gas wells, in particular their casing, and the related drilling operations in the context of marginal/abandoned gas field development, as well as the design and execution of relief wells for the purpose of well blowout control, as set out in the Expert Report of John Wright (May 29, 2014) and in the relevant Committee Reports identified in Annex B; and
• expressing his views on the methodology adopted and the opinions stated by John Wright, and the methodology and opinions stated within the relevant Committee Reports identified in Annex B, and the technical positions expressed by the Claimant (to the extent such technical positions are different from those of the Claimant's expert).

456. The Terms of Reference, which were adopted following consultation with the Parties, made it clear that Mr Abel also was “expected to point out any deficiencies in methodology and calculations contained in such reports as well as any resulting necessary corrections thereto. The Tribunal Expert

²⁶⁶ HT 2016.02.22, page 333. ↩

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shall not present a new evaluation, different in methodology from that set forth by John Wright or adopted within the relevant Committee Reports”. The Terms of Reference reserved the possibility that the expert “is of the view that a different approach is required for properly assessing the factual situation in the present case”, reserving for the Tribunal to decide on how to proceed in that eventuality.

457. Mr Abel completed his report on 8 June 2015. In that report, Mr Abel discussed the technical issues that arose from the factual situation, as it appeared from the available evidence, and the opinion expressed by Mr Wright. As part of his report, Mr Abel identified what he considered the relevant questions and the answer that Mr Wright had given in his report. Mr Abel examined this answer, explained where he agreed and where he disagreed, stating in case of disagreement what he considered as the correct answer.

458. Mr Abel's report was delivered to the Parties and they were given an opportunity to comment in two exchanges of submissions of 31 August and 30 September 2015. In its Comments of 31 August 2015, the Claimant objected to Mr Abel's report, asserting that he “grossly failed to respect the Terms of Reference”, it discussed points where it disagreed with Mr Abel's report. It requested that the Tribunal “accord no weight to the expert report of William Abel given its material and prejudicial failure to respect the Terms of Reference agreed by the Parties and ordered by the Tribunals”. It also requested:

If the Tribunals determine that, notwithstanding Niko's submissions, Mr. Abel's Report is, in whole or in part, to be given weight, Niko respectfully submits that it must be given a full opportunity at the hearing to lead evidence from Mr. Wright to address Mr. Abel's novel contentions.²⁶⁷

459. The Claimant was given an opportunity of commenting both the report of Mr Abel and that of Dr Adams which the Respondents had produced on 31 August 2015 (Adams 1). It did so in a submission of 23 October 2015 and by a second report from Mr Wright, also dated 23 October 2015, (Wright 2). In this second opinion Mr Wright wrote:

²⁶⁷ C-CD.3, paragraph 54. ↩

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While, in general, Mr. Abel's report is presented in a fair and balanced way, in some instances he went beyond the assessment of my report and delved into how the blowouts could have been avoided and what procedures could have been used for a successful outcome. Although this is commonly what we, as specialists, do when assessing a blowout, I purposely avoided this approach as it leads to hindsight conclusions and was not, as I understood my mandate, what was being asked. With hindsight, it is almost always obvious what might have been done differently to prevent a blowout and this case is no different. As noted in my report, I understood my task to be to assess what was done by Niko and its consultant GSM against the “reasonable operator” standard. To the extent Mr. Abel addresses that question, I do not agree with all of his opinions and my comments follow.²⁶⁸

460. At the November 2015 Hearing, the Tribunal referred to the development that occurred in the presentation of the expert reports: originally the Tribunal appointed its own expert, because the Respondents had not presented their own expert. Since that had changed, the Tribunal considered Mr Abel's role primarily in assisting the Tribunal in finding its way "through the complicated and complex explanations made by the two experts". ²⁶⁹ The Tribunal was not of the opinion that Mr Abel had overstepped his mandate; but it added that, in the interest of transparency, it had asked Mr Abel to provide his explanations in front of the Parties and their experts, affording to them the opportunity to “complete, correct or adjust these explanations”.²⁷⁰

461. This is indeed what happened at the November 2015 Hearing. The Parties and their experts had ample opportunity of discussing Mr Abel's views at that hearing; and they did so extensively. The Parties then had further opportunities to address Mr Abel's explanations. They did so in the Post-Hearing Briefs and at the February 2016 Hearing.

462. In its Post-Hearing Brief, the Claimant stated:

While Mr Abel also played an important educative role at the hearing, Niko has taken note of the Tribunals' clear statement at the outset of

²⁶⁸ Wright 2, page 3. ↩
²⁶⁹ HT 2015.11.02 (Day 1), page 15. ↩
²⁷⁰ HT 2015.11.02 (Day 1), page 24. ↩

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the hearing that Mr Abel's role was to assist the Tribunals in understanding the technical issues relevant to the case, rather than to provide an independent opinion for the Tribunals to rely on. However, where Mr Abel contributed to the discussion of the key issues at the hearing, Niko has referred to certain observations of Mr Abel, both as contained within his report and also as expressed at the hearing.²⁷¹

463. The Respondents relied in their Post-Hearing Brief on a number of occasions on matters of opinion expressed by Mr Abel's in his report and at the November 2015 Hearing. They quoted in particular statements about what he described as “the inadequate overbalance” of the hydrostatic pressure in the wellbore and the kick detection and slow reaction of the drilling crew.²⁷²

464. At the February 2016 Hearing the Claimant raised the question whether the Tribunal intended to rely upon opinions expressed in the report prepared by Mr Abel. The Claimant stated that it had not relied upon or generally addressed the opinions expressed by Mr Abel, while the Respondents' Post-Hearing Brief repeatedly relied “on Mr Abel's opinions as opinions". In support it referred specifically to the two instances just mentioned and described them as “a couple of rather striking examples” for such reliance. The Claimant concluded:

So Niko maintains its objections to Mr Abel's opinions as expressed in his report. We have of course no objection to the Tribunal's reliance on Mr Abel to guide it in interpreting the evidence submitted by the parties but we do not believe that it is appropriate for the Tribunal to rely upon Mr Abel's opinions as independent opinions reflecting his independent analysis, which was beyond his Terms of Reference.²⁷³

465. The Respondents disagreed, stating

... it is BAPEX's position that Mr Abel's opinion is in fact an independent opinion solicited by the Tribunal in order to allow it to have additional information above and beyond the opinion submitted

²⁷¹ C-PHB, paragraph 43. ↩
²⁷² R-PHB, paragraphs 144 and 147. ↩
²⁷³ HT 2016.02.21, page 14, lines 4-12. ↩

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by Claimant at a time when Respondent had not yet submitted an opinion.

It is our position that his opinion did not go beyond the Terms of Reference, that it is an independent opinion from a highly qualified expert that was hired by the Tribunal to provide an opinion and should be fully considered by the Tribunal on an equal footing to the opinions of the experts of Claimant and Respondent.²⁷⁴

466. The Tribunal addressed this point by referring to Mr Abel's Terms of Reference and stated:

From our perspective, the observations made by Mr Abel fall within the Terms of Reference and, therefore, are subject to comments by both parties.

If you had a misunderstanding in this respect, you the Claimant, we invite you to comment on these points tomorrow so that you will not be left without an opportunity of commenting on these aspects. Is that agreeable?

MR LEGUM: It is. My recollection is that we presented comments already in writing in our September 30 comments on the reports of the Tribunal experts but we will take another look at and try to make the Tribunal's work easier by focusing on what is important.²⁷⁵

467. Later at that hearing the Claimant emphasised the importance of the explanations from the experts:

... the Tribunals must, we submit, pay careful attention to the opinions of the experts.²⁷⁶

The Tribunal then raised specifically the question of Mr Abel:

PROFESSOR MCLACHLAN: ... you advanced before us yesterday that the best evidence that we have available before us as to generally accepted industry standards is the evidence of the experts from whom

²⁷⁴ HT 2016.02.21, page 14, line 21 to page 15, line 9. ↩
²⁷⁵ HT 2016.02.21, pages 219 - 220. ↩
²⁷⁶ HT 2016.02.21, page 44. ↩

[Page 138]

we heard because, as I understood it, all three of them were experts in the sense that they had specialist expertise in well relief of one kind or another.

I put it to you that that in and of itself cannot be a ground for giving less weight to Mr Abel's evidence than to the other experts in the light of your submission that the best evidence we have got is the evidence of the experts.

MR TARNOWSKY: I agree with you, Professor McLachlan, on that point, that the best evidence for the Tribunal to turn to is the evidence of the experts.²⁷⁷

468. In conclusion on this issue, the Tribunal does not believe that Mr Abel exceeded the scope of his assignment. In any event, even if Mr Abel had expressed opinions beyond the scope of his assignment, the Parties and their experts had full knowledge of these opinions and had every opportunity of responding; and, once again, the Tribunal, having heard the Parties' argument and their experts' opinions, makes the present Decision by making its own assessment of the relevant issues.

469. The Claimant raised two other objections:²⁷⁸ one concerned Mr Abel's availing himself of the assistance of another person in making certain calculations, as he explained at the November 2015 Hearing;²⁷⁹ the other objection concerned the standard applied by Mr Abel's approach when he explained: “we only used the information that was given to us and we gleaned from that as we would as if we were drilling this well on behalf of a client". ²⁸⁰

470. Concerning the first of these objections, the assistance provided to Mr Abel with respect to certain calculations, the Tribunal explained that what was relevant from its perspective was

... what information and opinion is given to us. Mr Abel said the opinion he gave to us under your control and you can rebut or contest

²⁷⁷ HT 2016.02.22, pages 331 – 332. ↩
²⁷⁸ HT 2016.02.22, pages 327 – 330. ↩
²⁷⁹ HT 2015.11.05 (Day 4), page 808. ↩
²⁸⁰ HT 2015.11.05 (Day 4), page 809. ↩

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or use your experts to rebut this opinion, so where he got it from is of secondary, if of any, importance.²⁸¹

471. The Claimant's objection arose in the context of the calculation of the pore pressure gradient, for which Mr Abel used the value of 0.433 psi/ft.²⁸² This value is contested between the Parties and the Tribunal is fully aware of the controversy about this value. What matters for its assessment of the issue is the justification for the choice of this or another value and the arguments for and against this choice, and not the question who calculated the value.

472. The second objection, i.e. the standard applied by Mr Abel, is indeed a critical one. It concerns the question of whether the standard by which Niko's performance must be judged is that of Mr Abel, as a specialist, or that of an ordinary operator. According to the Claimant, the standard of performance applied in Mr Abel's opinion was that of highly qualified experts and “not how an operator subject to the provisions of the JVA would undertake the well". ²⁸³

473. The Tribunal is fully conscious of this issue and has flagged it already in Procedural Order No 12, as quoted above in Section 7.1. The issue was addressed in the February 2016 Hearing in the following terms:

PROFESSOR PAULSSON: So the difference you are making is between average specialist in drilling operations versus relief activity specialist?

MR TARNOWSKY: Yes. The point is that Niko's submission is that the standard of care under the JVA is that of the average international oil and gas operator, not someone who practises in the field as a relief well specialist and has a particular focus and area that gives him or that individual a much greater specific insight into well control because that is all they do.

²⁸¹ HT 2016.02.22, page 327, lines 20-24. ↩
²⁸² Expert Report of L. William Abel, 8 June 2015 (Abel), page 17, Figure 4.1, discussed at HT 2015.11.05 (Day 4), pages 805 et seq. ↩
²⁸³ HT 2016.02.22, pages 326-327. ↩

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PROFESSOR PAULSSON: So the difference between a general practitioner and a pathologist?

MR TARNOWSKY: Precisely, or any other medical specialist.²⁸⁴

474. When determining the required conduct resulting from the prudent operator standard of Article 26 of the JVA, the Tribunal will take into account all relevant circumstances, and be mindful of the qualification that must be expected of an operator under terms of the JVA.

7.6 Conclusion on Niko's Obligations

475. Having considered the various texts referred to by the Parties, the Tribunal concludes that no directly applicable contractual or other legal obligation has been identified which required, at the time of the blowouts, a specific act or omission the breach of which by Niko was causal for the blowouts.

476. The conduct which Niko had to adopt in its Petroleum Operations is defined in Article 26.2.4 of the JVA, which refers in more general terms to the standards and the level of care that Niko had to observe, in particular the "generally accepted standards of the international Petroleum Industry". In this Decision, the Tribunal refers to the standard applicable under Article 26.2.4 of the JVA as the prudent operator standard.

477. When considering the sources relevant for this standard, one notes that they generally recognise the diversity of situations that arise in the performance of operations such as the Chattak wells. Mr Wright, for instance, insisted on the specific nature of drilling and well control, and highlighted the extent to which these operations depend on the circumstances of each well:

The drilling of oil and gas wells, unless there are specific laws in the country of operations that must be followed, is left to the operator to determine the best course of action for their situation. That is, there are 50 shades of grey in attempting to determine a reasonable course of action. ²⁸⁵

²⁸⁴ HT 2016.02.22, page 330, line 25 to page 331, line 15. ↩
²⁸⁵ Wright 2, page 3. ↩

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478. Much depends on the specificity of the well and the geology. Mr Abel used an instructive image :

... the people who taught me to drill said the hole speaks to you, listen to what it is saying ...²⁸⁶

479. That makes it particularly difficult to determine the specific conduct required of an operator like Niko in the specific situation in relation to the blowouts. The Tribunal is conscious of the fact that a broad range of discretion is perforce left to operators in the petroleum industry when planning and performing drilling operations. While in many respects the operator has the choice of the most suitable way of proceeding, it must exercise this choice in a responsible manner, ensuring both safety and efficiency. The standard to be followed thus is one of professional competence and responsibility.

480. In this context, the advice of the three experts was particularly important and useful for the Tribunal, both with respect to the identification of the standards relevant for specific aspects of the case and in applying such standards to the specific conduct at issue. All three experts were highly qualified and had extensive experience in relevant petroleum operations. When examining the events in detail below in Sections 8 and 9, the Tribunal found their explanations very useful and at many occasions found their advice persuasive. Where it had to choose between conflicting views, the Tribunal considered the arguments in support of these views to determine the most persuasive one in the circumstances and giving regard to the contractual terms.

²⁸⁶ HT 2015.11.02 (Day 1), page 204, lines 17-19. ↩

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8. THE FIRST BLOWOUT (СНАТТАК 2 WELL)

8.1 Some key concepts concerning the drilling operations and the blowouts

481. Before discussing the first blowout and the circumstances in which it occurred, the Tribunal sets out its understanding of some concepts and terms that are relevant for the drilling operations and the blowouts.

482. Areas known as sands are sand or sandstone layers permeated with natural gas. They are also referred to as “gas reservoirs”.²⁸⁷ Gas moves through the sand or pores of a reservoir rock layer towards the surface until it encounters a trap, a high point in the reservoir where gas and fluids are stopped by a layer of impermeable rock (shale). ²⁸⁸

483. In the present case the highest layer trapping the gas in Chattak West is the regional seal or marine shale, a substantial impermeable layer of clay or rock, ²⁸⁹ approximately 75m thick (from about 485m to 560m, according to other sources 500m to 570m, below surface).²⁹⁰ The regional seal forms the barrier between the porous sandstone gas reserves below and the sandstone layers above this shale. ²⁹¹

484. The definition of shallow gas is a matter of controversy among the Parties and the experts. The Tribunal understands the term as applying to gas deposits in shallow sands, but Mr Wright cautions that “there is not an industry standard that defines the depth that crosses from shallow wells to deep wells”.²⁹² Dr Adams proposes that “shallow gas has nothing to do with depth" and defines it as “any gas zone where the formations above it are too weak to shut the well in with a full BOP [Blowout Preventer] and control that". ²⁹³ The Claimant refers to a definition from the OGP Risk Assessment Data Directory which defines shallow gas release as “an incident where shallow gas is released from the well after a gas zone had

²⁸⁷ C-CD.2, paragraph 73. ↩
²⁸⁸ C-CD.2, paragraph 75. ↩
²⁸⁹ C-CD.2, paragraph 75 states “impermeable rock”, elsewhere the layer is said to be of clay. ↩
²⁹⁰ These values are given in Wright 1, page 37, by reference to the “diagnostic of the Chattak 2 well" from the Chattak 2A Relief Plan and Drilling Procedure, Exhibit C-86; in C-CD.2, paragraph 75, the size of the shale is indicated as 70m, between 500m and 570m. ↩
²⁹¹ Explanations by the Claimant in C-CD.2, paragraph 75. ↩
²⁹² See e.g. Wright 2, page 5. ↩
²⁹³ HT 2015.11.4, page 594. ↩

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been penetrated before the BOP has been installed (any zone penetrated after the BOP is installed is not a shallow gas incidents)".²⁹⁴ For Mr Abel “shallow gas, the definition of shallow gas is like, John [Wright]'s, it is an unintended small reservoir and you [are] just trying to get past it to the objective which is always deeper”.²⁹⁵ The API RP 64 discusses extensively shallow gas, but does not define it. It mentions, however, that “shallow gas zones” can be 1'500 or 3'000 feet deep²⁹⁶ and explains: “Shallow gas sands are usually abnormally pressured and capable of flowing gas at high flow rates and in large volumes.”²⁹⁷ The issue of shallow gas is addressed below in Section 8.4.2.

485. Spud date: start of drilling.

486. A wiper trip is the lifting (or “tripping”) of the drill pipe up the well bore. ²⁹⁸

487. The Fracture gradient represents “the pressure at which the formation will start to fracture"; ²⁹⁹ or “formation fracture gradient”. It is “the hydrostatic value expressed in psi/ft that is required to initiate a fracture in a subsurface formation (geological strata)”.³⁰⁰

488. Formation Pressure (or Pore Pressure): “Pressure exerted by fluids [or gas] within the pores of the formation.³⁰¹

489. A kick is the influx of gas into the wellbore.³⁰²

490. Kick tolerance (KT) is a concept used in well design, specifically with respect to decisions concerning the depth of the casing (see below Section 8.4.3.3). Dr Adams explains:

The concept of kick tolerance (KT) has been widely discussed in the available information. The concept uses mud density and fracture gradients to calculate the тахітит пиmber of barrels of influx that

²⁹⁴ Blowout Frequencies, International Association of Oil and Gas Producers, OGP Report No. 434-2, Exhibit C-106, Section 1.2, Definitions. ↩
²⁹⁵ HT 2015.11.6, page 1217. ↩
²⁹⁶ API RP 64, Exhibit R-42, page 45. ↩
²⁹⁷ API RP 64, Exhibit R-42, paragraph 4.3.1. ↩
²⁹⁸ C-PHB, paragraph 165. ↩
²⁹⁹ Wright 1, page 15. ↩
³⁰⁰ API-RP 64, Exhibit R-42, paragraph 3.1.47. ↩
³⁰¹ API-RP 59, page 79; see also below Section 8.4.3.11. ↩
³⁰² C-PHB, paragraph 165. ↩

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can be allowed into the wellbore without fracturing the exposed rock formation from excessive surface pressures.³⁰³

Mr Wright explained:

The setting depth for a casing string is primarily driven by the formation's fracture gradient (the pressure at which the formation will start to fracture) and the anticipated pore pressure that will be encountered in the target producing reservoirs. When the pore pressure of the formation at the bottom of the open hole being drilled reaches a value where the formation at the casing shoe may fracture if a certain volume of fluid (oil/gas/water) enters the wellbore (normally called kick tolerance), for example from a permeable sand, the next casing string is typically set before drilling deeper.³⁰⁴

491. The term full column of gas is used as a reference for the design of casing depth. Mr Abel provides the following description:

Taking the alternate approach for casing setting depth where the maximum possible kick size can be tolerated, the casing would be set where the frac[ture] gradient crosses the gas pressure gradient line. In the industry this is called “Designing for a Full Column of Gas to Surface”. Below is the case where the casing has been run to a depth where no matter what size kick that is taken the formation will not fracture and no crater can be formed.³⁰⁵

He added: “Full column of gas means that the well is evacuated with only gas in the well.”³⁰⁶ Mr Abel illustrated his explanations by the following design: ³⁰⁷

³⁰³ Adams 1, page 26. ↩
³⁰⁴ Wright 1, page 15. ↩
³⁰⁵ Abel, page 27. ↩
³⁰⁶ Abel, page 37. ↩
³⁰⁷ Abel, Figure 7.1 at page 27. ↩

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Figure 7.1

[Page 146]

492. Swabbing, as explained by Mr Wright consists in a “reduction in wellbore pressure caused by a piston-like effect of moving the workstring upwards". ³⁰⁸

493. A blowout is, in the words of Mr Wright, a “loss of control incident”.³⁰⁹ In API RP 64 it is defined as “the uncontrolled flow of well fluid and/or formation fluid from the wellbore ...".³¹⁰

494. A Diverter is a “device attached to the wellhead or marine riser to close the vertical access and direct any flow into a line away from the rig”.³¹¹

495. The Chattak 2 Well had a Blowout Preventer (BOP). The Claimant described the instrument as follows:

A BOP is a large valve that sits on top of the well, underneath the rig floor. It can be closed if the drilling crew loses control of the well in order to prevent a blowout.³¹²

This description was illustrated by the figure below:³¹³

³⁰⁸ Wright 1, section 3.2.1, page 21. ↩
³⁰⁹ Wright 1, page 5. ↩
³¹⁰ API-RP 64, (Exhibit R-42), paragraph 3.1.13. ↩
³¹¹ API-RP 59 (Exhibit R-43), page 79 and API-RP 64 (Exhibit R-42), page 3, see also below Section 8.4.3.7. ↩
³¹² C-CD.2, paragraph 93, Figure 15-21. ↩
³¹³ C-CD.2, following paragraph 93. ↩

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Fig. 15-21. BOP stack showing rams and preventers. (Modified from Baker, 1979.)

[Diagram of a BOP stack with the following labels:]

• DRILLING PLATFORM
• ANNULAR
• BLIND RAMS
• PIPE RAMS
• BOP
• CHOKE MANIFOLD
• KILL LINE
• CASINGHEAD

496. A Degasser or Mud Gas Separator is an apparatus consisting of a big tank that collects the mud containing gas. The “gas goes to the top and gets vented off and the mud goes back into the pits and can be pumped back down in the hole again”.³¹⁴

8.2 Facts relevant to the first blowout

497. Following the conclusion of the JVA, Niko first explored the Feni field and drilled three wells there. Once this work had advanced to the point of production, Niko moved the drilling platform to the Chattak field in late 2004 and started drilling there.

8.2.1 A blowout precedent: Moulavi Bazar exploration well No1

498. The circumstances of a blowout which occurred in 1997 in the Moulavi Bazar field, operated by the Occidental Petroleum Corporation, are featured in the submissions of the Parties.

³¹⁴ Mr Wright at HT 2015.11.04 (Day 3), page 538. ↩

[Page 148]

499. Mr Wright explained that when Occidental drilled an exploration well in that field, it set casing at 155m. According to Mr Wright, the operator's “casing program design [...] was less robust than that followed by Niko on Chattak". ³¹⁵

500. Below the casing, Occidental continued drilling a 17 ½” diameter open hole through sandstone to a depth of 840m.³¹⁶ The First Enquiry Report on the Chattak 2 blowout also contained information about the Moulavi Bazar blowout. It described the formation and stated that "three shale beds separated by two sandstone beds, represent the interval between 527m and 805m."

