A setback today for Anadarko Petroleum (APC) in its efforts to get out from under the costs of the Deepwater Horizon disaster. The company is a 25% partner with majority stakeholder BP (BP) and minority partner Mitsui (10%) in the Macondo well that continues to spew oil into the waters of the Gulf of Mexico.
Anadarko will be on the hook for a share of the costs proportionate to its ownership in the project—unless a court finds BP guilty of gross negligence in the design and/or operation of the well. With BP putting $20 billion into escrow to cover claims, the negligence/no negligence question is of intense interest to the $18 billion (market capitalization) Anadarko and its investors.
The distribution of costs will also have a huge effect on which companies can afford to keep exploring in the Gulf. If Anadarko winds up picking up its 25% share of the costs, it will deter smaller oil companies from operating in the region. And that will mean that the globe’s biggest oil companies will be able to buy assets in the Gulf at very reasonable prices. (For more on how the Deepwater Horizon disaster will reshuffle oil assets in the Gulf see my post https://jubakpicks.com/2010/06/24/oil-company-buyers-and-sellers-in-the-deepwater-gulf-of-mexico-after-bp/ )
The task of winning a finding of gross negligence against BP got a little harder today, June 30, when both BP and Anadarko confirmed to the Financial Times that Anadarko was aware of the design choices that contributed so much to the disaster. Those design choices include the use of a long string lining on the well, a cheaper method for lining a well that provides less protection against exactly the kind of gas leaks that, according to preliminary reports, played a role in the explosion of the well, and the use of just six centralizers, devices that stabilize a well before it is cemented.
BP told the Financial Times that it provided each of its co-owners with documents on the well’s design and on any changes in the design. In addition BP told the Financial Times that it engaged in periodic communications with personnel from its partners on well design and well-control events during drilling.
If BP’s representations on consultation with its partners over the well’s design hold up, they will remove one line of attack for Anadarko in any suit to prove gross negligence. Anadarko won’t be able to argue—and use design documents to prove–that BP was negligent in the design of the well. (Well, it won’t be able to argue that without accepting its own responsibility, anyway.)
That doesn’t mean that Anadarko doesn’t have any legal arguments left. The company’s stance is that the design was within industry standards—if it had been executed correctly by BP.
That will leave Anadarko to prove that BP’s execution of the design, rather than the design itself, constituted gross negligence. That’s harder than simply pointing to documents that show design flaws as a result of an attempt to save a buck. (The long string design, for example, cost $7 million to $10 million less than a more secure multiple layer design.) Anadarko will have to delve into very specific details of how systems were built, installed, and managed that will require hours of depositions of BP managers and workers.
The lawyers will be happy, anyway.
“The distribution of costs will also have a huge effect on which companies can afford to keep exploring in the Gulf.” J.J. above.
Once the full costs are know on this disaster, the risk of ever doing it again will be calculable. Until the price of oil becomes many multiples of the current price, I can’t believe any company, large or small, will be willing to drill another deep water well, or for that matter any offshore well. The risk-adjusted cost/benefit ratio will be much too high to ever justify.
I don’t know how much oil the Saudi’s actually have left — they report higher reserves now than were reported back 60 years ago when Aramco was nationalized (that was the last time estimates didn’t have Saudi political ramifications), which seems impossible to me. New technologies and better measuring capability cant offset 60 years of being the primary producer in the world. I think oil in the surprisingly near future will become too expensive to use as a fuel. Other uses such as lubrication, plastics manufacture, etc. will out compete usage as fuel.
Me? I’m looking for a nice used bicycle. I don’t know how the current grid and generating capacity will ever keep up with the huge number of electric cars we’re likely to see in the next 5 years or so. Obviously we’ll all need one of them before too long, but I’m willing to wait awhile for that — don’t really want to climb out on the bleeding edge of that new technology.
BTW, I read BP is drilling a “relief well” which is going to finish some time in July or Aug. Hope it will work.
But the problem about BP and all others involved is not when the gusher will stop. The problem is the seemly unlimited liability! Did you read the report that turtle sued BP already? Besides people and business, there are also turtles, pelicans, fish! They all are going to sue. This will impact oil price down the road very negatively.
Run26.2:
It works only if the oil never reach shore. If it only stays in the ocean, marine biology may dissolve it. But that is not realistic. Oil will be washed to shore. Once it reaches shore and get into the sand or something, how is the “nature” going to “dissolve” it? Yes, eventually it may, but how many decades?
The main reason that I (so many other Americans) am not happy about the RESPONSE is that the government could have organized a massive efforts to keep the oil from reaching shore and at the same time suck it up as much as possible.
The oil was in relatively small area at earlier time and it would be much easier to do it if we had take it seriously early on. Now we know we did not use all the capacity we have and we refused foreign help offered. Now the oil is everywhere reaching to Atlantic. Needless to say it will touch every shoreline on its way.
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yx… since oil is natural, it does make some sense. I can see the harshness of the chemicals or secondary impacts of the firing of the slick as being worse. I would think that efforts to protect the shore via booms should be made. I also recall reading or hearing about birds with oil and they are better off in the long run to let them be, whether oil slicked or not.
