It's BP vs. Transocean in a Colossal Fight Over Liability for the Gulf Oil Spill
BP is refusing to shield rig contractor Transocean from rapidly rising costs associated with the massive oil spill in the Gulf of Mexico. But BP might well come up empty here: Unless it can prove gross negligence, Transocean's liability exposure could be limited to the damage caused by... diesel fluid leaking from its crippled drilling rig.
Transocean (RIG), the world's largest offshore drilling contractor, warned in its quarterly earnings filing that BP had reservations and would likely seek to avoid its contractual responsibilities, including protection from financial penalties and liabilities resulting from the Macondo well disaster in the Gulf:
In particular, the operator, in response to our request for indemnification, has generally reserved all of its rights and stated that it could not at this time conclude that it is obligated to indemnify us. In doing so, the operator has asserted that the facts are not sufficiently developed to determine who is responsible and has cited a variety of possible legal theories based upon the contract and facts still to be developed.
BP's conviction that it doesn't have to honor terms of the Deepwater Horizon drilling contract are motivated by the least noble of all great actions -- greed:Prior to the capping of the well on July 15, a federal task force estimated up to 173 million gallons escaped from the well into Gulf waters, less captured or contained crude. Under the Clean Water Act, BP could be fined $4.5 billion, or as much as $17.6 billion (if found guilty of committing gross negligence).Net commercially insured coverage for spill-related liabilities is between $4 billion and $6 billion, only a fraction of the projected $35 billion to $37 billion in total economic loss resulting from the spill, according to estimates provided by the reinsurance brokerage arm of global consultancy firm Towers Watson (TW).
Furthermore, powerful thermal updrafts -- the more than 300 lawsuits and hundreds of plaintiffs, from laid-off rig workers, unhappy shareholders and beach-front property owners -- all egged on by Web-driven legal advertisements promising billions in reparations, will ultimately rocket BP's liability exposure into the stratosphere: does vulnerability of potential jury awards in the aggregate totaling $60 billion to $70 billion seem so far-fetched?
By attempting to abrogate its contractual obligations with Transocean, BP is, in my view, seeking to siphon off some of the cash-rich contractor's hoard of $2.9 billion, and its $1.33 billion in additional liability insurance.
Investment banker Morgan Stanley (MS), however, echoes the consensus of most Wall Street analysts and maritime legal experts, who counter that Transocean's first line of defense against possible default by BP is found in section 23.2 of the indemnification agreement signed by BP as part of the Deepwater Horizon Drilling Contract:
IN THE EVENT ANY WELL BEING DRILLED HEREUNDER SHALL BLOWOUT, CRATER OR CONTROL BE LOST FROM ANY CAUSE, COMPANY SHALL BEAR THE ENTIRE COST AND EXPENSE OF KILLING THE WELL OR OF OTHERWISE BRINGING THE WELL UNDER CONTROL AND SHALL PROTECT, RELEASE, DEFEND, INDEMNIFY, AND HOLD HARMLESS CONTRACTOR FROM AND AGAINST ALL CLAIMS, SUITS, DEMANDS, AND CAUSES OF ACTION FOR COSTS ACTUALLY INCURRED IN CONTROLLING THE WELL.Transocean also has precedent on its side; rarely does maritime/drilling jurisprudence contradict "contract sanctity" -- in this case, contractual indemnification.
On its second-quarter 2010 earnings call, chief executive Steven Newman told analysts there was no evidence of any fluids leaking from its battered Deepwater rig, which sits on the ocean floor in about 5,000 feet of water. Additionally, Newman diplomatically articulated Transocean's position:
We believe we are the responsible party only for the discharges of fluids emanating from the drilling rig on or above the surface of the water. Therefore, we believe we are not responsible for the discharged hydrocarbons from the Macondo well.Investigators are hoping to begin salvage operations next month, assuming the Macondo well is stable and has been permanently sealed. The government is hoping to retrieve the blowout preventer -- evidence viewed vital to BP's hopes of proving "gross negligence" on the part of Transocean:
BP insists the rig owner was responsible for the operation and maintenance of the BOP -- which allegedly failed to stop the natural gas surge that led to the explosion and sinking of the rig.Unfortunately for BP, in the months following the wellhead blowout, congressional testimony has brought to light that BP's Macondo well operations were running about five weeks behind schedule. At a rig rental rate of $500,000 per day, BP management running day-to-day operations were feeling the pressure of cost overruns. Consequently, management ignored crew safety concerns and chose riskier procedures meant to save time and money: For example, an order directing the rig crew to replace heavier drilling mud (an essential material used in plugging the wellhead) with less expensive, lighter seawater.
After all is said and done, a lot more will be said than done. ~ UnknownMorgan Stanley (MS) told its clients in a recent research note that, at present, the possibility of evidence suggesting gross negligence on Transocean's part "appears to be low risk."
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