501. According to Mr Wright, “[a] blowout occurred when swabbing while pulling out".³¹⁷ The First Enquiry Report explained:

Due to swabbing during pulling out, gas from formation entered into the wellbore. This made the well under balanced which resulted in blowout. ³¹⁸

502. The First Enquiry Report recounts that a similar report had, as one would expect, also been prepared with regard to the Moulavi Bazar blowout. That report has not been produced in the present arbitrations. The Claimant denies that it was made available to it or that it was even informed about its existence.³¹⁹ BAPEX asserts that

... Niko was aware of a recent shallow gas blowout in Bangladesh: the Moulavi Bazar blowout. ³²⁰

503. The statement is based on Mr Hornday's testimony at the November 2015 Hearing where he stated that, while he was working for another company, ³²¹ he had heard of the Moulavi Bazar blowout. The Claimant

³¹⁵ Wright 1, page 17, and illustration of the Moulavi Bazar blowout, showing the casing design by Figure 3-4 at page 18. ↩
³¹⁶ First Enquiry Report, Exhibit R-3, section 5.0; the indication about the diameter is taken from Wright 1,page 17. ↩
³¹⁷ Wright 1, page 17. ↩
³¹⁸ First Enquiry Report, Exhibit R-3, Section 5.0, page 73. ↩
³¹⁹ HT 2016.02.22, page 359. ↩
³²⁰ R-PHB, paragraph 105. ↩
³²¹ According to his witness statement, Mr Hornaday joined Niko Canada in 2001, WS Hornaday 1, paragraph3. ↩

[Page 149]

considers the conclusion drawn by BAPEX from this statement as a “mis-characterisation of Mr Hornaday's evidence.”³²²

504. The Claimant observes that there was no mention of the Moulavi Bazar blowout in the Marginal Field Evaluation that had been prepared jointly by Niko and BAPEX with shared information.³²³ The Claimant states the circumstances of the Moulavi Bazar blowout were known to it only much later by reason of the work carried out by Mr Wright, the Claimant's expert in these arbitrations, who had previously been engaged in Occidental's relief well operation. Mr Wright wrote:

I designed the relief well and managed the relief well special services for the Occidental blowout at Moulavi Bazar in 1997, so I have first-hand experience in the types of problems encountered in the Chattak 2 blowout.³²⁴

505. Mr Wright added that information about blowouts is generally not easily available:

The fact is that not much useful information regarding operators' experiences with blowouts is easily available. There was never a paper published by Occidental on the Moulavi Bazar relief well. Operators typically do not want to publish their dirty laundry to the world and much useful information is not made available to the industry at large.³²⁵

506. In these circumstances, it cannot be assumed that Niko knew any details about the Moulavi Bazar blowout when it started drilling the Chattak 2 Well. One would expect, however, prior blowouts in Bangladesh to have been a matter of interest to a diligent operator. Indeed the Tribunal doubts that the very occurrence of this blowout had escaped Niko's attention. After all, as the Respondents' counsel pointed out during the February 2016 Hearing, in 1997, this blowout occurred in the same time period that Niko was preparing and presenting its first proposal to the Government seeking to secure a contract in the gas industry in Bangladesh. When

³²² HT 2016.02.22, page 358 (Tarnowsky). ↩
³²³ HT 2016.02.22, page 359 (Tarnowsky). ↩
³²⁴ Wright 1, page 10. ↩
³²⁵ Wright 2, page 11. ↩

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questioning Mr Hornaday, Mr Smith assumed that “the Moulavi Bazar blowout would have been a major event in Bangladesh and generally a very significant event in the oil and gas industry in Bangladesh"; and Mr Hornaday agreed.³²⁶

507. There is no indication that Niko requested any information about the Moulavi Bazar blowout. Equally, there is no indication that BAPEX volunteered such information to Niko; nor that it made the enquiry report about the Moulavi Bazar blowout, which is in fact mentioned in the 2005 First Enquiry Report, available to Niko. The Parties disagree about whether Niko should have asked for, or BAPEX should have volunteered to provide, further details. The question will be considered further below in the context of the Tribunal's examination of any contributory responsibility on the part of BAPEX.

508. The situation is different with respect to knowledge of the Moulavi Bazar blowout by Mr Grace when he conducted the relief operations. In his report of 4 July 2005, he makes reference to “the Oxy blowout in 1997” and asserts that “all of the previous data was reviewed including” that from the Oxy blowout, and moreover describes some conclusions drawn from it.³²⁷ Mr Wright surmised that the source of this information was “the Vector Magnetic engineer who worked on the Moulavi Bazar project”.³²⁸

509. The Tribunal enquired about the manner in which liability for the Moulavi Bazar blowout was dealt with. The Respondents informed the Tribunal at the February 2016 Hearing that there had been no legal proceedings in Bangladesh concerning Occidental Petroleum's liability for the blowout because

... there was a settlement between the Government and Occidental in that case whereby the Occidental agreed to pay 5 per cent of future production in compensation for the injury caused by the blowouts and we can get evidence of this but the payments to date have amounted

³²⁶ HT 2015.11.06, page1096. ↩
³²⁷ Robert Grace Report, Events at Niko Resources – Chattak 2A Relief Well, 4 July 2005, Exhibit C-45, page 6. ↩
³²⁸ Wright 2, page 11. ↩

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to approximately a billion dollars, but there is no legal proceeding in the process.³²⁹

510. The fact is that after the 1997 blowout, the field at Moulavi Bazar was not abandoned but continued producing.³³⁰ Mr Wright refers to Petrobangla's 2012 Annual Report³³¹ and concludes that since the 1997 blowout and subsequent kill, the field produced over 200 bcf of gas, “indicating that the field has continued to be drilled and produced extensively”.³³²

8.2.2 The Chattak field and the Chattak 1 Well

511. The Chattak field, is divided into a Western and an Eastern part, separated by a fault. The Chattak 1 Well was situated in Chattak West. The Marginal Field Evaluation stated that the “Chattak East exploration structure will be drilled and tied in to the Chattak West plant facilities following successful development of the Chattak West Field”.³³³

512. The Marginal Field Evaluation had identified in Chattak West “three proven reservoirs and one untested zone with potential recoverable reserves" and listed them as follows:

• Sandstones 1&2 have 115 Bcf untested
• Sandstones 3&4 have 71 Bcf remaining
• Sandstones 5&6 have 58 Bcf remaining
• Sandstones 7&8 have 14 Bcf remaining.³³⁴

513. The layers have been represented by the following drawing, presented by Dr Adams at the November 2015 Hearing; it should be noted, however, that this drawing is schematic and does not show the thin shale between Sands 1 and 2; it should not be taken as an exact representation of these sands:³³⁵

³²⁹ HT 2016.02.21, page 271, lines 14-21. ↩
³³⁰ HT 2016.02.21, page 100 (Tarnowsky) with reference to Wright 2, page 28. ↩
³³¹ Excerpt of Petrobanlga Annual Report, 2012, Exhibit C-107. ↩
³³² Wright 2, page 28. ↩
³³³ Marginal Field Evaluation (MFE), Annex B to the JVA, Exhibit R-1, page B-7; for further details see in particular Decision on the Corruption Claim, pages 304 et seq. ↩
³³⁴ MFE, Annex B to the JVA, Exhibit R-1, page B-8. ↩
³³⁵ Dr Adam's presentation, Exhibit RH-3, slide 10. ↩

[Page 152]

514. Sand 1 is the shallowest reservoir in the West Chattak field, below the marine shale between 500m and 570m below surface. It is contained by the regional seal described above.³³⁶ Sand 2 starts around 650m below surface and is separated from Sand 1 by a relatively thin shale layer.³³⁷ The shallowest reservoir in Chattak West is Sand 1, below the regional seal³³⁸ and separated from Sand 2 (at around 650m below surface) by a relatively thin shale layer.³³⁹

515. The Marginal Field Evaluation provided these and other geological data about the Chattak field. Nevertheless, the study concluded:

It has been observed that there are significant gaps in the existing data and additional data for Chattak and Feni are essential to do effective reservoir characterisation of these fields. These data can be obtained after drilling the first well in each of these two fields.³⁴⁰

516. Chattak West had been drilled in 1959 to the depth of 2123m and tested in four principal zones with recoveries in Sands 3&4 and 5&6; possibly

³³⁶ See Section 8.1. ↩
³³⁷ C-CD.2, paragraph 75. ↩
³³⁸ See above Section 8.1. ↩
³³⁹ C-CD.2, paragraph 75. ↩
³⁴⁰ MFE, Annex B to the JVA, Exhibit R-1, page B-14. ↩

[Page 153]

also in Sands 7&8.³⁴¹ The Chattak 1 Well had a depth of the first casing of 450m.³⁴² The well was operated over a 25 year period and produced 26.43 bcf, supplying the Chattak cement factory and Sylhet Pulp and Paper Mill.³⁴³ Increased water production forced Petrobangla to shut the well down in 1985.³⁴⁴ In the JVA negotiations Chattak West was accepted without dispute as “marginal and abandoned”.³⁴⁵

517. According to Mr Hornaday, the well “was not abandoned at that stage”; it "was plugged back but I think there was still a wellhead on it”. Reviving the well "was an option” for Niko. When he visited the site before the JVA was concluded, Mr Hornaday noted “a fair amount of bubbling around the cellar of Chattak 1”. He assumed that the bubbling could have come from the well; but the phenomenon was observed also at “some places elsewhere on the western side of the location”. In other words, Mr Hornaday concluded that there were “various causes” for the bubbling.³⁴⁶

518. The new well which Niko proposed to drill in the Chattak field (Chattak 2) was also located in the Western part of the field, approximately 380m northeast of Chattak 1.³⁴⁷

8.2.3 Preparations for the drilling of the Chattak 2 Well and the Well Proposal

519. In order to drill the wells in both Feni and Chattak, Niko engaged a number of subcontractors. Mr Adolph named the following:³⁴⁸

• The China Petroleum Drilling Technology and Development Corporation (CPTDC) “to provide a drilling crew and rig, together with associated technical equipment”; according to Mr Adolph the crew “had to possess appropriate well control and drilling training certificates";

³⁴¹ MFE, Annex B to the JVA, Exhibit R-1, refers to “recoveries in sands 3&4m 5&6 and 7&8"; in support it refers to Figure 9 which shows the Chattak 1 Well Completion drilled only to Sands 5&6; Chattak 2 Well Proposal stated that the Chattak 1 Well produced from Sands 3&4 and Sands 5&6; Sands 7&8 are mentioned as the principal target, together with Sands 1&2, Exhibit C-15, pages 1 and 4. ↩
³⁴² Shown in Figure 9 of the MFE, Annex 2 to the JVA, Exhibit R-1. ↩
³⁴³ Chattak 2 Well Proposal, Exhibit C-15, page 3; the proposal indicates 2134m as the depth of the Chattak 1 well. ↩
³⁴⁴ MFE, Annex B to the JVA, Exhibit R-1, page B-6. ↩
³⁴⁵ See Decision on the Corruption Claim, Section 9.5. ↩
³⁴⁶ HT 2015.11.06, pages 1109 – 1112. ↩
³⁴⁷ Chattak 2 Well Proposal, Exhibit C-15, page 2. ↩
³⁴⁸ WS Adolph, paragraph 22 et seq. ↩

[Page 154]

• Mr Zhang Zhigang, an independent contractor, as the drilling supervisor. According to Mr Adolph, Mr Zhang was “an experienced drilling supervisor who could speak both English and Chinese fluently, which was important as there were both Chinese and English [speaking] crew members on the rig”;
• Other service providers to support the drilling project. Mr Adolph named MI-Drilling Fluids “[...] to provide the drilling mud and related services” and BJ Services “[...] to provide cementing and related services". Mr Adolph described both companies as “highly reputable oil-field service providers”.

520. As mentioned above, on 24 November 2004 Niko advised BAPEX that the Joint Venture was “moving the drilling rig to Chattak” and that it would be “in a position to start drilling these wells early in January 2005".³⁴⁹

521. Niko prepared the Well Proposal for the Chattak 2 Well and submitted it to BAPEX with its letter of 14 December 2004, “for your information and taking the necessary action”.³⁵⁰ Niko asserted that BAPEX acknowledged receipt of the proposal but raised no query and did not respond.³⁵¹

522. This Well Proposal provides for drilling some 380m northeast of the Chattak 1 Well and identified Sands 1&2 as the “primary target of the well".³⁵² The Well Proposal recalled that the Chattak 1 Well achieved production from Sands 3&4 and Sands 5&6, and explained that the Chattak 2 Well was

... designed to evaluate and produce reservoir sands 1&2 in interval 570-650m and sands 7&8 in the interval 1634-1670m. Chattak 2 is also designed to further evaluate and possibly produce gas from previously produced reservoir sands 3&4,5&6 (or the lateral equivalent), at 1080m-1115m and 1247m-1284m in a crestal position.³⁵³

³⁴⁹ In its letter of 25 January 2005, Exhibit C-24, Niko asserts that BAPEX acknowledged receipt of this letter. ↩
³⁵⁰ Chattak 2 Well Proposal, Exhibit C-15. ↩
³⁵¹ Niko's letter of 25 January 2005, Exhibit C-24, summarising information given to BAPEX. ↩
³⁵² Chattak 2 Well Proposal, Exhibit C-15, pages 3 and 2. ↩
³⁵³ Chattak 2 Well Proposal, Exhibit C-15, pages 2 and 4. ↩

[Page 155]

523. A number of figures and appendices were attached to the Well Proposal. These included volumetric reserve estimates for Sands 1&2 and 7&8, “Feni/Chattak Casing Design” for the 7” Production Casing and the 13.8” Surface Casing, the Cementing Programme for these two types of casing, the Drilling Programme, a Drilling Fluid Proposal and some cost information.

524. The witnesses testifying on behalf of Niko explained that the design for the Chattak 2 Well had been produced by Mr Peter Mercier. In his witness statement Mr Adoph explained:

I understand that Peter Mercier, Niko Canada's senior drilling manager, had produced the well design for Chattak 2. Mr. Mercier prepared the Chattak 2 well proposal in consultation with Keith Rawlinson, who was at the time Niko's senior geo-physicist (and subsequently became Niko's Vice President of Exploration), and Ray Dupuis, who was the consulting reservoir engineer assigned to the project. Messrs. Rawlinson and Dupuis were not involved with the preparation of the drilling program as such, but with the selection of the proposed drilling location and potential volumes of gas that may be discovered. Messrs. Mercier and Rawlinson are no longer with Niko Canada or its affiliated companies.³⁵⁴

525. Mr Hornaday stated in his witness statement that he “did not have significant involvement in the design of the Chattak wells or the plans to develop the Chattak field”.³⁵⁵ At the November 2015 Hearing he added:

... we assigned that task [the design of Chattak 2] to principally Mr Mercier who was, as you know, very experienced drilling engineer.³⁵⁶

526. As mentioned above, the Chattak 2 Well Design contained the “Feni/Chattak” Casing Design which provided details for two levels of casing, a full page for each. One is entitled “Surface Casing Design” and envisaged casing of a 13 3/8” diameter to a depth of 990 feet, corresponding to some 302m; the other, entitled “Production Casing”, at a diameter of 7” to a depth of 5741 feet (corresponding to some 1750m). Some of the details about these two sets of casing are also represented in

³⁵⁴ WS Adolph, paragraph 28. ↩
³⁵⁵ WS Hornaday 1, paragraph 13. ↩
³⁵⁶ HT 2015.11.06, page 1115, lines 19-21. ↩

[Page 156]

the Drilling Programme, which shows the depth in meters, one to a level of 300m the other to 1750m. This can be seen in the document below, showing the Drilling Programme, as it was contained in the Well Design sent to BAPEX on 14 December 2004.

527. According to Mr Wright, this design implied a kick tolerance of 10bbls at the depth of 1743m, the approximate planned depth from surface of the Chattak 2 Well.³⁵⁷ He calculated that the data in the Surface Casing design “produces a different kick tolerance when drilling through Sands 1&2 (sand top of 560m TVD) where the influx occurred that led to the blowout on Chattak 2".³⁵⁸

528. Mr Adolph wrote in his Witness Statement that BAPEX did not respond to the letter with the Well Proposal and, to the best of his knowledge, did not otherwise "raise any concerns or identify any deficiencies in the Well Proposal, or provide any further information relevant to drilling in the

³⁵⁷ Wright 1, page 15 and table 3.2; this table is taken from the Surface Casing Design produced as Exhibit C-82 and not included in the corresponding table in Exhibit C-15. ↩
³⁵⁸ Wright 1, page 15. ↩

[Page 157]

Chattak West field”.³⁵⁹ Mr Hornaday, too, was not aware of any reaction from BAPEX.³⁶⁰

529. Mr Baqi, who started on 1 January 2005 to serve as acting General Manager of the Geological Division of BAPEX, declared that, prior to the first Chattak 2 blowout, he

... personally had not seen any well proposal for the Chattak #2 well, or any indication that Niko had given BAPEX advance notice of the planned date for the start of drilling. I asked Niko to provide me with the well design following the blowout to assess what had gone wrong with it. On 17 January 2005, I received a copy of the Chattak #2 well proposal. Niko's cover letter to the proposal made reference to Niko's letter dated 14 December 2004, with which Niko claims it originally submitted its Chattak #2 proposal.³⁶¹

530. In these arbitrations, BAPEX occasionally puts into doubt that the 14 December 2004 letter with the Chattak 2 Well Proposal was in fact submitted to BAPEX. It refers, for instance, to “the well proposal allegedly submitted in December 2004".³⁶²

531. No other evidence, however, puts into question the fact of the communication of the Well Proposal along with the 14 December 2004 letter. The 17 January 2005 letter, which Mr Baqi did receive and to which he refers in the above quoted passage of his witness statement, makes express reference to the 14 December 2004 letter. When, in response to a request by BAPEX, Niko's letter of 25 January 2005 summarized the information provided, it stated expressly that BAPEX “acknowledged receipt of the well proposal (acknowledgment copy enclosed)”. Niko also stated that its Senior Manager – Commercial, Mr Syed Kabir, met on 30 December 2004 with Mr S.A. Haqqani, JMC member, who “was handling all technical matters on behalf of BAPEX for the joint venture” and advised him that Niko would “spud on December 31, 2004”; Niko added that “Mr

³⁵⁹ WS Adolph, paragraph 29. ↩
³⁶⁰ HT 2015.11.06, page 1122. ↩
³⁶¹ WS Baqi, paragraph 7. ↩
³⁶² R-PHB, paragraph 226. ↩

[Page 158]

Haqqani and BAPEX officials were invited to attend the spud-in during the meeting by Niko”.³⁶³

532. There is no indication that, upon the receipt of the 17 and 25 January 2005 letters, BAPEX protested and questioned having received the 14 December letter and the Well Proposal. The First Enquiry Report of 7 February 2005, prepared by the Enquiry Committee that had interviewed the Managing Director of BAPEX on 18 January 2005 and “exchanged views” inter alia with Mr Abdul Baqi, Deputy General Manager BAPEX on 5 February 2005, reported that

Niko forwarded Chatak #2 Well Proposal, Casing Design, Drilling and Evaluation Program, Cementing Program, Mud Program on 14 December 2004.³⁶⁴

533. In these circumstances, the Tribunal has no reason to doubt that Niko's letter of 14 December 2004 with the Well Proposal was actually received at the time by BAPEX.

534. The Claimant asserts that the absence of comments was consistent with “BAPEX's usual course of action” and that with respect to the Feni field, “BAPEX never commented on any of the Feni well proposals, nor did it object to the drilling that took place subsequently”.³⁶⁵ Similar assertions had been made already in the letter of 25 January 2005, where Niko wrote that it did not receive any query or response on the Well Proposal; that letter also stated that Niko's Mr Kabir informed Mr Haqqani, “who was handling all technical matters on behalf of BAPEX for the joint venture” on a “regular basis[,] of the progress of all major operations”.³⁶⁶

535. Concerning the spudding date, the Tribunal observes that the Well Proposal and the 14 December 2004 letter do not mention that the start of drilling at Chattak 2 was scheduled for 31 December 2004. As noted above, the Claimant refers to the letter of 25 January 2005,³⁶⁷ in which Niko observes that in a letter of 24 November 2004 it had advised BAPEX that it was “moving the drilling rig to Chattak” and that it was “in a

³⁶³ Niko's letter of 25 January 2005, Exhibit C-24, summarising information given to BAPEX; the letter of 14 December 2004, Exhibit C-15, transmitting the Well Proposal, is signed by Mr Syed. ↩
³⁶⁴ First Enquiry Report, Exhibit R-3, paragraphs 3.3, 3.7 and 4.3. ↩
³⁶⁵ C-CD.2, paragraph 99. ↩
³⁶⁶ Niko's Letter to BAPEX, 25 January 2005, Exhibit C-24. ↩
³⁶⁷ Niko's Letter to BAPEX, 25 January 2005, Exhibit C-24. ↩

[Page 159]

position to start drilling these wells early in January 2005”. It also refers to a meeting in which Niko's Senior Manager Commercial, informed Mr Haqqani, the JMC member, on 30 December 2004 that spudding would take place on 31 December 2004 and that BAPEX “officials were invited to attend the spud-in".

536. Moreover, the Claimant produced copies of the Daily Drilling Reports and their communication to BAPEX by fax, starting with Report No 1, dated 1 January 2005 and transmitted by fax the following day.³⁶⁸

537. While one might have expected a more formal notification of the scheduled date for the spudding of the Chattak 2 Well, the Tribunal finds it difficult to believe that BAPEX was not aware of Niko's intention to start drilling and could not have received any further details, if it wished to receive them.

8.2.4 The drilling operation and the casing

538. Drilling started at 19:45h on 31 December 2004 (the spud date). The drilling operations are recorded on a day by day basis in “Daily Drilling Reports" which as mentioned were copied the same or the following day to BAPEX. The Claimant has produced these records for the 10 days from the spud date to 9 January 2005 as well as the cover letter to BAPEX for the first seven reports.³⁶⁹

539. These reports are from Mr Zhang, the drilling supervisor, to Mr Mercier. They record the operations and their timing, contain a 24-hour forecast and provide other information, such as the use of drilling fluids, materials and fuel used.

540. Some information about the drilling is also contained in a report apparently prepared immediately after the first blowout and entitled

Sequence of Events: Well Control Chattak-2
Client: Niko Resources
Crew Onboard: Rajat C. Pattapong, Ferdous, Masudur
Date: 7/1/2005 to 8/1/2005

³⁶⁸ Chattak 2, Niko Daily Drilling Reports, Nos. 1 to 10, 1-10 January 2005 (Daily Drilling Reports), Exhibit C-20. ↩
³⁶⁹ Daily Drilling Reports, Exhibit C-20. ↩

[Page 160]

Well: Chattak-2.³⁷⁰

541. The document appears to be a report by the “Crew onboard”; Mr Wright describes it as “the rig crew on the scene”.³⁷¹ It thus is the only eye witness description of the events produced in these arbitrations.

542. The Claimant also prepared a document entitled “Chattak 2 Well Control Incident and Blowout – Draft Report” and dated 11 January 2005.³⁷² Mr Wright reproduced this draft report, explaining that it was prepared by “Niko personnel”.³⁷³ At the November 2015 Hearing the Claimant's counsel added that, according to his understanding it was prepared by Mr Peter Mercier.³⁷⁴ The version produced seems to have been the “final draft".³⁷⁵ The Tribunal understands that it was this draft which Niko transmitted to the First Committee and to which that committee referred as one of the sources of its First Enquiry Report.³⁷⁶ From the explanations provided by the Parties, the Tribunal concludes that the information available to the Experts in these arbitrations, with the exception of personal interviews mentioned in the First Enquiry Report, is the same as that which the Enquiry Committee had in 2005.³⁷⁷

543. The Daily Drilling Reports show on Day 1 from 19:45h to 22:00h: “Spud Chattak 2 Well. Drill ahead to 20m.” By the end of the day a depth of 28m was reached. The first report also shows a 20” casing conductor at 20m shoe depth.