I’m just wondering when we are going to take over the spill and detonate a small nuclear device and close the gusher.
porky,
the press has widely reported that the terms of the BP/APC venture require APC to share in the liability costs unless it is proven that BP was grossly negligent or reckless. I believe that is the source of Jim’s second paragraph above.
It looks to me that the DOJ’s letter has practically put a lien on all these companies! These companies can not sell their assets before DOJ says so. Another game changer in addition to the cap being lifted.
Run26.2
I saw that report this morning, but not sure it’s better idea. But I do agree with yo that it is a gusher for lawyers!
Doing nothing may have been the best option (for the environment): http://www.reuters.com/article/idUSTRE65R5RC20100628
What does the Contract Say?
Until sombody knows what was spelled out in the contract, we do not know the indemnity and defense provisiions between BP and APC. Given the majority stake by BP, they may be on the hook for the minority shareholders indemnity, fees and costs. So far, I have not seen this issue addressed.
Just a thought
*Make that on-shore drilling
Jim or others,
How about NBR for a play on drilling?
Yeah, tha Alex- what a guy! Changed his mind again, looks like he prefers Mejico after all. But there seems to be some winds and waves and tides to the north- and east. All oily.
Stories an MarketWatch and MSN.
cjxland
I just looked at the weather, and Tornados are forming in Brownsville, and landfall is tageted south of Brownsville late tonite.
What ya talkin about?
A Gusher for Lawyers
“Already, lawsuits are pouring into courthouses almost as fast as tar balls are washing up onto beaches. More than 250 have been filed so far, and many seek class-action status.”
http://www.reuters.com/article/idUSTRE65T2MZ20100630
This and when a storm comes along and washes all that oil and residue miles and miles onshore = bankruptcy. I would not touch BP with a 10′ pole. Oh, and the CEO got the dreaded “vote of confidence” yesterday from the Board. Dead man walking. He will be gone once his service as Company scapegoat has been completed. He’ll have to dry his eyes with his huge pile of pounds.
Jim,
What would be the strategy or your recommendation to play the American or the Canadian markets for the rest of the year for someone who’s not ready or to chicken to go on the emerging markets for which, I guess, you will come up with recommendations pretty soon. Thanks
Jim, your conclusion is only as correct as the premise that the well’s design was so dangerous as to constitute gross negligence. That’s never been APC’s contention and the design of the well has been known to everyone with a stake- the parties and the regulators, since before the drilling started. APC is not partnering up and being exposed to untold liabilities without at least knowing the design of the well.
BP may ultimately be found not liable for gross negligence, but it won’t be because of the well’s design. As you note, the issue will be how BP operated the process of implementing the design. As the manager, it had the right and the duty to decide operational issues.
YX made a pretty good point the other day about all of the BP workers taking the fifth and generally clamming up following the incident. That may have been good thinking then, but if it continues it is probably not going to help BP’s cause when they’re trying to convince 12 taxpayers that they didn’t act recklessly… “I did nothing wrong, but I can’t tell you what I did.” And the RIG workers that testified before congress or which spilled the beans on 60 minutes pulled no punches in explaining BP’s repeated decisions not to pull back in the face of mounting evidence of problems, because the project was behind schedule and over budget.
I’ll continue to nibble on Rig and avoid BP.
Without even asking permission, Alex has upgraded himself into a hurricane, and changed his direction to straight at the US Gulf coast.
Murphy warned us about Mother Nature…]
I think everyones’ problems from this disaster are just about to go parabolic, or worse. Yep- that bad publicity may go on for awhile longer. Something tells me that the $$20 Billion sinking fund for cleanup is already sunk- probably BP, too. If we didn’t need that oil so badly, I’d say it’s bye-bye GoM exploration and production, forever. I’m looking for at least some serious regulation- maybe after the next “moratorium”, and I betcha sizable disaster-cleanup bonds- up front- will be a part of it.
I was thinking to buy XOM at some point, but the buy out rumors made me think twice. Who wants to get involve in this mess? It seems to me this hole has no bottom! Exxon itself has not said anything, but some “experts” are all hoping or wishing.
engine44:
I am really sorry to inform you that RIG is on AG Eric Holder’s list. He and DOJ have asked all companies involved in the spill to inform DOJ before depleting assets! Looks to me they are all on the hook.
Jim –
I noticed on your “Jims watch list” page you have a bit of a formatting problem, all of the stories are off by a few lines (If you go to that page and take a look at it, that may explain what I mean better) I don’t know if your web master is using “book marks” or not, but if he is, it looks as though they are slightly out of whack…
Each of the descriptions begins its paragraph about three sentences above where it should… (Easier for you to take a look, you will see what I mean instantly…)
Jim, Thanks for the update. I agree that cvx could ultimately benefit from BP and APC’ s troubles and be able to pick up some Gulf Assets at good prices. Hopefully cvx will also be more cautious and not cut corners after seeing what a disaster BP has on their hands. I added more cvx to my portfolio yesterday on the big drop and bought at 68.03. Cvx also pays a dividend of about 4%, affording me considerable patience with the stock unless something bad happens to them like happened to BP. In that case, I am outta there at the first hint of big trouble.
I am sure that the bad publicity for off-shore drilling will go on for awhile. New regulations ect..
I am sticking to companies that have land operations like ECA/CVE.
I’m happy that RIG wasn’t mentioned in the above discussion.