544. On Day 2, the depth of 306m had been reached. On the following days a wiper trip was performed and 13 3/8" casing was installed, the casing shoe was set at 305m.

³⁷⁰ Sequence of Events Report: Well Control Chattak-2, 7-8 January 2005 (Sequence of Events Report), Exhibit C-19. ↩
³⁷¹ Expression used in Wright 1, page 24. ↩
³⁷² Chattak 2 Well Control Incident and Blowout – Draft Report, Exhibit C-21. ↩
³⁷³ Wright 1, page 25. Frist Enquiry Report of 7 February 2005, Exhibit R-3, paragraph 3.5, also refers only to the draft report dated 11 January 2005. ↩
³⁷⁴ HT 2015.11.03 (Day 2), page 315. ↩
³⁷⁵ HT 2015.11.03 (Day 2), page 315. ↩
³⁷⁶ First Enquiry Report, Exhibit R-3, paragraph 3.5, and HT 2015.11.03, page 322. ↩
³⁷⁷ The Tribunal announced this conclusion, stating that it would take it as correct unless the Respondents were to provide contrary information within the time it had requested for verification (HT 2015.11.03 (Day 2), pages 326 and 327); no contrary information was provided. ↩

[Page 161]

545. On Day 5 (4 January 2005) the Daily Drilling Report shows work on the installation of the BOP. This installation seems to have been completed on that day; the report for Day 7 shows for the first time an entry under the heading “Last BOP Test” with the date 5 January 2005.

546. Drilling resumed on day 7 (6 January 2005). It was interrupted after 5 meters at the depth of 310m, when a Leak-off Test (LOT) was performed. The Daily Drilling report records mud weight (EMW) of 18 pounds per gallon (ppg),³⁷⁸ indicating a high strength of the surrounding formation. The Sequence of Events report by the drill crew reports additional information about this EMW: “Drilling of 8.5" hole was resumed after LOT (EMW 18.0 ppg). Formation was mostly medium to coarse grained SST from 306m onwards.”³⁷⁹ Mr Wright considered the value of 18 ppg as “too high really for such a shallow formation”.³⁸⁰ The test and its result will be discussed further below in Section 8.4.3.7. Drilling then resumed and progressed on Day 7 to 485m.

8.2.5 The evidence with respect to the events of 7 January 2005

547. At the November 2015 Hearing the Tribunal identified the sources of information available to the experts and specifically “the factual basis for analysing by expert opinion what actually happened on 7 January 2005".³⁸¹ It was thus confirmed that the available direct evidence for the wiper trip and the first blowout are (i) the Daily Drilling Reports (Exhibit C-20), (ii) the Midnight and Afternoon Reports containing drilling and other data (Exhibit C-27),³⁸² (iii) the Sequence of Events report of the “crew onboard" (Exhibit C-19) and (iv) the Draft Report on the blowout, as described above in Section 8.2.4 (Exhibit C-21).

548. The Claimant also relied on the witness statement of Mr Adolph, Niko's country manager from December 2004 to August 2006. Mr Adoph moved to Bangladesh only in January 2005, after the blowout had occurred, but he asserted that he had “extensive conversations with [his] colleagues at Niko and a review of contemporaneous documentation relating to these

³⁷⁸ Daily Drilling Report for 6 January 2005, Exhibit C-20, page 24. ↩
³⁷⁹ Sequence of Events Report, Exhibit C-19, page 1. ↩
³⁸⁰ HT 2015.11.03 (Day 2), page 420, line 22. ↩
³⁸¹ HT 2015.11.03 (Day 2), page 305, 327, relating to the discussion recorded on pages 305 – 329. ↩
³⁸² HT 2015.11.03 (Day 2), page 312. ↩

[Page 162]

events".³⁸³ On that basis, Mr Adolph provided a detailed account of the blowout.³⁸⁴

549. The Claimant also produced a report which Niko's well control consultant prepared shortly after the blowout, dated 24 January 2005 (Exhibit C- 23),³⁸⁵ containing “hearsay account” of what the consultant learned after its personnel arrived at the site on 9 January 2005.³⁸⁶ For the sake of completeness, the Claimant also mentioned the CPTDC drilling reports from December 2004 (Exhibit C-16) and a document entitled Geoservices Masterlog and referred to as the “mud log”; but they contain data recorded only until 6 January 2015 (Exhibit C-17).³⁸⁷

550. Other relevant documentation recording the events is not available. In its summary after the November 2014 Hearing, the Tribunal pointed to the difficulty it had observed concerning the contemporaneous evidence and noted

...that important parts of the records for the critical period have disappeared. In particular, the mud log for 7 January 2005 and specifically the trip tank record for that day, which might have provided useful information about the pressure in the borehole, according to Niko's explanation, remained on the rig when the blowout occurred and only a small piece of paper was saved.³⁸⁸

551. As Mr Wright pointed out in his first report:

A trip sheet was reportedly maintained and was monitored by both the rig crew and the mud loggers. However, the trip sheet was destroyed in the blowout.³⁸⁹

552. Similarly, the First Enquiry Report notes the absence of critical records:

³⁸³ WS Adolph 1, paragraph 9. ↩
³⁸⁴ See WS Adoph 1, paragraphs 35 – 47. ↩
³⁸⁵ C-CD.2, paragraph 104, referring to Safety Boss, Summary Report Covering the Period from Jan 09 to Jan 12, 2005, Exhibit C-23. ↩
³⁸⁶ Safety Boss, Summary Report Covering the Period from Jan 09 to Jan 12, 2005, Exhibit C- 23, page 1 and HT 2015.11.03 (Day 2), pages 327 and 328. ↩
³⁸⁷ HT 2015.11.03 (Day 2), page 328 and 329. ↩
³⁸⁸ Letter of 6 January 2015, page 2. ↩
³⁸⁹ Wright 1, page 7. ↩

[Page 163]

Driller's Console record or the record from mud logging unit are not available. The first one went down with the rig and the mud logging unit is completely covered by sand blown during blowout. As the unit was quite close to the fire, possibility of recovery of data from the unit is unlikely.³⁹⁰

553. The Tribunal has considered the evidence identified by the First Enquiry Committee in its report. The Committee identified this evidence in paragraphs 3.4 and 3.5, i.e. the Daily Drilling Reports and Niko's Draft Report, as well as the Chattak 2 Well Proposal (Exhibit C-15), including a document from the 3D seismic report.³⁹¹

554. Finally, the Tribunal has had regard to the Drilling and Evaluation Programme which Niko proposed on 16 October 2005 for a Chattak 3 well. The proposal contains the following explanations for the blowout on which the Respondent relies specifically:³⁹²

A blowout occurred on the Chattak 2 well while wiper tripping from a depth of 807m. A prolific gas sand at 560m, shallow casing setting depth, and swabbing while tripping were contributing factors to causing a serious blowout in which the drilling rig was lost.³⁹³

8.2.6 The events of 7 January 2005 prior to the Wiper Trip

555. On 7 January 2005 (Day 8 since the spud) drilling further progressed. The Daily Drilling Report mentions two activities: “Circulate bottom up” for 15 minutes starting at 7:15h, and “Take single shot survey, 625m, 0.5 degree", for 50 minutes, starting at 7:30h.³⁹⁴ The Sequence of Events report by the drill crew provides the following additional information:

Sand-I &2 top were expected at 550 m. [...] While drilling between 560 - 590 m, we observed gas peak three times & gas increased to тахітит 17.73% from background gas of 0.8-1 %. The max ROP was

³⁹⁰ First Enquiry Report, Exhibit R-3, paragraph 6.9. ↩
³⁹¹ The information listed in paragraph 3.4 of the report is taken from the Well Proposal, including page 9, entitled “Time slice of 3D seismic data”; other seismic data was shown on Exhibit C-85; See HT 2015.11.03 (Day 2), pages 324 and 325. ↩
³⁹² R-PHB, paragraph 152. ↩
³⁹³ Marginal Field Development - Chattak, Drilling & Evaluation Program for Chattak 3 (Updated) (16 October 2005), Exhibit R-35, page 12, paragraph 3.1.1, in the document produced by the Respondent this passage is emphasised. ↩
³⁹⁴ Daily Drilling Report, Exhibits C-20, page 26. ↩

[Page 164]

30 m/hr and average ROP was 16 m/hr while drilling from 560m to 590M. Formation was Claystone 70-80% & SST 20-30%. We informed RF & they did flow checks three times. Flow check was OK (static).

556. The Daily Drilling Report records that by 18:00h the depth of 807m was reached. Then a wiper trip was initiated. The Sequence of Events report states:

Drilled ahead to 807 m, gas dropped to 1% while drilling below 750 m (approx). The average ROP was 22 m/hr. MW was 9.1 ppg.³⁹⁵

557. The draft report of 11 January 2005 contains the following information about the drilling to 807m:

Drilling continued with directional surveys and flow checks. An increase in mud log gas readings was noticed at 485m and continuing down to 728m. Peak gas was 17.73% and was noticed at 586m. Flow checks were conducted throughout this section but particularly at: 559m, 567m, 592m. Drilling continued to 633m. The string was circulated and reciprocated prior to taking a survey. Drilling continued to 807m at which point a wiper trip was required.³⁹⁶

558. Some additional information is provided by the First Enquiry Report, presumably based on the interviews which Committee members conducted with a number of persons, including Mr Zhang, Niko's Drilling Supervisor, and members of the drill crew. The Report mentions the pressure of the mud column at 500m, concluding that “[a]ll the known gas horizons of this field are normally pressured”. It refers to “mud log data” and concludes that “mud weight was at an acceptable level”. It notes single shot surveys at two other levels (401m and 430m).³⁹⁷

559. No serious incidents were reported during the first six days since spud during which time drilling reached 807m. After the November 2015 Hearing, the Tribunal recorded its understanding from the evidence produced of the situation as of that moment and wrote:

³⁹⁵ Sequence of Events Report: Well Control Chattak-2, Exhibit C-19. ↩
³⁹⁶ Chattak 2 Well Control Incident and Blowout – Draft Report, Exhibit C-21. ↩
³⁹⁷ First Enquiry Report, Exhibit R-3, page 6, paragraph 6.4. ↩

[Page 165]

There is no indication that, prior to [the wiper] trip, a kick or any other problematic event occurred. In particular there is no indication that the drilling through the upper stratum to the marine shale and below through Sand 1 and Sand 2 encountered any noteworthy problems.³⁹⁸

560. No objections were raised by the Parties to this conclusion in their subsequent submissions or in the course of the February 2016 Hearing. An express confirmation of an important aspect of this understanding can be found in the First Enquiry Report:

The well Chattak #2 did not encounter unexpected gas pressure while drilling down to 807m.³⁹⁹

561. This observation allows the conclusion that, while drilling through Sands 1 and 2, Niko seems to have kept an overbalance in the well and thus to have avoided a kick. The Claimant states that Niko “successfully drilled through Sands 1 and 2”.⁴⁰⁰ These observations do not, however, allow significant conclusions to be drawn about how safe the overbalance was, and what risks would be faced during a wiper trip in these Sands.

8.2.7 Wiper Trip on 7 January 2005 and the first blowout

562. The Daily Drilling Report for 7 January 2015 contains the following laconic entry for the period from 19:00 to 19:50h:

Wiper trip 12 stands to 466m. Well blowout at 19.50 hrs.

563. The report about the activity immediately before this event is equally succinct:

8:00 – 18:00 Drill ahead to 807m

18:00 – 18:30 Circulate hole clean

18:30 – 19:00 Take single shot survey, 795m 1.06 degree ⁴⁰¹

³⁹⁸ Letter of 6 January 2016, page 2. ↩
³⁹⁹ First Enquiry Report, Exhibit R-3, paragraph 7.1(b). ↩
⁴⁰⁰ C-PHB, paragraph 165. ↩
⁴⁰¹ Daily Drilling Report, Exhibits C-20, page 26. ↩

[Page 166]

564. The drilling contains the following “24 Hour Summary":

Drilled ahead to 807 m. Circulated hole clean. Took survey. Wiper trip 12 stands to 466 m. Well Blowout, Closed pipe rams within 1 min. Tried to circulate gas cut mud out., noticed gas leaking underneath ground. Diverted flow to flare line.⁴⁰²

565. Similarly, the Sequence of Events report by the “Crew onboard” provides some more details:

Drilled ahead to 807m. Gas dropped to 1% while drilling below 750 m (approx.). The average ROP was 22 mlhr. MW was 9.1 ppg. At 807 m, wiper trip was planned. Well was circulated for 30 min, a MSS survey was taken. No gain was observed while survey. Started to pull out from 807 m. No slug was pumped prior to wiper trip. Started POOH at 19:00 hrs 7/1/2005. At 1950 hrs, 12 stands had been pulled out & we were losing mud (total loss for 12 stand was 2.48 bbl). Trip sheet was maintained during this entire trip.⁴⁰³

566. The rig crew illustrated its description in the Sequence of Events report by the following drawing, demonstrating the location where it situated the occurrence of the kick:⁴⁰⁴

WELL PROFILE

[Image of a well profile diagram]

20" cse 20 m

13 3/8" cse 305 m

Kick position 466 m. Std

TD 807 m

⁴⁰² Daily Drilling Report, Exhibits C-20, page 26. ↩
⁴⁰³ Sequence of Events Report, Exhibit C-19. ↩
⁴⁰⁴ Sequence of Events Report Exhibit C-19, third page. ↩

[Page 167]

8.2.8 The first blowout on 7 January 2005 – the factual evidence

567. While there is very little information about the wiper trip, the events from 19:50h onward are better documented. At this time the contemporaneous records specifically mention the blowout: The mention “Well blowout at 19:50 hrs" appears in the Daily Drilling Report.

568. By that time the drilling bit had been raised to 466m and, as indicated by the Niko Draft Report, “an influx entered the well. The well was shut in.”⁴⁰⁵ Large amounts of drilling mud were pushed up into the trip tank which overflowed. Mr Adolph quantified the kick at 42bbl and described it as “very severe”.⁴⁰⁶ The Sequence of Events report by the drill crew indicates that "a sudden gain in trip tank (gain 32.4 bbl)” was observed; that it tried to "call rig floor, no response" and rushed to the rig floor “to inform the gain"; and noted that the well was “flowing & mud rising up to 20 m from the rig floor”. The “spillage on ground floor” is quantified in the Daily Drilling Report at “about 10bbls” which, added to the gain in the trip tank, produces the approximately 42bbl mentioned by Mr Adolph. The rig crew then closed the BOP.⁴⁰⁷ The gas flow was diverted through the flare lines.⁴⁰⁸ The crew also tried to re-establish control by circulating mud, but stopped the attempt shortly thereafter, when they heard a “noisy sound inside degasser”.⁴⁰⁹

569. A useful summary of the events that followed is provided by the first blowout control specialist who arrived on site on 9 January 2005 and recorded what he heard and read:

On 07 Jan 2005 @ 20:40 during the kick control procedures the flow diminished through the manifold and began to come to surface around the rig @ approximately 21:00. Gas and debris rapidly increased in volume and velocity. Flow around the wellbore was estimated to be up to 100m high, carrying with it tremendous amounts of debris including sand, rocks, bricks and smaller parts of drilling equipment. The rig fell to the SSE and shortly after that the flow ignited, initial flame height also estimated a 100m. Within a few hours from ignition

⁴⁰⁵ Draft Report, Exhibit C-21. ↩
⁴⁰⁶ Calculated as the addition of 32 bbl pit gain plus 10 bbl of mud that was observed to have spilled onto the ground at the surface of the rig, See WS Adolph 1, paragraph 39. ↩
⁴⁰⁷ Sequence of Events Report, Exhibit C-19 and Daily Drilling Report, Exhibit C-20, page 26. ↩
⁴⁰⁸ WS Adolph 1, paragraph 45. ↩
⁴⁰⁹ Daily Drilling Report Exhibit C-20, page 26. ↩

[Page 168]

the entire substructure and mast disappeared into the crater. Gas flow reported through fissures up to 100m away with the main part of the flow being concentrated within the crater.

570. The Daily Drilling Report No 8 for the events on 7 January 2005, prepared on the following day and dated 05-01-08,⁴¹⁰ is presented as follows:⁴¹¹

⁴¹⁰ For explanations concerning the dating of these reports see HT 2015.11.03 (Day 2) pages 308 – 310. ↩
⁴¹¹ Daily Drilling Report, Exhibit C-20, page 26. ↩

[Page 169]

571. The events on the two following days, 8 and 9 January 2005, are recorded in the following Daily Drilling Reports:

and

572. Further details are provided by the drill crew in their Sequence of Events report. At 19:50 hrs, the report continues:⁴¹²

After unscrewed 12th stand observed sudden gain in trip tank (gain 32.4 bbl). It happened within a minute or two, in the same time the return sensor also showed a sudden increase in flow from 17% to 60%. Pattapong tried to call rig floor, no response. Ferdous opened the door to rush to rig floor to inform the gain; he found well flowing & mud rising up to 20 m from the rig floor. BOP was closed by rig crew.

Mr. Zhang came to our unit & took a print out of the trip sheet. He wanted to know about the amount of gain in trip tank, annulus volume at 466 m, strokes required to circulate annulus. Tried to circulated thru choke: first 16 bbl, 10 min off, then 70 bbl. MW was 9.1+ ppg. Mr. Zhang told Geoservices to monitor any gain in pits. Before circulating Mr. Zhang told Peter (MI Mud Man) to increase MW by adding barite. 5 bags of barite were mixed to 9.2+. It was noticed that ground started cracking near bell nipple. Mr. Zhang told everybody to go to a safer place; so we left the location.

Rig power was shut down. Gas was burnt thru flare line for 90 min. The fire came down slowly after 90 min. We were at safe distance

⁴¹² Sequence of Events Report, Exhibit C-19. ↩

[Page 170]

from rig. We heard loud sound coming from inside the well. Part of rig area started cracking & gas came up.

Entire crew were taken to a safe place with security by car.

At about 0400 hrs, we heard a loud sound & gas started coming up vigorously. We came to know that at 0430 hrs, rig submerged into ground. Gas was coming up continuously with louder & louder sound. At 0655 hrs, gas cought [sic] fire & continue[d] burning. Then, we tried to leave that place by boat, but failed due to angry mob. Finally, Rajat & Pattapong reached Chattak jetty at 1645 hrs. Geoservices unit#89 & tool container went into underground.

573. Finally, the Tribunal reproduces the relevant parts from the Draft Report which Mr Mercier produced on 11 January 2005. This report was delivered to the First Enquiry Committee and referred to in its Enquiry Report of 7 February 2005:

With 12 stands out of the hole and the bit at a depth of 466m an influx entered the well. The well was shut in.

• Mud gain - 32 bbls.
• Spillage on ground about 10bbls (estimating the kick size to be 40 bbls).
• Shut in casing pressure 4.5Mpa (652psi).

Attempted to circulate gas cut mud out through degasser - noise in degasser necessitated stopping the pump and shutting in well. Same pressures.

Tried to circulate out gas at 30spm with choke adjustments. Noticed gas leaking up through the ground. Fully opened the choke to flare. Gas began to reduce out flare line indicting the well may have been packing off.

Flow around rig area increase dramatically creating a large crater around rig. All personnel were evacuated from site.

[Page 171]

At 04:30 8 January 2005, derrick fell and disappeared into the crater.

At 06:55 flare ignited and well flowed out of control.

There were no injuries or fatalities. The flow was sweet dry gas with no liquids of any description.

On 9 January 2005 at 09:30am, flow diminished and extinguished.

Area inspection indicated small flares through fissures in and around the drill site.

Gas flare continues to decrease daily. The field is being monitored with daily site visits.

Full investigation is underway by all parties concerned.⁴¹³

8.3 Possible causes for the blowout and for the failure to control it

8.3.1 The undisputed elements: the kick and its immediate consequences

574. As the Claimant pointed out in its Post-Hearing Brief, it is common ground between the Parties and the experts that “the blowout of Chattak 2 actually occurred during the wiper trip, when the drill pipe was lifted or 'tripped' up the wellbore”; during this operation a kick occurred.⁴¹⁴ The Parties also agree that the kick was produced by gas from Sands 1 and 2.

575. Gas from these sands moved up through the well bore and turned into a violent unrestricted flow. The shut-in of the well caused an obstruction at the casing shoe. The gas forced its way around this obstruction by broaching the well bore below the foot of the casing,⁴¹⁵ entering the formation and flowing up outside the casing. According to the First Enquiry Report, the “sandstone worked as a conduit for leakage to the surface”.⁴¹⁶ The flow of the gas caused a crater and undermined the soil

⁴¹³ Draft Report, Exhibit C-21. ↩
⁴¹⁴ C-PHB paragraph 165; See R-PHB, paragraph 101. ↩
⁴¹⁵ First Enquiry Report, Exhibit R-3, paragraph 6.11; also paragraph 7.1(d). ↩
⁴¹⁶ First Enquiry Report, Exhibit R-3, paragraph 5, page 73. ↩

[Page 172]

supporting the rig, leading to the collapse of the rig into the crater, in the manner described above.

576. This movement of the gas has been represented by drawings in the reports of Mr Wright and of Mr Abel and in a drawing of the First Enquiry Report. Because of slight differences in the details represented in these drawings, the Tribunal reproduces below all three of these drawings starting with that of the First Enquiry Report: ⁴¹⁷

⁴¹⁷ First Enquiry Report, Exhibit R-3, page 89. ↩

[Page 173]

[Image of a diagram of a drilling rig and wellbore]

20 inch Casing @ 20m.

5 inch Dol Pipe

13 3/8 Inch Casing @ 305m.

8 ½ Inch PDC B

Bit at 466m

Sand 1 & (115 Bcf)

Top of Sand @ 500m

Total Depth 807m

[Page 174]

577. Mr Wright provided the following drawing in his first report:⁴¹⁸

[Image of a chart titled "Figure 3-8: Estimated Underground Flowing Pressures in the Chattak 2 Wellbore After the Kick"]

⁴¹⁸ Wright 1, page 28, Figure 3-8; also produced in his presentation at the November 2015 Hearing, slide 19. ↩

[Page 175]

578. Mr Abel represented the event in the following drawing:⁴¹⁹

Chattak-2

[Image of a diagram of a wellbore]

• 13-5/8" @ 305m
• Qg
• Qm
• 466m
• 560m
• 1 Sand (30m)
• 600
• 625m
• 2 Sand (20m)
• Pr 853 psi
• 8-½" hole
• 807 m

Figure 12.1

⁴¹⁹ Abel, Figure 12.1 at page 41. ↩

[Page 176]

8.3.2 The Tribunal's preliminary assessment and the Parties' comments

579. Following the Parties' submissions, including the reports of their experts, the Tribunal provided, in an Annex to Procedural Order No 12 and in preparation for the November 2015 Hearing, inter alia some indications of the issues that, in its preliminary understanding, arose from these submission and reports.

580. At the November 2015 Hearing the Tribunal then discussed at length with the Parties, as well as their experts and the Tribunal's expert, the technical issues of critical relevance, in particular with respect to drilling technology and the establishment of a factually reliable narrative of “what actually happened on 7 January”.⁴²⁰

581. Following that hearing and in light of the argument and evidence presented by the Parties and the experts, the Tribunal presented in a letter of 6 January 2016 its understanding of the possible causes of the blowout of the Chattak 2 Well. To the extent to which the Parties considered the explanations as incorrect, the Tribunal invited them “to specify (a) where they disagree with the explanations, (b) what evidence supports their disagreement and (c) what other more plausible evidence should form the basis of the Tribunal's analysis and decision”.

582. The Tribunal noted the absence of any indication that a kick or any other similar problematic event had occurred prior to the wiper trip. In particular, the Tribunal had been shown no evidence that prior drilling through the upper stratum to the marine shale and below through Sand 1 and Sand 2 had encountered any noteworthy problems.⁴²¹

From the evidence it appears therefore that the most plausible explanation for the blowout is that a kick occurred during the wiper trip and that this kick was created by “swabbing” which occurred when the drill pipe (or drill string) was pulled up in the drilling mud and the stands were removed from the well. This operation must have created a temporary underbalance in the borehole compared to the surrounding formation, causing gas to enter the borehole.

⁴²⁰ HT 2015.11.3 (Day 2), page 338. ↩
⁴²¹ This was noted also in the First Enquiry Report, Exhibit R-3: “the well did not encounter unexpected gas pressure while drilling down to 807m” at paragraph 7.1 (b). ↩

[Page 177]

583. In response, the Parties provided comments and corrections in their Post- Hearing Briefs and at the Hearing in February 2016.

584. The Claimant discussed possible causes in detail in its Post-Hearing Brief of 22 January 2016.⁴²² It asserted that:

The experts were also in agreement that the specific cause of the kick could not be determined. All three experts recognised that the phenomenon of “swabbing” may have occurred. [...] Mr Wright also explained at some length a number of potential causes of “swabbing” but he noted that even if it had occurred, it could not be determined with any certainty which particular factor had caused it.⁴²³

585. At the February 2016 Hearing, the Claimant addressed specifically the Tribunal's presentation:

Niko is comfortable with the Tribunal's summary of the facts in that letter, save for one point of clarification [concerning the passage in which] the Tribunals observe that it appears therefore that the most plausible explanation for the blowouts is that the kick was created by swabbing.

The experts did indeed identify swabbing as a plausible explanation for the kick but, as has been pointed out in Niko's post hearing brief, they also identified lost circulation as a plausible explanation for the kick and that is that with the lost circulation is a loss of mud into the formation.⁴²⁴

586. The Respondents reproduced the quoted passage from the Tribunal's letter and did not object to it; they did, however, comment on the possible uncertainty about “exactly what happened during the kick”⁴²⁵ and drew conclusions with respect to evidence for Niko's claim for a non-liability declaration, an issue that shall be discussed below in Section 8.4.

⁴²² In particular at C-PHB, paragraphs 166 to 171. ↩
⁴²³ C-PHB, paragraph 166, referring to Wright 1, page 21. ↩
⁴²⁴ HT 20416.02.22, page 323. ↩
⁴²⁵ R-PHB, paragraph 101. ↩

[Page 178]

8.3.3 The origin of the kick in Sands 1 and 2

587. The circumstances that caused the kick were addressed in the expert reports. These circumstances and the exact time when it occurred were discussed extensively during the November 2015 Hearing. While “swabbing” was considered as a likely cause, different mechanisms causing the swabbing were discussed and, as the Claimant rightly pointed out, other explanations also had been suggested.

588. Later during the November 2015 Hearing, Dr Adams concluded:

We have narrowed it down to swabbing or loss of circulation or a combination of both.⁴²⁶

589. The Claimant reached a similar conclusion, as the above quotation from the February 2016 Hearing shows; and the Respondents, quoting Dr Adams as above, also seem to share this conclusion. The Tribunal therefore will focus on these two possible explanations for the kick.

590. The first of the possible causes, Swabbing, is a piston like effect as explained above in Section 8.1. During a wiper trip it may occur when the drill bit is pulled up by removing stands from the drill pipe. In the present case, 12 stands were removed in successive steps before the blowout was noticed by the crew. At each step of these removals, the piston effect operates and the pressure is reduced. It is essential for a successful wiper trip that the reduction of the pressure is limited and quickly compensated. Mr Wright explained the procedure at the November 2015 Hearing:

... when you have moved the pipe up it is going to create a slight under-pressure. You just want to make sure that you have got enough over-pressure that you are still over-balanced when you move the pipe up. That is why you move it slow. That is why you have the right mud properties, that you do not do it too much.⁴²⁷

591. In other words, the kick is not caused solely by “slight under-pressure” occurring during this operation. An additional factor is extant: disruption of the hydraulic balance in the wellbore by virtue of reduction of the pressure in the wellbore below the pressure in the surrounding formation.

⁴²⁶ HT 2015.11.05 (Day 4), page 906, line 25 to page 907, line 1. ↩
⁴²⁷ HT 2015.11.03 (Day 2), page 452, lines 7-14. ↩

[Page 179]

The speed with which the drill bit is pulled up is a critical element of the prevention of kicks.

592. There is no direct information about the manner in which the wiper trip was performed. It is therefore not known how fast each of the stands was removed and, at each of these operations, the bit was pulled up. Only the total time of the operation is recorded.

593. Based on the information that 12 stands were removed during the 50 minutes preceding the blowout, Mr Wright calculated the average duration of each step in the operation. He concluded: “This is a reasonably slow tripping speed and should avoid swabbing given the assumed data."⁴²⁸

594. The Respondents contest these explanations. They point out, inter alia, that some months after the first blowout, Niko itself gave swabbing as one of the reasons for the blowout. In its Drilling and Evaluation Programme for a Chattak 3 well, dated 16 October 2005, Niko gave as one of the contributing factors for the blowout “swabbing while tripping".⁴²⁹

595. The First Enquiry Report gave a more detailed explanation, to which Mr Wright referred at the November 2015 Hearing:⁴³⁰

During tripping out, 12 stands were pulled out in 50 minutes or each stand took an average of 4 minutes. The gears were at the lowest ratio. The average speed of pulling out is considered slow. This does not provide information on the speed of pulling out of first couple of stands. In absence of chart record actual speed of pulling out for each stand could not be ascertained. Analysis of other information indicates that the reason for well becoming under balance is swabbing.⁴³¹

596. At the November 2015 Hearing Mr Wright also recognised that he did “not have enough direct evidence from the rig data. All we have got to glean from is the basic average times.”⁴³² He accepted that “the possibility of

⁴²⁸ Wright 1, page 21 and his explanations at the November hearing: HT 2015.11.03 (Day 2), page 440. ↩
⁴²⁹ Marginal Field Development – Chattak, Drilling & Evaluation Program for Chattak 3 (Updated), 16 October 2005, Exhibit R-35, page 12, quoted at R-PHB, paragraph 152. ↩
⁴³⁰ HT 2015.11.05 (Day 4), page 905. ↩
⁴³¹ First Enquiry Report, Exhibit R-3, page 7, paragraph 6.10. ↩
⁴³² HT 2015.11.05 (Day 4), page 905. ↩

[Page 180]

pulling too quick is obviously there but we do not have any evidence to say that is what [the drilling supervisor] did”.⁴³³

597. Mr Wright also considered another mechanism that could cause swabbing. He described it as the drill bit being “balled up with clay” from drilling through the regional seal.⁴³⁴ In his first report he explained:

If the bit was balled up then the swabbing effect would happen at a much lower trip speed. The rig crew, however, reported there was no over pull during the trip to alert them that it was a problem. Further, based on the BHA and the nature of the formations involved here, it is unlikely that there was any such balling up.⁴³⁵

598. When Mr Wright referred to balling up at the November 2015 Hearing, he confirmed that balling up increased the risk of swabbing: “even if you are pulling slower you could still swab in gas even if you are pulling the proper speed".⁴³⁶ However, he mentioned it as a possibility; but he did not provide any concrete indications that it may have occurred and caused the kick in the present case.

599. In any event, Mr Wright does not assert that “balling up” is an occurrence that would come at a surprise to the drilling crew and that could be disregarded when designing the well and planning the drilling.

600. The possible alternative cause for the kick on which the experts and the Parties agree is described as loss of circulation or a loss of mud into the formation. Mr Wright explained in his report:

A possible explanation for the influx is when pulling the BHA (bottom hole assembly) through the highly permeable Sands 1 & 2, some of the filter cake (drilling mud residue on the walls of the formation) may have been removed causing a small loss of mud into a fracture with a swap of gas (i.e., a few bbls of mud go into the formation and few barrels of gas come into the wellbore at the same time) which may not

⁴³³ HT 2015.11.05 (Day 4), page 881. ↩
⁴³⁴ HT 2015.11.03 (Day 2), page 444 and HT 2015.11.03 (Day 4), page 885. ↩
⁴³⁵ Wright 1, page 22, also at page 8; the mechanism was explained at the November 2015 Hearing by Mr Abel at HT 2015.11.02 (Day 1), page 251. ↩
⁴³⁶ HT 2015.11.05 (Day 4), page 883. ↩

[Page 181]

create a noticeable gain in the trip tanks since the gas is not over pressured.⁴³⁷

601. Per Mr Wright's explanation, the loss of circulation commences with "removal of filter cake”. At the November 2015 Hearing, he explained that filter cake is formed by particles in the drilling mud which produce a deposit on the surface of a permeable formation and prevent gas from entering the well bore.⁴³⁸ He described the removal of the filter cake as follows:

It could also be because you have got a permeable sand and, let us say, if you are really wiping the hole and pulling the filter cake off the wellbore then you could be losing some fluid into that permeable sand that is dropping the level slightly.⁴³⁹

602. There is no evidence that such removal of filter cake occurred and there is no record of corresponding fluid loss that might have caused the kick. Indeed, Mr Wright conceded that it would be “pure speculation”.⁴⁴⁰ In any event, Mr Wright describes the mechanism:

... you pull all the filter cake off when you are pulling it up that would create the suction that would make the gas come into the well.⁴⁴¹

603. He confirmed that a kick occurring in such circumstances would be a case of swabbing.⁴⁴²

604. Dr Adams confirmed these explanations about the formation and removal of the filter cake. He stated that its removal may have been the reason for the wiper trip “to wipe the hole and get rid of that filter cake which you do not want”.⁴⁴³ He did, however, not provide any evidence for that assumption, and the Tribunal has not seen in the record any indication that the removal of the filter cake was the reason for the wiper trip.

⁴³⁷ Wright 1, page 7 and HT 2015.11.03 (day 2), pages 453 – 454. ↩
⁴³⁸ HT 2015.11.05 (Day 4), pages 884 and 885. ↩
⁴³⁹ HT 2015.11.03 (Day 2), page 445, lines 18-23. ↩
⁴⁴⁰ HT 2015.11.05 (Day 4), page 885. ↩
⁴⁴¹ HT 2015.11.05 (Day 4), page 885, lines 22-24. ↩
⁴⁴² HT 2015.11.05 (Day 4), pages 885 and 886. ↩
⁴⁴³ HT 2015.11.03 (Day 2), page 484. ↩

[Page 182]

605. Dr Adams also had another explanation for the possible lost circulation that appeared different from that of Mr Wright; he attributed it to possible excessive pressure in the borehole:

... the pressure inside the well from the hydrostatic pressure by drilling fluids exceed[ed] the rock strength. When that occurs it creates a fracture.⁴⁴⁴

606. Dr Adams suggested that the fracture occurs “in the bottom of the hole somewhere that has opened up”;⁴⁴⁵ in later explanations he seemed to accept that the fractures may occur at other locations in the well bore. He stated that, as a result of the fracture of the formation, quantities of drilling mud enter the “the rock somewhere and we do not necessarily know where they go”.⁴⁴⁶

607. The Claimant pointed out that this explanation implied that the pressure of the drilling fluids (or mud) would have exceeded the resistance of the rock in which the well was drilled and therefore caused the wellbore to fracture. It concluded:

This is the direct opposite of the position taken by Mr Abel in his report, wherein it was suggested that the mud overbalance during the trip was too low.⁴⁴⁷

608. The apparent contradiction is resolved when one follows Dr Adams' explanation to its next step. As a result of the flow of the mud into the formation, so Dr Adams opines,

... the pressure from this mud column is reduced and if it reduced below formation pressures then whatever is in those formations can start flowing into the rock, so on occasions lost circulation is a cause for a kick.⁴⁴⁸

609. Dr Adams'explanations, assuming that a fracture occurred in the formation, would imply that mud was lost into the formation. Dr Adams

⁴⁴⁴ HT 2015.11.05 (Day 4), page 921, line 24 to page 922, line 2; see also C-PHB, paragraph 170. ↩
⁴⁴⁵ HT 2015.11.03 (Day 2), page 483. ↩
⁴⁴⁶ HT 2015.11.05 (Day 4), page 922. ↩
⁴⁴⁷ C-PHB, paragraph 171. ↩
⁴⁴⁸ HT 2015.11.05 (Day 4), page 923, lines 19-23. ↩

[Page 183]

has not pointed to any evidence that would indicate that such fluid loss did indeed occur, and so confirm his hypothesis.

610. Despite the differences in their explanations, the experts agree that the information available does not allow a conclusion as to how exactly the kick was caused.

611. Mr Wright concluded:

... we do not know what the exact mechanism was. It was probably some swabbing with some losses simultaneously.⁴⁴⁹

612. Dr Adams, having reduced the options to swabbing and loss of circulation, concluded:

What we are saying is we cannot really define between these two but we have excluded everything else.⁴⁵⁰

613. Having considered the different explanations proposed by the Parties and their experts, the Tribunal notes that, in all plausible explanations, the circumstances that led to a kick, and in particular the loss of pressure when the drill bit is pulled up, are events that occur not infrequently during tripping. The operation is risky when the trip moves through sands containing gas. In such situations, it is incumbent on the drilling team to perform the trip in such a manner that the reduction of the pressure, caused by pulling the drill bit or by other events described above, is limited in time and the pressure in the borehole is preserved at a level above the pressure of the gas in the formation.

614. Relying on Mr Wright's explanations, the Claimant emphasises that the critical part of this activity relates to the drilling mud and its density:

... determining fluid density or “mud weight” involves an intricate balance between maintaining an overbalance to keep the gas in the formation surrounding the bore hole, yet avoiding too heavy a mud

⁴⁴⁹ HT 2015.11.04 (Day 3), page 553, lines 18-20. ↩
⁴⁵⁰ HT 2015.11.05 (Day 4), page 907, lines 2-4. ↩

[Page 184]

weight which creates a higher pressure and can fracture the wellbore.⁴⁵¹

615. Mr Wright indeed insisted on the need for careful balancing of the mud weight and emphasised the importance of determining and maintaining the adequate mud density. Indeed, he considered “drilling mud density” as one of an “initiating factor” for the swabbing.⁴⁵² At the November 2015 Hearing he explained:

...so you have to balance very carefully between what is a sufficient pressure to over-balance your reservoir but not having too much over balance that you are going to have drilling problems or induce losses.

It is not an easy thing to do. It is not possible to make a drilling programme by somebody in an office in Calgary, Canada, and say this is exactly what mud weight you are going to run. That is not possible. It is not realistic.

The responsibility has to go to the drilling supervisor on location to assess what he sees as he is drilling the well. You need to have the weight as close as possible, have a bit of over-balance hopefully, and you are in the right direction because of the uncertainties and then you monitor the hole as you drill it. That is basically the way it is done.⁴⁵³

616. Mr Abel explained the basic design objective of adjusting the mud density to keep the “mud hydrostatic slightly bigger than the pore pressure”.⁴⁵⁴ The Well Proposal had specified characteristics of drilling fluid, including mud type. For the mud density of the 8 ½” hole (in the well bore below the 305m casing foot) it was indicated: “Mud Density as hole conditions dictate".⁴⁵⁵

⁴⁵¹ C-PHB, paragraph 172, quoting testimony of Mr Wright at HT 2015.11.03 (Day 2), pages 400 – 401. ↩
⁴⁵² HT 2015.11.04 (Day 3), page 559; also slide 20 of Mr Wright's presentation at the November 2015 Hearing (Exhibit CH-5). ↩
⁴⁵³ HT 2015.11.03 (Day 2), page 401, line 9 to page 402, line 1. ↩
⁴⁵⁴ HT 2015.11.02 (Day 1), page 230, adjusted by reference to the terms used in his slide 23, Exhibit THE- 1. ↩
⁴⁵⁵ Chattak-2 Well Proposal, Exhibit C-15, page 15; see also above paragraph 526. ↩

[Page 185]

617. Mr Wright explained that such an approach was common practice in circumstances as those prevailing here; it means that the entire responsibility is placed on the drilling team:

This is a common practice in drilling, particularly when there is little information available upon which to specifically program the mud weights. It calls for the drilling supervisor and responsible members of the rig crew (driller, rig superintendent, mud man, mud loggers, etc.) to monitor the well conditions (including gas monitoring and losses) and assess whether increasing or decreasing the mud weight is warranted. Niko appears to have made a conscious decision to do this to make sure the crew was alert to hole conditions.⁴⁵⁶

618. At the November 2015 Hearing, and as mentioned above, Mr Abel described the process by explaining that “the hole speaks to you, listen to what it is saying”.⁴⁵⁷ He confirmed:

Each company will have a different guideline for their man on the rig but the general thing in that from my experience is that the man on the rig, the drilling supervisor, has the authority and the directive that if the hole speaks to him that he must change the drilling parameters, one of which being the mud weight. So, in my experience, most drilling personnel on site have that authority to change the mud weight up or down depending on what they think is happening in the hole.⁴⁵⁸

619. The Tribunal concludes that it was the responsibility of the drilling supervisor and the crew to prevent gas from entering the wellbore, in particular by providing the appropriate mud weight. During the wiper trip on 7 January 2005 they did not succeed in this task and gas entered the wellbore, creating the kick at the origin of the first blowout.

8.3.4 From the kick to the underground blowout at 19:50h.

620. According to the Daily Drilling Report and the Sequence of Events report of the drill crew, the first blowout occurred at 19:50h. It manifested itself by a sudden gain of mud in the trip tank and spillage around it. Within a

⁴⁵⁶ Wright 2, page 24. ↩
⁴⁵⁷ HT 2015.11.02 (Day 1), page 204. ↩
⁴⁵⁸ HT 2015.11.05 (Day 4), page 831, lines 6-16. ↩

[Page 186]

very short time, one or two minutes, some 42 bbls moved up through the wellbore.

621. In the circumstances, it does not appear that this surge was the immediate result of the initial kick. When discussing the origin of a kick through the loss of circulation, Mr Wright explained, as quoted above, that a few barrels of gas would come into the wellbore; and he continued:

Once in the wellbore, this small volume of gas would migrate upwards through the thin water-base mud expanding near the surface and causing the well to be underbalanced at Sands 1 & 2 and gas to flow into the wellbore. This could explain the rapid gain in the trip tank of 42 bbls in 1 to 2 minutes reported by the mud logger (Exhibit C- 21).⁴⁵⁹

622. At the November 2015 Hearing, Mr Wright explained that the small volume of gas was "less dense, it is a buoyancy difference, it is going to migrate like bubbles on a scuba diver, it is going to work up the well”.⁴⁶⁰ Later at the hearing he described the process again:

... just a small kick and it only takes about three or four barrels to under-balance the well like we saw but three or four barrels comes in and given 20 minutes or so it works its way up the wellbore until the top of the sand at 560 metres goes under-balance. The second it goes under-balance, then it starts to flow and when it starts to flow every psi that it goes under-balance it flows harder and harder and harder so that takes off very fast.⁴⁶¹

623. Mr Wright described the action of the gas entering the well bore after it had become under-balanced: the gas “moves the mud up like a piston”; and:

When it starts expanding rapidly then that is when the mud is getting blown out of the well.⁴⁶²

⁴⁵⁹ Wright 1, page 8, and HT 2015.11.03 (Day 2), pages 453 – 454. ↩
⁴⁶⁰ HT 2015.11.03 (Day 2), page 459. ↩
⁴⁶¹ HT 2015.11.05 (Day 4), page 886, lines 15-24. ↩
⁴⁶² HT 2015.11.03 (Day 2), pages 457 and 460. ↩

[Page 187]

624. Mr Abel reached a similar conclusion:

The reported sudden and violent flow at the end of the wiper trip has the signature of a kick that has migrated to near the surface and then becomes eruptive due to rapid gas expansion. Based on the information provided, an undetected kick that migrated to near surface is the most likely scenario that resulted in a sudden well flow followed by a violent eruption of mud.⁴⁶³

625. There are some variations about the assessment of the time it took the “bubble” to work its way up the wellbore, i.e. between the entry of a small volume of gas and the blowout recorded at 19:50h. At the November 2015 Hearing, Mr Wright also mentioned that the first entry of gas could have occurred some 30 minutes before the “unloading”.⁴⁶⁴

626. In his first report, Mr Wright provided a calculation of that period of time:

If 3 to 4 bbls of gas flowed into the wellbore at 560m it should migrate to the surface in 9.1 ppg water-base mud in approximately 15 to 20 minutes (assuming 0.5 m/sec gas migration velocity). As the bubble reached near the surface, the Sands 1 & 2 would go underbalanced and start to flow. This timing is consistent with the amount of time that the trip would have taken to pull the drill pipe from Sands 1 &2 to 466m.⁴⁶⁵

627. Dr Adams did not wish to commit to a specific period of time, but he opined that there was some time for the crew to react:

I said there may have been something going on 15 or 20 minutes ahead of time. John [Wright] threw out a number 30. During that period of time if something is changing that is a time that the crew can do something.⁴⁶⁶

628. The Sequence of Events report of the drill crew states that “Trip sheet was maintained during this entire trip”. The trip sheet might have provided some information about the question whether and if so when the crew

⁴⁶³ Abel, pages 35-36. ↩
⁴⁶⁴ HT 2015.11.03 (Day 2), page 501. ↩
⁴⁶⁵ Wright 1, page 23. ↩
⁴⁶⁶ HT 2015.11.03 (Day 2), page 505, lines 12-16. ↩

[Page 188]

detected the kick, as it was moving up through the well. Unfortunately, this sheet was lost.

629. There are, however, two items of information that provide some indication: (i) the drill crew reported that, while the 12 stands were being pulled up, “we were losing mud (total loss for 12 stands was 2.48 bbl)”;⁴⁶⁷ (ii) at the end of the report, the crew reproduced a small drawing, entitled “Trip tank behaviour":

Trip tank behavior

[Image of a hand-drawn graph]

630. Mr Wright and Mr Abel have explained the functioning of a trip tank for the purpose of detecting whether gas enters the wellbore. The main tool for this function is the “Trip Tank Indicator”, shown on the following drawing of a trip tank, as Mr Wright represented it:⁴⁶⁸

⁴⁶⁷ Sequence of Events Report, Exhibit C-19. ↩
⁴⁶⁸ Wright 1, page 23; the trip tank can also be seen on slide 12 of Mr Abel's presentation at the November 2015 Hearing (TEH-1). ↩

[Page 189]

[Image of a diagram of a trip tank]

Bell
Nipple

BOPs

To Shakers

FULL
EMPTY

Trip Tank
Indicator

Trip Tank

Trip Tank
Pump

Figure 3-6: Example Diagram of a Trip Tank

631. The Trip Tank Indicator shows the volume of mud in the trip tank; changes in this volume reflect changes in the volume of mud circulated through the wellbore. When gas enters the wellbore, it replaces the mud in the wellbore and the quantity of mud in the trip tank increases. Mr Wright described the mechanism as follows:

Okay, the first thing you look at is if we are taking gas into the wellbore and if we are monitoring our trip tank properly and we do not have any losses, then we would get a gain in our trip tank because we have swabbed a volume of gas in. So we have pulled the bit up through that sand slowly and it reduced the pressure underneath, probably not a whole lot but enough to maybe bring in a few barrels.⁴⁶⁹

632. The other element of information provided by the Sequence of Events report was that, during the removal of the 12 stands, 2.48bbl mud were lost. Mr Wright considered this information and concluded: “Since the hole is kept full with the trip tank and only a small loss of 2.5 bbls was recorded, the sands should not have gone underbalanced.”⁴⁷⁰ Mr Wright also provided an explanation for the quantity of mud loss reported by the

⁴⁶⁹ HT 2015.11.03 (Day 2), pages 451, lines 11-19. ↩
⁴⁷⁰ Wright 1, page 23. ↩

[Page 190]

drill crew. He opined that the initial kick could have brought some four or five barrels of gas, but the crew only mentioned 2.5 barrels of mud loss:

The mud loggers only show 2.5 barrels of losses so perhaps four barrels of gas came in the well and six and a half barrels of mud went out of the well during this trip phase.⁴⁷¹

633. Mr Abel referred to this phenomenon in similar terms:

... two things or three things can be going on down hole which mask all of it, so you can have exchange where it is drinking and it is kicking at the same time. You can have migrational effects which the expansion of the – and all those are nonlinear and that would – superimposed onto that.⁴⁷²

634. At the November 2015 Hearing, Mr Wright considered this loss “unusual”. As possible explanations he mentioned “permeable sand”, or the bit could have been “balled up with clay” or “pulling the filter cake off the wellbore".⁴⁷³ Later at the November 2015 Hearing, he commented:

So there has got to be something going on with the losses and gains simultaneously or there is something wrong with the equipment.⁴⁷⁴

635. Mr Wright also linked the information about the 2.5 barrels of mud loss with the graph of the trip tank. He saw as a possible explanation that at each removal of a stand 0.2 barrels of mud were lost. But “the pump keeps the hole full of mud so if you lose some mud down here it does not reduce the mud hydrostatic because the pump is keeping it full”. He was not sure whether the loss of the 2.5bbl of mud was something to be concerned about; but he would “want to know what is going on”.⁴⁷⁵

636. Dr Adams analysed the graph shown above with the objective of demonstrating the development of the mud volume over time.⁴⁷⁶ He related the dents in the curve to the removal of the last four stands and the effect

⁴⁷¹ HT 2015.11.05 (Day 4), page 910, lines 15-18. ↩
⁴⁷² HT 2015.11.03. (Day 2), page 498, lines 5-11. ↩
⁴⁷³ HT 2015.11.03 (Day 2), pages 444 and 445. ↩
⁴⁷⁴ HT 2015.11. 04 (Day 3), page 501. ↩
⁴⁷⁵ HT 2015.11.03 (Day 2), pages 445 – 446. ↩
⁴⁷⁶ HT 2015.11.03 (Day 2), page 466. ↩

[Page 191]

of this removal on the mud volume. At the end of his explanations, the Tribunal summarised how it understood his testimony:

So that means when they are moving stand 11 and 12 gas was in the borehole and had already the effect of increasing the volume of mud flowing out of the top.

DR ADAMS: That seems to be what this suggested to me, yes.⁴⁷⁷

637. The difficulty with this analysis is that the drawing does not identify values and scale; while one may assume that the coordinates show time and volume, there are no values indicated on the axes for either of them. As Mr Wright pointed out, the drawing does not provide sufficient information to allow "any logical observation as to what is going on”. He stated:

In my opinion, we do not have enough information. We have got a little squiggly line that somebody ripped off the bottom of a log without any details ...⁴⁷⁸

638. Mr Abel was of the opinion that the diagonal line above the sharp turn to the right in the drawing indicated that “the gas has been in the hole for a little while [...] we know the source of the gas is at the bottom of the well not near the surface so, therefore, something had to bring it from 500- something to this level and that is all I can conclude from that”; but otherwise "the data is very vague”⁴⁷⁹ and, later in the discussion, concluded “we just do not know".⁴⁸⁰

639. When discussing the possible reaction of the drill crew, Mr Abel emphasised the distinction which Mr Wright had made, as quoted above: the initial kick brought in a small volume of gas which moved up, like a “bubble”, in the wellbore and then caused the wellbore at Sands 1 & 2 to become under-balanced producing the sudden surge of mud the "unloading":

I think there needs to be a distinction between the violent nature of the unloading and the kick detection. The kick detection is that point

⁴⁷⁷ HT 2015.11.03 (Day 2), page 474, lines 2-7. ↩
⁴⁷⁸ HT 2015.11.03 (Day 2), page 496, lines 15-18. ↩
⁴⁷⁹ HT 2015.11.03 (Day 2), pages 498, 497. ↩
⁴⁸⁰ HT 2015.11.05 (Day 4), page 924. ↩

[Page 192]

where the trip tank is telling you there is a small gain and you can react and then there is the point when there is a violent flow and its impossible to react. That is all I am saying, is that I think, typically, you should have seen the small gain before it became violent. That is what I think should have happened and I fault them if they did not because I know there was a warning. Maybe they just were not looking. I do not know.⁴⁸¹

640. The Claimant asserted that “[n]either Dr Adams nor Mr Abel were able to identify any evidence in the record that particular warning signs were present that should have alerted a reasonable rig crew to the kick any earlier".⁴⁸² This is not quite correct. The evidence just discussed shows that both the small mud loss prior to the blowout and the graph of the trip tank showed signs that were, in the words of Mr Wright, “unusual”. They may have been signs of the initial kick moving up through the wellbore, announcing the subsequent unloading of the well. Mr Wright stated that he did not “understand why they did not see it” in this initial phase.⁴⁸³

641. Moreover, the record shows only what the crew noticed. It does not show any warning signs which may have occurred but were overlooked by the crew.

642. This being said, the Tribunal must nevertheless consider the difficulties that the three experts faced when interpreting this evidence. The experts had time to study the evidence before they prepared their reports and they discussed it at length at the November 2015 Hearing. Notwithstanding their unhurried examination and analysis of the circumstances, the experts could not reach a firm conclusion. In these circumstances, the Tribunal finds it difficult to conclude that the drilling supervisor, the drill crew and the mud loggers, engaged in the work on the wiper trip, should have analysed this evidence within minutes and concluded that it was the sign of an imminent blowout. Of course, the drilling team may have had other information which is not available in these arbitrations and which may have included a warning sign; but the Tribunal has no basis for assuming that to have been the case. In sum, while observing that there were signs that indicated an anomaly in the wellbore, the Tribunal is reluctant to conclude that the crew present at Chattak 2, operating with

⁴⁸¹ HT 2015.11.05 (Day 4), page 912, lines 7-19. ↩
⁴⁸² C-PHB, paragraph 187. ↩
⁴⁸³ HT 2015.11.05 (Day 4), page 910. ↩

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the tools available to it, should have detected the small volume of gas, the “bubble”, moving up through the wellbore quickly enough to take remedial steps.

8.3.5 The attempted blowout control

643. When the crew noticed the surge of mud, it closed the BOP. Mr Wright explained what he considered the normal procedure to be followed in such a situation:

The proper procedure to follow when taking a kick while tripping pipe is to shut the BOP and install a full opening safety valve (FOSV) or a check valve on the drillpipe at the floor as soon as possible after the flow is observed.⁴⁸⁴

644. Mr Wright stresses the urgency of this operation: “Close the BOP, to stop the flow as fast as possible [...] to limit the amount coming in”.⁴⁸⁵ In this case, the crew let 42 bbls come in before they closed the BOP; they recorded that this flow “happened within a minute or two”.⁴⁸⁶

645. The Tribunal understands that a drilling team has these means of observing that gas is moving through the wellbore: (i) instruments that measure the speed of the flow of the mud and (ii) the trip tank indicator attended by the mud loggers. Mr Wright explained “the mud loggers are monitoring the pits continuously” and “the driller has his own independent sensors as well with alarms”.⁴⁸⁷ Similar explanations were provided by Dr Adams.⁴⁸⁸

646. In the evening of 7 January 2005, the sudden inflow of gas was indeed observed both in the trip tank and in the instrument measuring the flow of the mud. The Sequence of Events report noted a “sudden gain in trip tank" and "the return sensor also showed a sudden increase in flow from 17% to 60%”: In the Sequence of Events report, the crew described the steps it then took:

⁴⁸⁴ Wright 1, page 25. ↩
⁴⁸⁵ HT 2015.11.03 (Day 2), page 282. ↩
⁴⁸⁶ Sequence of Event Report, Exhibit C-19, page 1. ↩
⁴⁸⁷ HT 2015.11.03 (Day 2), page 286. ↩
⁴⁸⁸ HT 2015.11.03 (Day 2), pages 290 – 295. ↩

[Page 194]

Pattapong [a member of the drilling crew and one of the authors of the report] tried to call rig floor, no response. Ferdous [another member of the drilling crew and co-author of the report] opened the door to rush to rig floor to inform the gain; he found well flowing & mud rising up to 20 m from the rig floor. BOP was closed by rig crew.⁴⁸⁹

647. Mr Wright expressed the view that in "hindsight allowing a 42 bbl gain in the trip tank before closing the BOP could be viewed as high volume for a trained crew”. He explained, however, that in the circumstances, the time it took the crew to close the BOP was “not unreasonable”. He envisaged possible scenarios explaining the interval:

The 42 bbl gain reportedly happened in 1 to 2 minutes, just as the rig crew were breaking the connection on the 12th stand of drillpipe. The driller (who is responsible for shutting in the well) and the other crew would be focused on that safety critical activity and not typically observing the trip tank. This would leave the responsibility to the mud logger.

In my experience (from performing unannounced kick drills), mud loggers are not typically very fast in observing and responding to a mud gain. If it took the mud logger even 30 seconds to notice the gain, then another 15 seconds to determine that it was not part of the rig crew adding mud to the trip tank (which has to be filled from time to time during a trip out), and then call the rig floor, a minute has already passed.

The driller could easily be away from the phone for a few seconds while doing some activity on the rig floor. By the time the mud logger gets to the drill floor, the mud flow is increasing rapidly and noticed by the driller who closes the BOP and stops the flow.⁴⁹⁰

648. These considerations are, of course, hindsight speculations. The described conduct might appear surprising, as both the mud loggers and the drilling crew are engaged in the operation of performing a wiper trip through the

⁴⁸⁹ Sequence of Events Report, Exhibit C-19, page1. ↩
⁴⁹⁰ Wright 1, page 26; he gave similar explanations at the November 2015 Hearing at HT 2015.11.03 (Day 2), pages 284 -286. ↩

[Page 195]

reservoir, with the risk of a kick. The operation had lasted for less than an hour and one might expect that both the mud loggers and the drilling crew, had they been properly warned of the risk of a kick, would have remained alerted. The Tribunal, nevertheless, wishes to avoid being overly influenced by the wisdom of hindsight. It is aware of the difficulties the experts had in interpreting the events. Mr Wright, for example, pointed out that "first of all they have to be aware that something is not right”, and he was of the opinion that that “may take several minutes”.⁴⁹¹

649. Still, the fact remains that the speed with which the BOP is closed is critical for the success of the operation. Mr Wright explained that, given the low strength of the formation between the casing foot and the marine shale, the blowout had to be caught before it reached 20 bbls. He referred to the Leak-off Test on 6 January 2005, which had shown the unrealistically high value of 18 ppg. If that value had been correct, the formation “would have contained” the gas. “When they closed the BOP to stop it from coming through the drill floor it would have stopped it.”⁴⁹² But the formation did not have this strength:

If that value is incorrect and it is really 12 and a half or 13-pounds per gallon, then you would not be able to close in but you could close in, say, 20 barrels of kick, so if the crew can react quick enough to close the BOP before you get 20 barrels and can stop the influx, then they could circulate that kick-out and get back to a normal pressure and everything would be fine.⁴⁹³

650. The crew did not react quickly enough. By the time the crew closed the BOP, 42 bbls of mud had been ejected and the gas had reached the weak formation between the casing foot and the marine shale. Confined in the wellbore, the gas could not move up any more. It found its way out by broaching the formation and pushed up outside the wellbore. Mr Wright explained:

Once the well was shut-in with a 42 bbl gain, the gas from Sands 1 & 2 was already at the 13-3/8” casing shoe and the shut-in casing pressure was 650 psi indicating there was also gas to the surface. At this point, the gas pressure is greater than the formation strength at

⁴⁹¹ HT 2015.11.03 (Day 2), page 285. ↩
⁴⁹² HT 2015.11.03 (Day 2), page 461. ↩
⁴⁹³ HT 2015.11.04 (Day 3), page 523, lines 7-14. ↩

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the shoe causing the formation to fracture with gas flowing at high rates into the formation and eventually fracturing to the surface as there is no seal above the 300m shoe depth. In effect, a blowout was occurring underground virtually immediately upon shutting in the well. ⁴⁹⁴

651. The drilling team does not seem to have been aware of the full measure of this dramatic situation. It made attempts to control the blowout. The measures are explained in the Sequence of Events report:

Tried to circulated thru choke: first 16 bbl, 10 min off, then 70 bbl. MW was 9.1+ ppg. Mr. Zhang told Geoservices to monitor any gain in pits. Before circulating Mr. Zhang told Peter (MI Mud Man) to increase MW by adding barite. 5 bags of barite were mixed to 9.2+. It was noticed that ground started cracking near bell nipple. Mr. Zhang told everybody to go to a safer place; so we left the location. ⁴⁹⁵

652. At the November 2015 Hearing, Mr Wright was questioned by the Tribunal to explain the measures taken by the crew, as described in this report:

PROFESSOR MCLACHLAN:

[...]

What does that tell us about what they tried to do in remedial terms and what is the significance of it insofar as you can tell?

MR WRIGHT: Okay. When you have a kick on a drilling rig, what the crew is trained to do is to shut the well in as quickly as possible. So when it is shut in, the assumption is that the kick is contained in the wellbore and you have got a solid cylinder. There is not any movement anymore, there is nothing flowing underground, there [are no] losses so the gas is trapped in the wellbore and everything is held in that cylinder. They do some calculations based on their casing pressures and drill pipe pressures and they are going to circulate that gas bubble out of the well. So they pump mud down the drill string and up the annulus through a choke and they use this choke, which is just

⁴⁹⁴ Wright 1, page 8. ↩
⁴⁹⁵ Sequence of Events Report, Exhibit C-19. ↩

[Page 197]

a valve, to keep their drill pipe pressure at the bottom of the hole constant as this gas comes through the choke and replaces the gas with mud.⁴⁹⁶

653. Mr Wright provided further explanations about the process which the drill crew adopted. From these explanations the Tribunal understands that the measures taken by the crew were based on the assumption that they faced a kick, consisting of a small quantity of gas the bubble described previously by Mr Wright. Following the “the basic system that [...] rig crews are trained to do [...]”,⁴⁹⁷ the crew attempted to “circulate out a kick”, venting the bubble out through the choke. In reality, however, the situation was much more serious: the gas was “flowing into the sand outside the well” but had not yet reached the surface;⁴⁹⁸ there was what Mr Wright described as an “underground cross-flow”. Mr Wright described this situation as follows:

But by this time, as we know, the well was already above the fracture gradient, if we are assuming it is 13 pounds per gallon – and we know it broached to surface, so that is a pretty good assumption – is already flowing underground. My experience is that very, very few drilling crews will recognise that they have an underground blowout going on, particularly in the first hour of the event occurring. So this crew has, as you mentioned yesterday, is happily making a trip and all of a sudden the well is blowing out on them, they shut it in rapidly and they are having to make very fast decisions on what they are supposed to do next. So they are following their – basically, what they are trained to do and that is shut the well in and try to circulate the kick-out.⁴⁹⁹

654. Mr Wright concluded about the procedure adopted by the drill crew:

If you knowingly have an underground cross-flow going on with a lot of gas coming up the well, then using this procedure will not work. So it is not a procedure that you would want to use to control the well, but of course at this point they do not know that.

⁴⁹⁶ HT 2015.11.04 (Day 3), page 535, lines 4-24. ↩
⁴⁹⁷ HT 2015.11.04 (Day 3), page 538. ↩
⁴⁹⁸ HT 2015.11.04 (Day 3), page 544. ↩
⁴⁹⁹ HT 2015.11.04 (Day 3), page 541, line 13 to page 542, line 4. ↩

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PROFESSOR MCLACHLAN: It will work for small amounts of gas trapped but not large amounts?

MR WRIGHT: That is correct. ⁵⁰⁰

655. Mr Wright also explained the incident with the degasser, recorded in the Daily Drilling Report:

Try to circulate gas cut mud out through degasser at 30 spm, but heard noisy sound inside degasser after pumped 2 min, like a pіесе of junk inside. Stop pumping and shut in well.⁵⁰¹

656. As explained above in Section 8.1, a Degasser is a big tank in which gas can be separated from the drilling mud. The mechanism in the tank is not designed for operating without any mud. If pure gas is blown into the tank, the noise described in the Daily Drilling Report occurs. Mr Wright explained:

...at the bottom of the mud gas separator there is a u-tube and it is usually long enough so that it creates some back pressure in the mud gas separator so that the gas does not go back over to the pit system, so the gas goes up through the vent at the top and then safely off location. So if you are bringing pure gas into there at very high rates, then that mud gas separator is not designed to be able to do that.⁵⁰²

657. Dr Adams also criticised the use of the Mud Gas Separator; but referring to the noise recorded, he concluded, without any explanation, that the apparatus was “overloaded with mud and gas". ⁵⁰³

658. In any event, the incident with the degasser does not seem to have had a major impact. Mr Wright reached the following conclusion from the records:

⁵⁰⁰ HT 2015.11.04 (Day 3), page 547, lines 11-20. ↩
⁵⁰¹ Daily Drilling Report, Exhibit C-20, page 26; similarly in Draft Report, Exhibit C-21. ↩
⁵⁰² HT 2015.11.04 (Day 3), page 543, lines 6-15. ↩
⁵⁰³ Adams 1, page 32, commented in Wright 2, page 26. ↩

[Page 199]

So they stopped to investigate what is going on and I am sure still at this time they still do not have an idea that they have an underground cross-flow.⁵⁰⁴

659. The records show that the crew continued their attempts to control the blowout. They stopped circulating mud and investigated the causes of the noise and then resumed. In the Daily Drilling Report, the Drilling Supervisor reported for the time from 20:40h to 21:00h:

20:40 21:00: Try to circulate gas out again at 30 spm while adjusting hydraulic choke, pumped 70 bbls in hole, was informed noticed gas leaking on ground from substructure toward southwest.

21:00 – 24:00: Fully open choke, divertor to flare line. Light flare line gas blow. Blow underneath ground getting stronger and stronger. Gas flow through flare line decreased.⁵⁰⁵

660. The further events until the crew evacuated the site, the derrick fell into the crater and the “gas blow fired itself”, have been recorded above in Section 8.2.6. Mr Wright commented on the resumed pumping by opining that the crew “still do not have an idea that they have an underground cross-flow". ⁵⁰⁶

661. The experts agree that the measures taken by the drilling team to control the blowout were inadequate or even counterproductive. Mr Wright stated: “you can usually control an underground cross-flow but if it broaches then you are not going to control it unless you drill a relief well”.⁵⁰⁷ In his report he wrote:

Given the fact that the well is now an underground blowout, and not a normal gas bubble circulation in a competent wellbore, there is absolutely no chance of controlling the well at this point using normal kick circulation techniques that the driller would be trained in.

⁵⁰⁴ HT 2015.11.04 (Day 3), page 543, lines 16-19. ↩
⁵⁰⁵ Daily Drilling Report, Exhibit C-20, page 26. ↩
⁵⁰⁶ HT 2015.11.04 (Day 3), page 543. ↩
⁵⁰⁷ HT 2015.11.04 (Day 3), page 559. ↩

[Page 200]

An underground blowout like this takes a dynamic kill approach to be successful. A typical rig crew including the company representative would not have experience in these techniques and would not know how to proceed.⁵⁰⁸

662. Both Mr Wright and Dr Adams described possible approaches for controlling the blowout.⁵⁰⁹ Mr Wright was firm in insisting that such measures cannot be expected from an ordinary drill team.

663. The Tribunal concludes that the drilling team was slow in reacting to the blowout when it was noticed and that the measures taken by the team were not only inadequate to control the blowout, but in parts even aggravated the situation. The question whether this inadequate reaction can be held against the drilling team and Niko will be considered in the next Section.

8.4 Niko's breaches

8.4.1 The Issues

664. In Section 7 above the Tribunal has discussed Niko's obligations by reference to which it must determine Niko's liability under the JVA for the blowouts. It has identified the “prudent operator standard” as the principal reference for this determination. The preceding parts of the present Section 8 have determined the causes for the first blowout and for the failure to control it. It now remains to be seen whether and to what extent these causes must be attributed to breaches by Niko of its obligations, considering specifically the breaches alleged by the Respondents.

665. The breaches alleged by the Respondents have evolved over time and were defined more precisely as the arbitrations progressed. In the submissions prior to the November 2015 Hearing, the Parties addressed the question of Niko's liability for the two blowouts in a manner that prompted the Tribunal to give the following guidance to the Parties in the Annex to Procedural Order No 12 of 21 October 2015:

5. In a provisional manner, the Tribunals have endeavoured to identify in the submissions of the Parties and in the expert reports the

⁵⁰⁸ Wright 1, page 8. ↩
⁵⁰⁹ HT 2015.11.04 (Day 3), pages 525, 550 and 583, respectively. ↩

[Page 201]

Breaches that have been alleged and to which, according to Procedural Order No 12, the Tribunals' examination now is limited. The Tribunals suggest to express these Breaches in the following manner:

1. (i) The casing design and setting depth for the 13-3/8” casing;
2. (ii) The well design for kick tolerance;
3. (iii) The well design for trip margin of overbalance;
4. (iv) The reaction of the rig crew when the blowouts occurred;

[...]

1. (ix) Failure to conduct a shallow gas hazard analysis and failure to achieve a proper understanding of the shallow gas hazards;
2. (x) Failure to calculate formation pressures properly;
3. (xi) Failure to determine fracture gradients adequately;
4. (xii) Failure to use a large bore diverter system instead of the classical blowout preventer (BOP) actually used;
5. (xiii) Crew training and experiences, including certification;
6. (xiv) Gas dispersion analysis;

The Tribunals point out that this identification is made on their present provisional understanding of the case. They invite the Parties and the experts to correct, or complement, where necessary, the identification and description of these Breaches. If any of the Breaches identified in the Parties' submissions and in the expert reports are not included in the above list, the Parties are invited to add them to the list. Such corrections and additions must

[Page 202]

be identified precisely, indicating the parts of the Parties' submissions or expert reports where breaches were described.

6. What are the consequences, in terms of liability, of Niko's choice of personnel and consultants and the due diligence reflected in this choice, distinguishing between the drilling of the Chattak 2 well and the relief operations?

666. These issues and the Parties' positions with respect thereto were considered during the November 2015 Hearing. Mr Wright in particular examined the areas of possible breaches identified by the Tribunal for the first blowout under the heading of “Possible Contributing Causes of Chattak 2 Blowout". He eliminated

• Shallow hazard survey
• Requirement for diverter system
• Pore pressure and fracture pressure assessment
• Crew certification and training
• Crew response after gas influx

but retained as possible causes

• Surface casing design criteria and options, and
• Drilling mud density and trip margin overbalance.⁵¹⁰

667. As mentioned above, the November 2015 Hearing focused on the technical and factual aspects of the events that led to the blowouts; the legal questions of liability were addressed in prior and subsequent submissions and at the February 2016 Hearing.

668. In its letter of 6 January 2016, the Tribunal provided further guidance by communicating its understanding of the causes of the blowouts and the measures that could have prevented them so as to assist the Parties in the discussion of acts and omissions attributable to Niko which may have generated liability, without thereby restricting the Parties' arguments. The letter included the following passages:

The experts seem to agree that the kick that occurred in the evening of 7 January 2004 could have been contained and the blow-out could

⁵¹⁰ Slide 20 of Mr Wright's presentation at the Hearing, recorded as Exhibit CH-5. ↩

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have been prevented, if the well casing had been installed below the depth of 305 m to a deeper level with higher rock strength.

If these explanations are correct, it seems to result from the explanations of the experts that the only actions which could have prevented the first blow-out were

1. (i) a performance of the wiper trip in which the extent of swabbing that must have occurred and the resulting kick were avoided, e.g. by slower movements or increased mud weight;
2. (ii) a control of the kick before it reached the level of strength assumed in the kick tolerance which the design allowed;
3. (iii) a well design for a “full column of gas” which would have required casing to a depth that reached the marine shale;
4. (iv) alternatively, the installation of an adequate “diverter”.

If the Parties consider that this explanation does not correctly reflect the evidence before the Tribunals, they are invited to specify (a) where they disagree with the explanations, (b) what evidence supports their disagreement and (c) what other more plausible evidence should form the basis of the Tribunals' analysis and decision.

To the extent to which the Parties consider that these assumptions are correct, it would seem that causes (i) and (ii) are operational in nature while causes (iii) and (iv) concern the design. The Parties are invited to address the question on which grounds a blow-out caused by the circumstances so identified will justify any liability of Niko.

669. The Parties addressed these points in their Post-Hearing Briefs of 22 January 2016. The Respondents quoted the four types of action identified by the Tribunal and stated:

... these actions were required by the JVA's diligent, conscientious, and workmanlike operations standard, the Bangladesh Petroleum Act, and by the generally accepted standards of the international

[Page 204]

petroleum industry. Niko's failures to take them were thus breaches of the JVA. As noted by the Tribunal, these actions would have prevented the blowout. Therefore, but for Niko's breaches, the blowout would not have happened. In these circumstances, but for causation is sufficient to establish legal causation. The test for causation is met with regard to each of the actions listed by the Tribunal. Niko's breaches caused the Chattak 2 blowout.⁵¹¹

670. The Respondents added, however, that there were “additional causal breaches of the JVA's diligence requirement and generally applicable standards"; they listed the following alleged failures of Niko:

1. 1) to gather relevant information,
2. 2) to plan its well based on shallow gas environment in which it would drill,
3. 3) to train its crew based on that plan, and
4. 4) to carry out its operations in accordance with that plan.⁵¹²

671. At the February 2016 Hearing, the Respondents developed their arguments further and summarised the position as follows:

... the proper question is was it diligent, conscientious and workmanlike for Niko to set casing at 305 metres because of a fear of shallow gas pockets, then drill without a diverter, then conduct a wiper trip without preparing the crew and without circulating mud and relying on kick tolerance?

It is the combination of all of those things that Niko did and them individually, but one cannot look at just individually, it is a decision after another after another that together created a very dangerous circumstance and was not diligent or conscientious.⁵¹³

⁵¹¹ R-PHB, paragraph 158. ↩
⁵¹² R-PHB, paragraph 160. ↩
⁵¹³ HT 2016.02.22, pages 456, 457 (corrected version). ↩

[Page 205]

672. In its Post-Hearing Brief, the Claimant reviewed the issues as they had been identified by the Tribunal. It pointed out that “only breaches that are causal and could therefore give rise to liability are at issue in this arbitration". With respect to the blowout at Chattak 2, it confirmed the relevance of the four issue that had been identified in the Tribunal's letter of 6 January 2016, presenting its understanding of these issues as follows:

(i) Surface Casing Depth

(ii) Use of Diverters

(iii) Performance of the Wiper Trip

(iv) Crew Response to the Influx of Gas.⁵¹⁴

673. The Claimant also mentioned some additional issues which it addressed “where those issues relate to the specific issues identified by the Tribunals". It mentioned specifically “shallow gas” and “crew training and certification".⁵¹⁵

674. Considering these positions of the Parties, the Tribunal will group its examination in what emerged as the two principal categories of issues, viz. (a) the design of the drilling operations, specifically with respect to casing depth, and (b) the qualifications and performance of the drilling crew. As a preliminary question the Tribunal will consider the issue of shallow gas and related issues.

8.4.2 Shallow gas

675. As can be seen from the summaries above, the issue of shallow gas was a major part of the Respondents' case about the deficiencies in Niko's planning of the well design. The Respondents insisted on the importance of "shallow gas handling” and stated: “It is, therefore, uncontested, that shallow gas is a circumstance requiring special precaution".⁵¹⁶ The Respondents described the shallow gas issue as twofold:

First, Niko knew, or should have known, that it would be drilling in a shallow gas zone. This is not only because Southeast Asia is prone to

⁵¹⁴ C-PHB, paragraphs 49 and 50. ↩
⁵¹⁵ C-PHB, paragraph 51, ↩
⁵¹⁶ R-PHB, title at page 29 and paragraph 68. ↩

[Page 206]

shallow gas, but because of the known depths of the sands. Second, Niko determined that it had an additional shallow gas risk because of bubbling gas in the area of Chattak 1 (which turned out not to be an issue). That Niko did not encounter the feared pocket of gas does not negate the first shallow gas risk: Niko still needed to be and was not prepared for the high pressure and rapidity of any influx in case of a kick. It was not.⁵¹⁷

676. The Respondents insisted that Niko should have taken “the necessary precautions when planning and training for shallow gas” and should have used a diverter for shallow gas operations.⁵¹⁸ They reproached Niko on the ground that it “did not properly investigate the area for shallow gas risk and it did not plan or train the crew in shallow gas handling".⁵¹⁹ The Respondents asserted:

Niko's first breach was failure to gather knowledge and design an adequate, safe well plan. One key deficiency was its failure to develop sufficient understanding of the two shallow gas risks it faced.⁵²⁰

677. When describing the manner in which “Niko breached generally accepted industry standards”, the first item mentioned by the Respondents was:

Niko failed to gather and consider all relevant information, especially considering the shallow gas risks, to make safe drilling and contingency plans;⁵²¹

and

Niko failed to take necessary measures [by failing to] adequately obtain data and plan its well for the shallow gas environment.⁵²²

⁵¹⁷ R-PHB, paragraph 88. ↩
⁵¹⁸ R-PHB, paragraph 82. ↩
⁵¹⁹ R-PHB, paragraph 87. ↩
⁵²⁰ R-PHB, paragraph 122. ↩
⁵²¹ R-PHB, paragraph 151. ↩
⁵²² R-PHB, paragraph 155. ↩

[Page 207]

678. An important aspect of the Respondents' argument about shallow sands is that gas in such locations is very prolific, with high flow rates. Dr Adams explained:

Shallow Gas Characteristics

1. High permeabilities (>1000 md) = very high flow rates.

2. Little or no response time.

3. High drill rates negate conventional flow check guidelines.⁵²³

679. Had it properly prepared its drilling operations, so goes the Respondents' argument, Niko would have been warned about these high flow rates and the resulting risks.

680. There was some debate in these arbitrations about the definition of "shallow gas” and “shallow gas hazard”, including the question whether there was a limit to the depth within which shallow gas and the related hazard would have to be accounted for. The essential point, however, was that, in the Respondents' argument, shallow gas had high flow rates and had to be expected in the Chattak field.

681. The Claimant responded that it had no reason to expect shallow gas hazards when it drilled; and it insisted that in fact the field did not have the characteristics of the hazards described by the Respondents and Dr Adam. Mr Wright explained:

Niko was not drilling shallow gas hazards as understood in the industry. They were drilling through the S1 and S2 sand packages with known depth from the offset well Chattak 1 and 3D seismic. There was uncertainty with respect to the exact pressure of the tip of S1 due to the gas water contact uncertainty, as well as inflow performance uncertainty ...⁵²⁴

⁵²³ Slides for Dr Adam's presentation at the November 2015 Hearing, Exhibit RH-3, slide 8. ↩
⁵²⁴ Wright 2, page 7. ↩

[Page 208]

682. Mr Wright insisted on the difference between “shallow gas hazard” and "shallow gas handling”. He asserted that “[s]hallow gas hazards are typically understood in the industry as unexpected gas trapped in shallow sands that might be penetrated prior to setting surface casing and before installing a BOP stack”.⁵²⁵

683. The Claimant and Mr Wright also objected to the characterization of Sands 1&2 as shallow gas hazards, having the high flow rates described by Dr Adams. Mr Wright accepted that these sands “could be classified as shallow reservoir sands [...] but not as shallow gas hazards as generally understood in the industry". ⁵²⁶

684. Relying on Mr Wright's explanations, the Claimant concluded that:

Based on the information available to Niko prior to drilling Chattak 2, there is no evidence indicating, and it is not reasonable to suggest, that Niko should have identified Sands 1 and 2 as “shallow gas” in the sense meant by Dr. Adams (i.e. highly permeable and certain to have a prolific flow). Indeed, there was nothing in the information available to Niko at the time that indicated that Sands 1 and 2 might be highly permeable and prolific. As Mr. Wright explains:

Based on the information available to Niko at the time that it was programming the Chattak 2 well, there was apparently no indication that it was going to be drilling into a high risk shallow gas field. To the contrary, I understand that they were expecting a marginal gas development project and planned accordingly. ⁵²⁷

685. Relying on the evidence from the experts, the Claimant further denied that “Niko knew or ought to have known that Sands 1 and 2 would exhibit the characteristics of what BAPEX terms shallow gas” and that Niko was alerted “to taking special precautionary measures”.⁵²⁸ The Claimant referred to what it described as the only characteristics of shallow gas

⁵²⁵ Wright 2, page 5, emphasis in the original. ↩
⁵²⁶ Wright 2, page 5. ↩
⁵²⁷ C-PHB, paragraph 120, quoting from Wright 2, page 10. ↩
⁵²⁸ HT 2016.02.22, page 340. ↩

[Page 209]

identified by the Respondents, i.e.“abnormal pressure and high permeability or an expectation of a sand being a prolific producer”. ⁵²⁹

686. Addressing this position concerning shallow gas and shallow gas hazard, the Claimant pointed out that no gas was encountered by Niko when drilling down to the marine shale; there was no shallow gas hazard in this part of the well.⁵³⁰

687. This is indeed the evidence before the Tribunal: no gas was encountered in the ground above the marine shale. The Tribunal concludes that any deficiency of Niko in planning for shallow gas in this part of the well remained without consequence for the blowout which the Tribunal has to consider.

688. The kick and the blowout originated below the marine shale in Sands 1 and 2. These were known reservoirs. Mr Wright explained in his second report:

Importantly here, the source of the blowout on Chattak 2 (and 2A) was not the result of a “shallow gas hazard” (as described above), but the reservoir sands S1 and S2. These sands were well identified from the offset well records on the nearby Chattak 1 well and from 3D seismic shot in 2004. They could be classified as shallow reservoir sands (although there is no reference in API that I am aware of that defines what depth constitutes a “shallow reservoir”), but not as shallow gas hazards as generally understood in the industry.⁵³¹

689. It follows that the conception of Mr Wright and the Claimant of “shallow gas hazards” as “unexpected gas trapped in shallow sands” penetrated before the installation of a BOP is not relevant here. The question is what Niko should have expected specifically in Sands 1 and 2, how it should have planned for it, and what it should have taken into consideration when designing the well and preparing the crew for the operation.

⁵²⁹ HT 2016.02.22, page 342, referring to quotations from Dr Adams and Mr Abel, shown on CH- 11, slides 10 and 11. ↩
⁵³⁰ HT 2016.02.22, pages 335 – 338. ↩
⁵³¹ Wright 2, page 5. ↩

[Page 210]

690. The Claimant places great emphasis on a statement in the First Enquiry Report to this effect:

All the known gas horizons of this field are normally pressured.⁵³²

691. At the February 2016 Hearing, Mr Tarnowsky stated for the Claimant:

So the only and the clear and compelling evidence in relation to formation pressure expectations prior to the drilling of Chattak 2 is that sands 1 and 2 were reasonably expected to be normally pressured [...]

PROFESSOR MCLACHLAN: [...] is there anything in the subsequent records that might suggest that that assumption as it turned out was incorrect?

MR TARNOWSKY: No and in fact as I pointed out it is the opposite. The Enquiry Committee after the event still says all of the known gas horizons in this field are normally pressured.⁵³³

692. The Claimant also relies on API RP 64 which states under the heading "Shallow Gas Flow":

Shallow gas sands are usually abnormally pressured and capable of flowing at high flow rates and in large volumes.⁵³⁴

693. The Claimant submitted “that there is no evidence indicating the presence or possible presence of either of these two factors in advance of drilling the Chattak well". ⁵³⁵

694. Mr Wright explained what should be understood by “normally pressured”:

... it is important to understand formation pressure characterization. It is common industry practice to call a gas reservoir normally pressured if its pressure is derived by a column of formation water

⁵³² Enquiry Report, Exhibit R-3, paragraph 6.4, referred to by the Claimant at HT 2016.02.22, page 345. ↩
⁵³³ HT 2016.02.22, pages 347 – 348. ↩
⁵³⁴ API RP 64, Exhibit R-42, paragraph 4.3.1. ↩
⁵³⁵ HT 2016.02.22, page 342. ↩

[Page 211]

from the surface to the gas water contact (GWC) (or the base of the gas bearing portion of the reservoir). There are various geologic circumstances where a reservoir is generally called abnormally pressured (i.e. where the pressure is materially greater than a formation water gradient, usually by the fluids supporting a portion of the overburden), but there is no indication that such were the circumstances in Sands 1 and 2. They are, therefore, normally pressured.⁵³⁶

695. In other words, stating that the “gas horizons [were] normally pressured” refers to the method by which normally the pressure of the gas in a reservoir is determined at the gas water contact (GWC). It does not indicate the actual gas pressure throughout the reservoir which is determined by various factors, in particular by the shallow location of the reservoir, the porosity or permeability of the formation, and the distance to the GWC. This means: saying that the known gas horizons in the Chattak field were "normally pressured” does not mean that Sands 1 and 2 would not behave as shallow reservoirs, according to the description in API RP 64, must be expected to behave. It does not mean that Niko did not have to expect these sands to behave as shallow reservoirs.

696. Niko had collected information on the Chattak field and analysed it in the Marginal Field Evaluation and could avail itself of information on Chattak 1, close to the Chattak 2 Well. It knew that the targeted Sands 1 and 2, started at a depth of some 560m. Mr Wright characterised these reservoirs as “shallow” and Niko had to allow for gas in these circumstances.

697. The Tribunal sees no need to determine whether the gas in Sands 1 and 2 and its pressure should be defined as “shallow gas” or constituting a "shallow gas hazard”, as understood by the Respondents and their expert. Based on the evidence, these reservoirs were not “abnormally pressured" in the sense of the term used by the First Enquiry Report. Rather it was in a shallow location, and thus gave rise to the risks of a shallow reservoir. The question which the Tribunal must address is whether Niko acted as a prudent operator when (i) designing the well for the gas in this specific shallow reservoir and (ii) dealing with the kick and the blowout that followed.

⁵³⁶ Wright 2, page 20. ↩

[Page 212]

698. Finally on this issue, the Tribunal addresses, further to its communication of 14 March 2016, (i) the Respondents' submission of 5 March 2016 and the new argument it presented with respect to the definition of shallow sands, together with the new exhibit produced as R-47 and (ii) the Claimant's 16 March 2016 objections to the admissibility of this new submission, including the Claimant's references to passages in earlier submissions where the issue had been dealt with. The Tribunal noted that (i) the Respondents' new submission may contain elements relevant for the quantification of the damage; but (ii) the submission did not contain any element that would have required, with respect to the principle of liability in this first phase, any modification in the conclusion which the Tribunal has reached on the basis of the earlier argument and evidence. Consequently, (i) no further submissions were necessary during the phase on the principle of liability and (ii) the Claimant may comment on the new evidence in its submissions on quantum.

699. The Tribunal notes that the Respondents' new submission may contain elements relevant for the quantification of the damage; but this submission did not contain any element that would have required, with respect to the principle of liability in this first phase, any modification in the conclusion which the Tribunal has reached on the basis of the earlier argument and evidence. The Claimant may therefore comment on the new evidence in its submissions on quantum."

8.4.3 The design of the Chattak 2 Well and the decision on casing depth

8.4.3.1 The design as implemented and the relevant standards

700. The Chattak 2 Well design provided for casing to a depth of 305m. This was specified in the Well Proposal and implemented. For the parts of the wellbore below the casing shoe, the design relied on kick tolerance. This is uncontested.

701. The difference between the Parties concerns the question whether this design, as implemented, met the standard that Niko had to comply with.

702. With respect to casing design, the Respondents identified in their Post- Hearing Brief the following conduct from Niko as required by the “various sources of generally accepted standards of the international petroleum industry and the sources":

[Page 213]

• Gathering and using all available information and data to design a safe drilling and contingency plan;

[...]

• Calculating and considering formation pressure and fracture gradients in the well design and to maintain the appropriate hydrostatic pressure while tripping;
• Setting casing deep enough to withstand anticipated pressures from drilling and kicks;
• Using a diverter when there is a risk of shallow gas; and
• Taking the necessary precautions when planning and training for shallow gas.⁵³⁷

703. The sources identified by the Respondents for these standards were set out in a table in their Post-Hearing Brief which specified the following standards: ⁵³⁸

• “Well planning: All available information and data must be gathered and considered to make safe drilling and contingency plans", relying on API RP 59, paragraph 5.1;
• "Casing: Casing should be set deep enough that it is in rock that can withstand anticipated pressures from drilling and if a kick should occur”, relying on API RP 59, paragraph 5.2;
• “Diverter: A diverter should be used when there is a risk of shallow gas”, relying on API RP 64, paragraphs 4.3, 4.3.1 and 4.4.2 (pages 5 and 6);

704. The Respondents also argue that the generally accepted standards thus identified “are confirmed in well control training manuals, in professional writings and by the well control experts”.⁵³⁹

⁵³⁷ R-PHB, paragraph 82. ↩
⁵³⁸ R-PHB, paragraph 36. ↩
⁵³⁹ R-PHB, title at page 19. ↩

[Page 214]

705. The Tribunal will consider the information provided about the relevant standards in its examination of the decisive issues. It will consider the question of the casing depth below in Sections 8.4.3.3, 8.4.3.5 and the issue of kick tolerance in Sections 8.4.3.4, 8.4.3.9 to 8.4.3.11 . The alleged requirement of a diverter is examined in Section 8.4.3.7.

706. It will be seen when considering the standards relied upon by the Respondents that they contain some general considerations but few, if any specific requirements for casing design. In the absence of such specific requirements, the Parties' arguments about Niko's casing design are thus based to a large extent on the prudent operator standard and on the views expressed by the experts in this respect.

8.4.3.2 The positions of the Parties and their experts

707. The Respondents have asserted that “Niko did not conduct petroleum operations in a diligent, conscientious and workmanlike manner.” Their argument commences by quoting the First Enquiry Report of 7 February 2005: “Niko is responsible for the blowout at Chattak for its gross negligence in designing the casing program and inefficient operational supervision.”⁵⁴⁰ The Respondents developed this position, arguing that Niko did not properly prepare its drilling programme. They asserted that Niko had failed to gather relevant information on shallow gas and on the reservoirs into which it was expecting to drill. They stated that it was "particularly unreasonable to choose a shallow casing setting depth",⁵⁴¹ and:

... setting the casing in weak formation rock at 305 meters [was] the fatal decision that was a primary cause of the Chattak 2 blowout.⁵⁴²

with the result that:

Niko's failure to set casing so that it had sufficient depth to withstand foreseeable pressure events is a breach of the generally accepted standard on setting casing depth ...⁵⁴³

⁵⁴⁰ R-PHB, paragraph 104, quoting from Enquiry Report, Exhibit R-3, paragraph 8.2, and title III.A.2.a. ↩
⁵⁴¹ R-PHB, paragraph 109. ↩
⁵⁴² R-PHB, paragraph 94. ↩
⁵⁴³ R-PHB, paragraph 128. ↩

[Page 215]

708. At the February 2016 Hearing, the Respondents insisted that the decision on the casing depth had to be seen in the context of the circumstances of the specific well and the qualifications of the crew:

So the standard is not as Niko has put it, did the joint venture agreement specifically require Niko to set the casing in the marine shale. The answer to this question is yes in the circumstances faced by Niko but the proper question is was it diligent, conscientious and workmanlike for Niko to set casing at 305 metres ...⁵⁴⁴

709. The Claimant justified the decision of setting surface casing at 305m by the observation of gas bubbling around the Chattak 1 Well, giving rise to concerns about shallow gas pockets above the marine shale. It explained that from the existence of a nearby water well of some 300m depth, it concluded that this risk did not exist above that level and that therefore it could drill safely to that depth. It sought to avert the risk of the gas pockets below the casing by the installation of a Blowout Preventer and observing kick tolerance in the drilling operations. The reasoning was explained as follows:

The surface casing was installed at approximately 300 meters, as planned. Niko fixed the depth at 300 meters largely because of concern that the drill could encounter shallow gas pockets. Niko employees had observed gas bubbling to the surface from around the nearby Chattak 1 well, likely due to a poor casing cement seal. A water well in the vicinity had been drilled to a depth of approximately 300 meters. Niko felt that there was no material risk of encountering shallow gas before that depth. Given the possibility of shallow gas pockets after that point, it was desirable, from a safety perspective, to have surface casing in place to enable the BOP to be installed before risking intersection between the drill and a shallow gas pocket.⁵⁴⁵

710. Based on these assumptions, Mr Wright expressed the opinion that Niko's well design, and specifically the decision to set casing at ~300m, was “in accordance with the reasonable operator standard”.⁵⁴⁶ He accepted that the design decision was driven by a safety concern:

⁵⁴⁴ HT 2016.02.22, page 456; for a complete quotation see above in Section 8.4.1. ↩
⁵⁴⁵ C-CD.2, paragraph 102. ↩
⁵⁴⁶ Wright 1, page 17. ↩

[Page 216]

The safety concern was to get casing in the ground as shallow as practical to safely drill to TD (target depth) and get the BOP installed to mitigate the risk associated with a shallow blowout that could occur if a gas pocket was encountered.

8.4.3.3 The Claimant's justification for the casing depth

711. The Well Proposal of December 2004 does indeed provide for surface casing of 13 3/8 inch diameter with the casing shoe at 990 feet, corresponding to some 302m.⁵⁴⁷ The document does not contain any explanation about the choice of this depth and there is no direct evidence to explain this choice. Mr Mercier, the senior drilling manager of Niko Canada at the time and tasked with the well design,⁵⁴⁸ did not testify⁵⁴⁹ and no notes about his casing design have been produced.

712. When Dr Adams explained his views on the casing design, he was asked whether there were any documents that shed any light on the reason why 305m was chosen as the depth for the surface casing. He responded that there was nothing in Niko's Well Proposal and that he had not seen any calculations determining the depth of that casing. ⁵⁵⁰

713. The only information about the considerations leading to the choice of casing depth at some 300m is the witness statement of Mr Adolph and some explanations by Mr Hornaday at the November 2015 Hearing. The Claimant summarised its position as follows:

Niko had observed at least one water well drilled to 1000 feet (305 meters), and, as such, had comfort that there would not be any significant gas accumulations in the area around Chattak 2 down to that depth, which would therefore render it safe to drill to that depth without a BOP installed. However, Niko did not know whether any gas accumulations might exist below that depth. In relation to this concern, it is important to note that although drilling records from

⁵⁴⁷ Chattak-2 Well Proposal, Exhibit C-15, page 14. ↩
⁵⁴⁸ WS Adolph, paragraph 28. See also section 8.3.2. ↩
⁵⁴⁹ Mr Adolph testified that Mr Mercier left Niko in 2009 or 2010 (HT 2015.11.05 (Day 4), page 947. He also explained that he continued to meet Mr Mercier: “we have talked about this incident over the last ten years probably at least a couple of times a year when we meet” (HT 2015.11.06 (Day 5), page 1041). ↩
⁵⁵⁰ HT 2015.11.04 (Day 3), pages 644 – 645. ↩

[Page 217]

Chattak 1 indicated that there was no continuous seal above the marine shale, the upper sands (i.e. the sands above the marine shale) could not be expected to be entirely homogenous, and clay “stringers” (i.e. clay strips of a more limited thickness and breadth) would likely exist. Smaller accumulations or “pockets” of gas could therefore have existed in the upper sands below 305 meters, as Mr Wright noted in his report.⁵⁵¹

714. Mr Wright had no direct information about the elements that underlay Mr Mercier's decisions. Mr Wright's reference to clay “stringers” was not based on conditions at Chattak 2 or on what might have been Mr Mercier's analysis, but on what Mr Wright thought "typically, a sand like this would have". ⁵⁵²

715. In his witness statement Mr Adolph explained the following in relation to the casing depth decision at some 300m:

This was higher than the depth at which casing had been set for the old well, Chattak 1. However, I recall from conversation with Mr Mercier that a major reason for setting casing at 300 meters was that gas had been observed bubbling at the surface in the surrounding area, indicating a risk that gas might be trapped in shallow sands above the regional seal. A water well had previously been drilled in the vicinity of the Chattak 2 location to approximately 1000 feet (or 300 meters), which gave Niko some confidence that there would not be significant gas pockets above 300 meters, but left us unsure about the depth below.⁵⁵³

716. At the November 2015 Hearing Mr Adolph stated that he did not participate in the well design:

MS PASIPANODYA You did not participate in the designing of the Chattak 2 well either, did you?

MR ADOLPH: That is correct.

⁵⁵¹ C-PHB, paragraph 92. ↩
⁵⁵² HT 2015.11.05 (Day 4), page 870 in response to a question from Mr Tarnowsky. ↩
⁵⁵³ WS Adolph 1, paragraph 30. ↩

[Page 218]

MS PASIPANODYA: You tell us in your witness statement that Peter Mercier, Niko Canada's senior drilling manager designed the Chattak 2 well.

MR ADOLPH: Yes, Pete was working in Bangladesh in 2004 as our drilling manager and he did the design work and the operations work for drilling in Feni and also for moving to Chattak to start the drilling.⁵⁵⁴

717. In his witness statement Mr Hornaday referred to “bubbling gas” that he had seen at the Chattak 1 well site,⁵⁵⁵ when he visited it in 2003; but he “did not have significant involvement in the design of the Chattak wells or the plans to develop the Chattak field”. ⁵⁵⁶ He offered no explanations about the well design in his witness statement. At the November 2015 Hearing, Mr Hornaday confirmed his observations about the bubbling gas⁵⁵⁷ but stated that his involvement in the well design was “very limited”.⁵⁵⁸ He nevertheless explained that a water well 1000 feet deep determined the depth of the casing to that depth.⁵⁵⁹

718. As the questioning continued, Mr Hornaday expanded on his recollection of his discussions with Mr Mercier. He explained that, after the presentation of the Well Proposal, there was no feedback from BAPEX. The exchange at the hearing continued as follows:

THE PRESIDENT: So, in fact, it was basically Mr Mercier who decided on this drilling programme and then it was implemented.

MR HORNADAY: Yes, yes.

THE PRESIDENT: There was no critical review of the programme, was there?

MR HORNADAY: We did discuss, you know, the –

⁵⁵⁴ HT 2015.11.05 (Day 4), page 946, line 22 to page 947, line 9. ↩
⁵⁵⁵ WS Hornaday 1, paragraph 16. ↩
⁵⁵⁶ WS Hornaday 1. paragraph 13. ↩
⁵⁵⁷ HT 2015.11.06 (Day 5), pages 1110 et seq. ↩
⁵⁵⁸ HT 2015.11.06 (Day 5), page 1115. ↩
⁵⁵⁹ HT 2015.11.06 (Day 5), page 1116. ↩

[Page 219]

THE PRESIDENT: When you say "we discussed" ...?

MR HORNADAY: I did discuss the, you know, some aspects of the programme verbally with Mr Mercier before he finalised –

THE PRESIDENT: Did you discuss with him, specifically the choice he made of casing to 305 metres and kick tolerance for the rest?

MR HORNADAY: Not specifically the – you know, I am aware of the kick tolerance methodology but certainly the issue of the shallow gas and how do we handle that.

THE PRESIDENT: You discussed that with Mr Mercier.

MR HORNADAY: Yes

[...]

MR HORNADAY: I discussed the logic of the setting depth of the casing definitely. Just I was aware that the design basis for the drilling out of the shoe was on a kick tolerance methodology.

[...]

THE PRESIDENT: Anybody else with whom Mr Mercier discussed this basic option?

MR HORNADAY: Not to my knowledge, no. He was our principal and drilling person in the country.⁵⁶⁰

719. When questioned about the reaction of BAPEX to the Well Proposal, Mr Hornaday replied:

⁵⁶⁰ HT 2015.11.06 (Day 5), page 1122, line 15 to page1123, line 12, page 1124, lines 20-24, and page 1126, lines 2-6. ↩

[Page 220]

MR HORNADAY: Yes, I was not directly involved. I was in Canada at the time but, yes, as the record has shown we submitted it and invited. ⁵⁶¹

720. There is another source of information about Niko's decision on casing design which Mr Wright does not seem to have taken into consideration: Shortly after the blowout, in the course of preparing its First Enquiry Report, the Government Committee also spoke to Mr Mercier, who at that time was in Bangladesh. The report deals inter alia with the casing design, but it makes no mention of the explanation provided by Mr Adolph and confirmed at the 2015 Hearing by Mr Hornaday. Instead it provides a different explanation for the casing design and the casing depth:

The well plan for Chattak # 2 is not much different than Feni. NIKO perhaps wanted to repeat its success in Chattak without considering the geological difference in Chattak. In Chattak # 1, 13 3/8 inch casing was set at 452m. Setting of 13 3/8 inch casing at 450m plus could have saved the well from blowout under similar condition. Exact depth for setting casing will depend on the result of seismic interpretation and correlation with Chattak # 1.⁵⁶²

721. This explanation seems to be confirmed by the Well Proposal for Chattak 2. This proposal seems specific for the Chattak 2 Well, except for two pages providing details on the casing design, one for surface casing the other for production casing. These two pages have an additional title “Feni/Chattak”. Thus, the page relevant here is entitled:

Feni/Chattak

Surface Casing Design⁵⁶³

722. Considering this evidence, it cannot be excluded that, when preparing the casing design for Chattak 2, Mr Mercier used the design he had prepared previously to be used for the Feni wells and used that design for Chattak 2. Indeed, the first trace of a detailed analysis on record in these

⁵⁶¹ HT 2015.11.06 (Day 5), page 1122, lines 8-11. ↩
⁵⁶² First Enquiry Report, Exhibit R-3, paragraph 6.12. ↩
⁵⁶³ Chattak-2 Well Proposal, Exhibit C-15, page 14; the two casing design pages also have been produced as Exhibit C-82 ↩

[Page 221]

arbitrations considering the water wells and the information they might provide is contained in the 22 February 2005 comments of Mr Grace about the need of an observation well to precede the relief well drilling. ⁵⁶⁴

723. Mr Adolph and Mr Hornaday were not involved in the well design of Chattak 2 which Mr Mercier prepared in Bangladesh while they were in Canada. Mr Adolph's explanations, and those presented at the November 2015 Hearing by Mr Hornaday, were of course given no less than eleven years after the time of the casing design.

724. Be this as it may, the Tribunal observes that the explanation in Mr Adolph's witness statement, as quoted above, remained uncontested in these proceedings. The Respondents and their expert assumed, like the Claimant and Mr Wright as well as Mr Abel, that “gas bubbles” caused Mr Mercier to be concerned about pockets of gas above the marine shale, and that the depth of the water well assured him that no such risk existed above 1000 feet so that the installation of the BOP was not needed above that level but was required below. Casing thus had to be introduced at 300m so that the BOP could be installed. For the remainder of the well down to the marine shale Mr Mercier relied on protection by kick tolerance. For its analysis, the Tribunal therefore makes the same assumption.

725. Under this assumption, the decision to set surface casing for the first 300m of the wellbore appears reasonable. Apart from the controversy about the use of a diverter, this conclusion seems to be shared by the Respondents and their expert. The difference concerns the range between the casing shoe at 305m and the marine shale. The Claimant and Mr Wright are of the view that it was reasonable for Niko to rely on kick tolerance; the Respondents, Dr Adams and Mr Abel are of the view that, in the circumstances, it was not.

8.4.3.4 Reliance on kick tolerance as a reasonable solution

726. A design that relies on kick tolerance identifies (i) the risks of a kick arising and (ii) the means available for the crew to prevent that the kick turns into a blowout. The Respondents have not identified any published standards regulating this design method.

⁵⁶⁴ Attached to the revised Minutes of Meeting of the Joint Management Meeting of the JVA held on 22 February 2005, Exhibit C-31, page 10. ↩

[Page 222]

727. Dr Adams described the kick tolerance concept in the following terms:

The concept uses mud density and fracture gradients to calculate the тахітит пumber of barrels of influx that can be allowed into the wellbore without fracturing the exposed rock formation from excessive surface pressures.⁵⁶⁵

728. Mr Wright described the kick tolerance concept in the context of decisions on the depth of casing:

The setting depth for a casing string is primarily driven by the formation's fracture gradient (the pressure at which the formation will start to fracture) and the anticipated pore pressure that will be encountered in the target producing reservoirs. When the pore pressure of the formation at the bottom of the open hole being drilled reaches a value where the formation at the casing shoe may fracture if a certain volume of fluid (oil/gas/water) enters the wellbore (normally called kick tolerance), for example from a permeable sand, the next casing string is typically set before drilling deeper.⁵⁶⁶

729. No standard has been identified in these proceedings that specifically prohibits or discourages the use of kick tolerance in the design of a well like Chattak 2. The dispute rather relates to the question whether the prudent operator standard had been complied with.

730. The Parties disagree about the question whether it was reasonable for Niko to rely on kick tolerance and, if so, whether the method, correctly applied, justified the decision to set the casing shoe at 300m rather than at a lower level, i.e. at 378m as advanced by Mr Abel,⁵⁶⁷ or at the regional seal at around 485m,⁵⁶⁸ as preferred by the Respondents and Dr Adams.

731. The Claimant argues that casing design relying on kick tolerance “is common in the industry, and moreover, was acceptable according to industry standards in the circumstances facing Niko”. ⁵⁶⁹ It refers to “a very clear understanding that any well at Chattak would have to be drilled in a

⁵⁶⁵ Adams 1, page 26. ↩
⁵⁶⁶ Wright 1, page 15. ↩
⁵⁶⁷ Abel, page 28. ↩
⁵⁶⁸ See above Section 8.1. ↩
⁵⁶⁹ C-CD.7, paragraph 58. ↩

[Page 223]

cost-sensitive manner to have any prospect of economic viability”.⁵⁷⁰ It clarified that it was not its position that “economic constraints permit the taking of unacceptable risks to the safety of persons and property"; but noted "that BAPEX and Petrobangla were fully cognizant, and apparently supportive of, the need for Niko to ‘be extra careful with costs' when drilling wells in a marginal and abandoned field such as Chattak".⁵⁷¹

732. The Respondents argue that reliance on kick tolerance was not in compliance with Niko's obligations as a prudent operator:

Niko's choice to rely on kick tolerance (which put the onus on the crew to identify the kick and control it) was not diligent. It was even worse to rely on kick tolerance and take the risks Niko did, including failing to properly plan and train its crew for kick tolerance.⁵⁷²

733. Dr Adams went even further and asserted that, generally, reliance on kick tolerance in shallow gas is inappropriate; it could only be used in “deep wells":

A KT [kick tolerance] application is restricted to deep wells. The misapplication of this concept, KT, can be dangerous when misunderstood as evidenced by Chattak 2 and Chattak 2A.

As Mr. Abel pointed out, the KT concept was inappropriate in a shallow gas formation such as the Chattak Field. Because the blowout rate does not allow sufficient time to monitor pit levels, Niko and Mr. Grace made a terminal error when the concept of KT was used as the basis of well control planning for Chattak 2 and Chattak 2A. These shallow formations are prolific producers because their permeability values are greater than deep rock gas formations by a factor of 500-1000. The rate of influx is so large that it is impossible for a rig crew to respond quickly. In numerous recorded instances, the flow rate causes the mud volume in the well to flow out at the surface before the rig crew can observe indications of a problem.

⁵⁷⁰ C-CD.7, paragraph 59. ↩
⁵⁷¹ C-CD.7, paragraph 61. ↩
⁵⁷² R-PHB, paragraph 112. ↩

[Page 224]

The only reliable means to safely handle this type of event is to deploy a diverter system designed with reduced closure times.⁵⁷³

734. At the November 2015 Hearing the Claimant disagreed:

It is a common industry approach to use kick tolerance for designing wells and it was reasonable to do so in all the circumstances.⁵⁷⁴

and

It is unchallenged that kick tolerance is an often used methodology for determining casing setting depth for land wells ...⁵⁷⁵

735. Mr Wright had supported that view:

The kick tolerance design concept is often used in land development drilling (such as Chattak 2) where you have offset well data.⁵⁷⁶

736. At the February 2016 Hearing, the Claimant presented the following conclusion about the discussion on kick tolerance:

It is unchallenged that kick tolerance is an often used methodology for determining casing setting depth for land wells and that 20 barrels is not an uncommon value for kick tolerances for land wells, and that even a ten-barrel kick tolerance or less, as Mr Wright referred to, is not uncommon for land wells.⁵⁷⁷

737. In response, the Respondents clarified that kick tolerance is a standard procedure in well design. They do not accept, however, that it was appropriate to use the method in Chattak 2:

... if we look at Niko's decision to rely on kick tolerance in isolation it might not appear to be a breach of international standards and may not have been the sole clause of the blowouts. Kick tolerance is in many circumstances a standard well control procedure but kick

⁵⁷³ Adams 1, page 26. ↩
⁵⁷⁴ HT 2015.11.02 (Day 1), page 147, line 23 to page 148, line 1. ↩
⁵⁷⁵ HT 2016.02.22, page 365, lines 19-21. ↩
⁵⁷⁶ Wright 2, page 25. ↩
⁵⁷⁷ HT 2016.02.22, page 365, lines 19-25. ↩

[Page 225]

tolerance was not a valid option when Niko was drilling into a shallow reservoir and particularly when it had decided to set casing in soft formation rock at 305 metres.⁵⁷⁸

738. The Tribunal concludes that, as a matter of principle, a design relying on kick tolerance may well be an acceptable solution. The question is whether, in the circumstances of the Chattak field, it was reasonable and prudent for Niko to rely on this method. Before addressing this question, the Tribunal will consider the options that Niko had when deciding on the casing design.

8.4.3.5 The options available to Niko: lower casing

739. It has been generally accepted in these arbitrations that it would have been possible for Niko to set casing to a lower level, including the possibility of casing in the marine shale; and also accepted that, if that had been done, the kick could have been controlled and the blowout thus avoided.

740. The First Enquiry Report stated: “A casing covering major part of the sand from the cap rock overlaying the first gas sand to surface would have been the logical choice.”⁵⁷⁹

741. Mr Wright explained:

If the casing had been set deeper then they could have contained it without it broaching.

[...]

When you set surface casing you would like to set it in an impermeable formation like a shale. That is what you would like to do because even if the fracture gradient is high enough, when you have got gas flowing in your annulus to that very highly permeable sandstone where your casing is set, that gas can flow into that sandstone at very high rates – extremely high rates –

⁵⁷⁸ HT 2016.02.22, page448, line 25 to page 449, line 9. ↩
⁵⁷⁹ First Enquiry Report, Exhibit R-3, paragraph 7.1(d). ↩

[Page 226]

[...]

I would not under the circumstances, though, want to drill all the way to 485 from the surface. I would have still set my casing like they did at 305 and then set a second casing in the marine shale.⁵⁸⁰

742. Mr Wright also stated that he had been informed “by talking to the gentlemen from Niko” that, in addition to the 13 3/8" casing for the surface casing and the 7” casing for the production casing as shown in the Well Proposal, Niko had at the site casing of 9 5/8”. ⁵⁸¹ This information was not contested. It would, therefore, have been possible for Niko to add such 9 5/8" casing between the casing shoe at 305m and the marine shale.

743. The availability of this size casing finds some confirmation to which Dr Adams called attention in the course of the November 2015 Hearing: the Well Proposal contains a page entitled Drilling Fluid Proposal, including the sentence: “Start to build KCL/PHPA mud once finished with 9 5/8" casing cement job.”⁵⁸² Dr Adams pointed out that “nowhere in this casing programme does it say 9 and five-eighth inch casing” and he found this "troublesome”. He did not conclude from this mention that Niko had reserved the possibility of casing of this size.

744. The Tribunal finds confirmation for the possibility of additional casing to be set in Mr Wright's explanations at the November 2015 Hearing: he discussed this option, indicating that it was available to Niko, once it had set the casing shoe at 305m as foreseen in the Well Proposal:

... I was told that additional 9 and five-eighths casing string was available based on the conditions so that they could have run a second casing string and put it in the marine shale and covered that sand all the way back to the surface.⁵⁸³

745. At the February 2016 Hearing the Claimant was asked this:

⁵⁸⁰ HT 2015.11.04 (Day 3), pages 559, lines 12-14, 560, lines 3-11, and 562, lines 16-20. ↩
⁵⁸¹ HT 2015.11.04 (Day 3), page 565. ↩
⁵⁸² Chattak-2 Well Proposal, Exhibit C-15, page 16; also shown on Dr Adam's slide 23 (Exhibit RH-3) and discussed by him at HT 2015.11.04 (Day 3), pages 645 – 646. ↩
⁵⁸³ HT 2015.11.02 (Day 3), page 567, lines 13-18, emphasis added. ↩

[Page 227]

... there were, in fact, no pockets of shallow gas that were encountered in the drilling process down as far as the marine shale. At that point, once you get to the marine shale and you have not encountered those risks, why not stop and case down to the marine shale at that point? Would that not have reduced significantly the risk of the operation because you would not then be relying on kick tolerance and you would not have been subject to the possibility of a lateral blowout once you then penetrated the marine shale and got into the lower sands?

MR TARNOWSKY: Yes and I think the evidence on that from all of the experts is clear, that certainly if a string of casing had been set in the marine shale you would then have had ultimate safety.⁵⁸⁴

746. The Tribunal has also considered whether setting casing in the marine shale would have caused important additional costs in time and money. BAPEX argued that this would not have caused substantial additional costs and would not have required much additional time. Based on Dr Adams' explanations, BAPEX asserted:

Setting the additional casing would have cost only about USD 30,000 and required only “maximum of a day” of additional work.⁵⁸⁵

747. Mr Abel also considered the additional time and cost of lower casing and spoke of a "small increment of cost and time”.⁵⁸⁶ He discussed the factors to be considered in such calculations and confirmed: “you are really not adding but an incremental expense to go deeper [...] a small increment [...] maybe a day". ⁵⁸⁷

748. The Claimant did not argue that a lower level of casing would have been very costly:

In fact, even though there is some evidence that the cost would have been relatively small to take the time to run a second string of casing

⁵⁸⁴ HT 2016.02.22, page 367, lines 5-21. ↩
⁵⁸⁵ R-PHB, paragraph 94, referring to Dr Adam's explanations at HT 2015.11.05, pages 771 to 772. ↩
⁵⁸⁶ Abel, page 28; the quotation concerned the additional 73 meters of casing required for his proposed method based on a full column of gas. ↩
⁵⁸⁷ HT 2015.11.04 (Day 3), page 675. ↩

[Page 228]

and the casing itself was relatively small, the obligations under the agreement to be as cost conscious and effective as you can are an aspect to consider in that.⁵⁸⁸

749. While the Tribunal recognises the objective of a cost conscious and effective operation as a justified concern, the level of costs that has been identified for the additional surface casing in the marine shale appears indeed modestly incremental compared to the overall drilling costs and the gain in safety. In this context it must be borne in mind that the Chattak 2 Well Proposal provided for production casing down to 5741 feet (1750m); additional casing would thus have had to be set in any event, even though at a smaller diameter. ⁵⁸⁹

750. The Tribunal concludes that additional casing from 305m to a lower level, especially to the marine shale, was a particularly safe solution, feasible in the circumstances. The additional costs in money and time would have been small and cannot be taken as a consideration militating against this choice of a casing design.

8.4.3.6 Other design options: full column of gas

751. In the course of the proceedings, other design options were also considered. In particular, Mr Abel had stated that, according to his opinion, casing beyond 305m was necessary but the additional casing did not have to reach the marine shale at about 500m depth but only to 378m, using the approach described as “a full column of gas”. By this method kick tolerance would be increased from the level of 16.4 bbls, as calculated by Mr Abel, to what he considered a safe level.⁵⁹⁰

752. Mr Abel explained the criteria for casing design and specifically for deciding the depth to which casing must be set:

In casing design, there are two basic options for design for pressure control and they are:

• full column of gas to the surface (conservative more cost, kick can be large) or

⁵⁸⁸ HT 2016.02.22, page 368, lines 4-10. ↩
⁵⁸⁹ Chattak-2 Well Proposal, Exhibit C-15, pages 13 and 15. ↩
⁵⁹⁰ Abel, page 28. ↩

[Page 229]

• kick tolerance (less cost, but relies on crew reaction to keep kick size within limits).

In the Chattak 2, Niko chose the latter design case of kick tolerance.⁵⁹¹

753. Mr Wright agreed that the full column of gas approach was an acceptable method for determining casing depth and that it was a conservative approach. But he opined that it was not an industry standard on land. In his second report he wrote:

Mr. Abel suggests that designing surface casing for a full column of gas is a standard industry practice. I disagree to the following extent. It is a conservative design approach and, in my experience, it is not considered an industry standard on land. It is a more comтоп approach applied to offshore drilling historically, but regulators are open for operators to set their individual design criteria.⁵⁹²

754. The question considered here is not whether a particular design approach is industry standard on land or generally. The question is instead whether, in the circumstances of Chattak 2, a full column of gas approach was a viable option at reasonable costs; and whether it provided a higher degree of safety. Mr Wright does not contest that it was a viable design option and, by saying that it was a “conservative design approach”, seems to accept that it was a safer approach than that chosen by Niko.

755. The Tribunal concludes that, in addition to the option of additional casing down to the marine shale, Niko had the option of a full column of gas approach to increase safety of the well.

8.4.3.7 Other options: diverter

756. The Respondents and Dr Adams were of the opinion that Niko should have used a diverter. Dr Adams explained the order of preference for design methods to be used in a situation as that at Chattak 2:

⁵⁹¹ Abel, page 19. ↩
⁵⁹² Wright 2, page 25. ↩

[Page 230]

... the most eloquent solution to drilling this would have been to drill it with casing set somewhere in the range of what we have seen [i.e. to the marine shale].

The next best solution is to drill it with a diverter down to this depth.

Number 3 on the list of options, which is a bad solution, is to set blowout preventers at 305 metres, as was done, because the calculations are just basic history of all these cases in the case that what would happen is what in fact did happen.⁵⁹³

757. Based on the opinion of Dr Adams and relying on API RPs 59 and 64, the Respondents assert that Niko should have installed a diverter in Chattak 2. They assert: “Niko's failure to use a diverter was a further breach of the generally accepted standards outlined above.”⁵⁹⁴

758. The Respondents present as the relevant “Generally Accepted Standard":

A diverter should be used when there is a risk of shallow gas.⁵⁹⁵

759. In support of this assertion, the Respondents rely on API RPs 64 and RP 59. The former describes its purpose as follows:

This recommended practice (RP) is intended to provide accurate information that can serve as a guide for selection, installation, testing, and operation of diverter equipment systems on land and marine drilling rigs (barge, platform, bottom-supported, and floating).⁵⁹⁶

760. The Respondents rely on the following extracts of API RP 64:

Diverters are primarily used to divert flow from the rig in three situations: 1) shallow fluid and gas flows; 2) drilling with a rotating head; and, 3) drilling with a marine riser.

⁵⁹³ HT 2015.11.04 (Day 3), page 774, line 19 to page 775, line 5; Dr Adams explained that by “eloquent” he meant “appropriate” (page 776). ↩
⁵⁹⁴ R-PHB, paragraph 130. ↩
⁵⁹⁵ R-PHB, table at page 18. ↩
⁵⁹⁶ API RP 64, Exhibit R-42, 1.1. ↩

[Page 231]

Shallow gas sands are usually abnormally pressured and capable of flowing gas at high flow rates and in large volumes. [...] A diverter system should be considered when drilling below the first casing string and the anticipated formation fracture gradient is insufficient to permit circulation and/or spotting of kill weight fluid. If the well is shut-in with the blowout preventer (BOP) at this stage of drilling operations, uncontrollable flow up the outside of the casing string may result.⁵⁹⁷

761. The Respondents also quote from Section 6 of API RP 59, dealing inter alia specifically with diverters:

A diverter system is designed to provide a means of flow control during the initial stages of a drilling operation by directing well flow encountered at relatively shallow depths away from the rig and personnel. The system provides a degree of protection prior to setting the casing string upon which the blowout preventer stack and choke manifold will be installed. [...] A diverter is not designed to shut in or halt flow, but rather permits routing of the flow to a safe distance. At this stage of drilling, if the well is completely shut in uncontrolled flow around the outside of the shallow casing could result.⁵⁹⁸

762. The Claimant and Mr Wright sharply disagreed that the use of a diverter was required or even that it would have been useful and safe. The Claimant asserted: “You do not typically use diverters to drill into your target reservoir”.⁵⁹⁹ Mr Wright added emphatically that a diverter would not be used, “because how dangerous a diverter system is”.⁶⁰⁰ Mr Wright also opined that “implementing shallow gas handling procedures with diverters is not the mitigation method that should have been employed to mitigate the uncertainties concerning the Chattak 2 S1 and S2 sands, let alone an industry standard as suggested by Dr Adams”. He added that “gas handling procedures that involve gas diversion are, by their nature, an extreme safety hazard", as they divert the gas into the atmosphere.⁶⁰¹ Dr

⁵⁹⁷ R-PHB, page 18, quoting from API RP 64, Exhibit R-42, paragraphs 4.3, 4.3.1 and 4.4.2. ↩
⁵⁹⁸ R-PHB, page 18, quoting from API RP 59, Exhibit R-43, paragraph 6.1, emphasis added. ↩
⁵⁹⁹ HT 2016.02.22, page 340. ↩
⁶⁰⁰ HT 2015.11.04 (Day 3), pages 527 – 528. ↩
⁶⁰¹ Wright 2, page 7. ↩

[Page 232]

Adams confirmed that using a diverter meant saving the rig but losing the gas.⁶⁰²

763. The Tribunal notes that API RP 64 does not require the use of diverters. To the contrary, it recognises that “equally effective solutions are available. The introductory chapter points out:

These recommended practices were prepared recognizing that alternative installations, arrangements, and/or operations may be equally as effective in meeting well requirements and promoting safety of drilling personnel, public safety, integrity of the drilling equipment, protection of the environment, and efficiency of ongoing operations.⁶⁰³

764. In the main text, API RP 64 states plainly: “A diverter is not a well blowout prevention device”.⁶⁰⁴

765. As to the use of diverters, API RP 62 explains the limited use of these installations:

The diverter system is not intended to shut-in or halt well flow, rather it provides a low-pressure flow control system to direct controlled or uncontrolled wellbore fluids away from the immediate drilling area for the safety of personnel and equipment. Although there are other uses, the diverter system is primarily used for the potentially hazardous flows that can experienced prior to setting the casing string on which the BOP stack and choke manifold will be installed.⁶⁰⁵

766. In other words, the diverter might have been of use for the initial phase of drilling, until the BOP was installed on casing down to 305m or to the marine shale. This is indeed what Dr Adams' proposal implied: his solution was that Niko should have drilled down to the marine shale with no casing but a diverter. Niko would then have set casing and replaced the diverter by a BOP.⁶⁰⁶ Any pockets of gas that would have been encountered during

⁶⁰² HT 2015.11.04 (Day 3), pages 677 – 678. ↩
⁶⁰³ API RP 64, Exhibit R-42, paragraph 1.5. ↩
⁶⁰⁴ API RP 64, Exhibit R-42, Section A.2, page 37, paragraph 7. ↩
⁶⁰⁵ API RP 64, Exhibit R-42, paragraph 4.1. ↩
⁶⁰⁶ Exhibit RH-3, slides 30 and 31, HT 2015.11.04 (Day 3), page 682. ↩

[Page 233]

that part of the drilling could have been released into the air without damage to the well.

767. The use of a diverter would thus have been a solution for the pockets of gas above the marine shale which, according to the Claimant, were the reason for the decision to set surface casing at 305m and install the BOP at that level. But no such pockets of gas were encountered by Niko when drilling Chattak 2. Once the marine shale would have been reached, Dr Adams' solution required casing and also a BOP, as discussed above.

768. The Tribunal concludes that for the circumstances under which the blowout occurred, the use of a diverter is not a recommended solution in the international petroleum industry. The risk of shallow gas above the marine shale, against which it might have been a protection, did not materialise. For the risk of the gas in the shallow reservoir below the marine shale, casing into the marine shale and a BOP would have been preferable.

769. In these circumstances, the Tribunal does not consider Niko's failure to use a diverter to have conflicted with the prudent operator standard.

8.4.3.8 Conclusion on other options

770. The Tribunal need not give further consideration to other well design options discussed in these arbitrations. For the purpose of the present examination it is sufficient for the Tribunal to conclude that Niko had at least one, if not two other viable design options which would have provided a safe operation and that the implementation of these options would have required only marginal additional costs and time.

771. The Tribunal is aware, however, that this conclusion cannot be the end of its analysis. While it is important to note that the design chosen by Niko was not a necessity in the circumstances and that Niko had the choice of another design providing in the eyes of the Claimant “ultimate safety", the Tribunal's mandate is not to determine the most suitable or the safest design for the Chattak 2 Well. Rather, the Tribunal must determine whether Niko's operations leading to the first blowout, and here specifically the design chosen, violated its obligations under the JVA and otherwise. As the Claimant correctly puts it when responding to the Tribunal's question concerning the availability of setting the casing in the marine shale:

[Page 234]

...we submit that the question for the Tribunals is was Niko required to do that by all of the circumstances and by the standard of conduct under the JVA?⁶⁰⁷

and

Where the dispute lies is whether [the kick tolerance] approach was unreasonable, having regard to any generally accepted international industry standards, applied to the circumstances of Chattak.⁶⁰⁸

772. The Tribunal, therefore, must examine whether, in the circumstances, Niko's reliance on kick tolerance complied with the standard of a prudent operator conduct required by the JVA.

8.4.3.9 The absence of information on kick tolerance in the well design

773. The Respondents assert: “Niko's kick tolerance plan was substandard and inadequate ...”⁶⁰⁹

774. The Claimant objects and argues that “Niko's ‘kick tolerance' approach and values were reasonable”.⁶¹⁰ It asserts that:

Niko's casing design, including the proposed setting depth of approximately 300 meters, was expected to produce a kick tolerance of over 20 bbls (barrels) at the top of Sands 1 and 2.⁶¹¹

775. The value of this “expected” kick tolerance of “over 20 bbls” was not indicated in the Well Proposal. This proposal does not identify any kick tolerance value used for the design. Neither this proposal nor any other evidence shows what kick tolerance the designer had determined. There is not even evidence that the designer, Mr Mercier, calculated the kick tolerance.

⁶⁰⁷ HT 2016.02.22, page 367, line 25 to page 368, line 3. ↩
⁶⁰⁸ C-PHB, paragraph 103. ↩
⁶⁰⁹ R-PHB, paragraph 139. ↩
⁶¹⁰ C-PHB, paragraph 106. ↩
⁶¹¹ C-PHB, paragraph 104. ↩

[Page 235]

776. The Claimant's assertion of a “kick tolerance of over 20 bbls" is derived from assumptions made by Mr Wright in his calculations, as described below; Mr Wright clarified:

I did not know what Mr Mercier did. I did not find any specific records whether Mr Mercier – how he made his determination on kick tolerance. I know he had the software to do it because I saw some casing design spreadsheet printouts that showed the depths that you could safely drill with 11.5 pounds per gallon leak-off test at 305 metres. So he had that software available to him in his casing design.

I am assuming as a reasonable drilling engineer that he would have made those calculations himself. Whether he would have put those in his drilling report, if there is nobody telling him that he needed to put them in there he may not decide to put them in there.

[...]

THE PRESIDENT: So you, Mr Wright, you will assume he made the calculation but we cannot find the records for it.

MR WRIGHT: That is my assumption. The 20 barrels is the value that I produced based on the estimated fracture gradient and the estimated pressures; that is correct.⁶¹²

777. The Tribunal finds this situation preoccupying: the Well Proposal was intended for Niko's Joint Venture partner and should have allowed BAPEX to form an opinion about the soundness of the design. One must ask how, on the basis of a document that did not explain that the design relied on kick tolerance and did not identify the assumed value of the kick tolerance, the Joint Venture partner was expected to understand and evaluate the design.

778. The Tribunal also notes that there is no evidence other than the Well Proposal about the information provided by Niko to the drilling crew to guide them in their operations. The kick tolerance value is important not

⁶¹² HT 2015.11.05 (Day 4), page 866, lines 2-17 and page 867, lines 5-11. ↩

[Page 236]

only for the designer but also and especially for the drilling crew. As Mr Wright pointed out it is “the main risk factor":

The main risk factor the operator must assess when deciding on surface casing setting depth, if kick tolerance is going to be utilized, is whether the well will broach to the surface if the kick tolerance is exceeded and an underground blowout is initiated below the casing shoe.⁶¹³

779. Consequently, the crew must avoid that any kick exceeds the level of the designed kick tolerance. Obviously, the drilling crew must be informed about that value. The Tribunal assumes, therefore, that information about the kick tolerance and its level is an elementary precaution a prudent operator would provide to the drilling crew.

780. The Tribunal has noted Mr Wright's explanations concerning the manner in which, in his experience, information is passed by the operators to the drilling crew, making “a one-page summary of the whole drilling plan" and reducing various aspects of the plan each “on a large sheet of paper":

A lot of the small operators do that, rather than have all of this data about how they came to arrive at this, they just have the paper that says this is how we are going to do it.⁶¹⁴

781. There is no indication that this procedure was adopted by Niko for Chattak 2. The only evidence available is the Well Proposal and this document does not assist the drilling crew by identifying the kick tolerance that they had to maintain throughout the drilling operation and in particular during the wiper trip. Mr Abel pointed out:

Abel could find no evidence that Niko put a plan in place to ensure that the kick tolerance criteria was met other than relying on the rig contractor to use the trip tank to catch the kick before it exceeded the design allowable. Niko failed to evaluate their own data and estimates for the low temperature and pressure effects at shallow

⁶¹³ Wright 2, page 25. ↩
⁶¹⁴ HT 2015.11.03 (Day 2), pages 403-404. ↩

[Page 237]

depths when designing the mud program (overbalance was not sufficient to allow tripping out to be a safe act).⁶¹⁵

782. This information is not included in the design documents and there is no indication about any other method by which this information was made available to the drilling crew. The absence of the information would have created a serious difficulty for the well control procedures. Indeed, as part of the list of deficiencies of the Well Proposal which he presented at the November 2015 Hearing,⁶¹⁶ Dr Adams pointed out that the Well Proposal did not contain well control procedures.⁶¹⁷

783. Mr Wright recognised the absence of the relevant information; but he presented such absence as common practice in situations as those which he saw prevailing in Chattak 2:

In Niko's drilling plan for Chattak 2 there was not a specified mud density range documented for drilling the 8-1/2” hole section. It specifically states: “as hole conditions dictate”. This is a comтоп practice in drilling, particularly when there is little information available upon which to specifically program the mud weights. It calls for the drilling supervisor and responsible members of the rig crew (driller, rig superintendent, mud man, mud loggers, etc.) to monitor the well conditions (including gas monitoring and losses) and assess whether increasing or decreasing the mud weight is warranted. Niko appears to have made a conscious decision to do this to make sure the crew was alert to hole conditions.⁶¹⁸

784. For Mr Wright this was an option available to a prudent operator and Niko deliberately chose this option:

As a prudent operator they have the option to decide how they want to handle that operational uncertainty based on their experience and the circumstances. They made the decision to install a BOP and drill cautiously through the S1 and S2 sands while monitoring gas content

⁶¹⁵ Abel, page 59. ↩
⁶¹⁶ HT 2015.11.04 (Day 3), page 620 and Exhibit RH 3, slied 15. ↩
⁶¹⁷ HT 2015.11.04 (Day 3), page 620. ↩
⁶¹⁸ Wright 2, page 24. ↩

[Page 238]

to determine the mud density required for control which is coттоп industry practice in development drilling.⁶¹⁹

785. The Tribunal recognises the possibility that a competent and experienced designer of a well like Chattak 2 may rely to some extent on judgment, especially where the scope of variations in a factor of the calculations is limited and thus produces only a limited range of uncertainty. As Mr Abel explained: “People will know the range of those numbers without specific data".⁶²⁰

786. The Tribunal considers that in the present case, the team for design and drilling had already developed the wells in the Feni field and was moving to another field in Bangladesh. Mr Mercier, the well designer, was in Bangladesh at the time of the drilling of Chattak 2 and, as the Daily Drilling Reports show, he received these reports and transmitted them to BAPEX.⁶²¹ It can be presumed that he was in regular contact at least with the Drilling Superintendent.

787. In such a context, the information in the well design documentation may be less complete than what one might expect otherwise. Since the project was a marginal/abandoned field and the JVA had highlighted the need for cost efficient work, relying on judgment where detailed calculations would bring only limited additional certainty and saving on documentation are not necessarily signs of an imprudent operator.

788. The absence of any design information about the kick tolerance, nevertheless, is preoccupying. The well design did not protect against the risk that the kick tolerance would be exceeded; consequently, any error of the drilling team causing the kick tolerance to be exceeded would be fatal.

8.4.3.10 Calculating the kick tolerance and the experts' attempts to determine that value in Niko's design

789. Since the kick tolerance of the Chattak 2 design was not specified by the designer in the available documentation, the experts had to develop it by reference to the available data. Mr Wright explained that the critical

⁶¹⁹ Wright 2, page 7. ↩
⁶²⁰ HT 2015.11.05 (Day 4), page 864. ↩
⁶²¹ See Exhibit C-20. ↩

[Page 239]

information for this calculation includes formation pressure, also referred to a pore pressure,⁶²² and fracture pressure:

The formation pressure obviously is the pressure that you are going to need to overcome with your drilling fluid and the fracture pressures are going to determine where you set your casings and what sort of kick tolerance that you have and what sort of mud densities that you can going to have to drill between section to section.⁶²³

790. Mr Wright also emphasized the complexity of the design process using kick tolerance:

This is a very complicated phenomenon and depends on many geological and blowout related factors with many uncertainties. There is not an industry standard that can guide an operator on this determination. Local knowledge and experience can be very helpful in making these assessments.⁶²⁴

791. The Tribunal concludes that well design using kick tolerance requires particular qualifications of the well designer and drilling team. Due to the number of variables to be considered and the importance of information necessary for the design, it is a risky process if not all this information is readily available.

792. As the kick tolerance value was not indicated in the Well Proposal, Mr Wright had to extrapolate it from other data in the Well Proposal. He calculated the kick tolerance at “over 20 bbls for drilling Sands 1 & 2 and over 10 bbls for Sands 7 & 8".⁶²⁵

793. For his calculations, Mr Wright relied on a table showing values “used by Niko in their casing design spreadsheet”.⁶²⁶ The table is contained in a document produced as Exhibit C-82. This document consists of three pages; the first two pages reproduce the “Feni/Chattak Surface Casing Design" and the “Feni/Chattak Casing Design" for production casing,

⁶²² Mr Wright at HT 2015.11.04 (Day 3), page 719. ↩
⁶²³ HT 2015.11.04 (Day 3), page 719, lines 16-23 . ↩
⁶²⁴ Wright 2, pages 25 – 26. ↩
⁶²⁵ Wright 1, page 7. ↩
⁶²⁶ Wright 1, page 15, Table 3-2. ↩

[Page 240]

respectively, as they were included in the Chattak 2 Well Proposal which Niko had submitted to BAPEX with its letter of 14 December 2004.⁶²⁷ The third page is included only in Exhibit C-82. It is identified by Mr Wright as "Chattak 2 Casing Design.xls"; no other explanation is provided about the origin of this exhibit and its third page.

794. The table on which Mr Wright relies contains an entry for “volume of influx 10bbls, 1.59 m³”. On that basis Mr Wright calculated that Niko's design provided for 21.6 bbl kick tolerance. He explained his reasoning as follows:

The volume used by Niko in their casing design spreadsheet was a 10 bbls kick tolerance at a depth of 1743m TVD (approximate planned TVD of the Chattak 2 well)...

[...]

This is the kick tolerance when at the target depth of the well. This produces a different kick tolerance when drilling through Sands 1 & 2 (sand top of 560m TVD) where the influx occurred that lead to the blowout on Chattak 2. At 560m TVD the Niko design provides for a higher volume of approximately 21.6 bbls using the same assumptions and a 9.1 ppg mud density (used when drilling that section), see Table 3.3. This data was input into and the results obtained using a typical 90m BHA length from the Niko Excel spreadsheet entitled “Chattak 2 Casing Design.” (Exhibit C-82).⁶²⁸

795. Mr Wright also “plotted the kick tolerance volume for the 113 BHA actually used in the Chattak 2 well when it was drilled and it gives 20.4 bbls with an influx height of 377m TVD”.⁶²⁹

796. At the November 2015 Hearing Mr Wright explained that a “kick tolerance approach, depending on the depth of the reservoir and the thickness of the gas-water-contact will give you a kick tolerance of somewhere between 15 and 20 barrels".⁶³⁰

⁶²⁷ Chattak-2 Well Proposal, Exhibit C-15, pages 13 and 14. See above, paragraph 593. ↩
⁶²⁸ Wright 1, page 15. ↩
⁶²⁹ Wright 1, page 15 and Figure 3.3 at page 16. ↩
⁶³⁰ HT 2015.11.03 (Day 2), page 416. ↩

[Page 241]

797. Mr Abel also attempted to calculate the kick tolerance. For the “deeper zones of the 7, 8 Sand” he calculated “an overbalance of 215 psi and a static kick tolerance of 39 bbls”. He then explained by reference to Figure 4.3 of his report that “at the 560m depth, there is only 18.6 psi over balance and a 16.4 bbl kick tolerance" which he considered a “small over balance and kick tolerance".⁶³¹

798. The Claimant criticised Mr Abel's calculation, stating that he “fails to disclose the full scope of the assumptions underlying [his] analyses and conclusions that there was only an 18.6 psi overbalance and a 16.4 bbl kick tolerance".⁶³²

799. At the November 2015 Hearing, Mr Abel was questioned about his calculations and explained that, in the absence of other information, he "back calculated the gas-water contact”, relying on information gained by the drilling, as will be further discussed in the following Section concerning the assumptions about formation pressure.⁶³³ Later at that hearing, he explained his Figure 4.3, considering the fracture gradient and the kick size. The full scope of assumptions in this part of the calculation remained, however, unclear to the Tribunal. Mr Abel emphasised, however, the extent to which such calculations remain based on “judgment” in coming to a “reasonable interpretation of this data”.⁶³⁴

800. Since Mr Abel had to use estimates for a number of values for his calculations, and since there are doubts whether some of the values used had been available at the time of the well design, the Tribunal does not rely on the value calculated by Mr Abel.

801. In order to gain an understanding about the reliability of Mr Wright's calculation of the kick tolerance in Niko's design, the Tribunal had to examine the assumptions in these calculations.

⁶³¹ Abel, pages 20 and 22. ↩
⁶³² Niko's Comments on the Tribunals Experts' Reports Concerning the Compensation Declaration, 31 August 2015 (C-CD.3), paragraph 53(c). ↩
⁶³³ HT 2015.11.05 (Day 4), pages 804 et seq., 822 and 823. ↩
⁶³⁴ HT 2015.11.05 (Day 4), pages 850 et seq., 854, 855. ↩

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8.4.3.11 The assumptions made in the kick tolerance calculations (formation pressure and fracture pressure)

802. As explained by Mr Wright in the quotation above, critical factors for the calculation of the kick tolerance of a well are the formation pressure and the fracture pressure.

803. Concerning the formation pressure, Niko's Well Proposal submitted to BAPEX indicates in the Reserve Estimate for Sands 1 and 2 an estimate of 0.433 psi. The Claimant explained that this was the value used by Niko for the formation pressure.⁶³⁵

804. Dr Adams asserted that the “API documents contain the only available and proper method for determining formation pressure in shallow gas formation. Niko did not use these procedures. Rather Niko made erroneous assumptions as to the formation pressure,”⁶³⁶ in particular with respect to the gas-water-contact, an essential element for the calculation of the formation pressure.

805. Dr Adams quotes from API RP 64, describing it as “the calculation procedure to determine the amount of abnormal pressure at the top of a shallow gas zone”:

Estimated pressure at the top of the shallow gas zone is equal to the aquifer pressure at the gas-water contact minus the hydrostatic pressure of the gas column.⁶³⁷

806. Dr Adams concludes from this quotation:

This calculation procedure from the API makes it obvious that identification of the GWC is a necessary component for pressure determination. The information available for review from Chattak 2 and Chattak 2A does not appear to have identified the GWC contact. Nor did Niko seem to understand the importance of the determination of the GWC. [...] The Chattak 1 noted the GWC at 1,281 m (Figure 3). The GWC for Oxy's [Moulavi Bazar] was 855 m (Figure 4). Mr. Wright's Expert Report and the plans for Chattak 2 and Chattak 2A did not