Update on Anadarko liability in the BP Gulf Oil Spill (read part I of the Anadarko liability thread here). Things are speeding up significantly now that the full scope of the spill is being exposed. As the size increases, so too does the potential for liabilities so high that they could break most smaller companies.

Already hitting the media now Bloomberg, Anadarko Says BP Should Pay After Being Reckless :

June 19 (Bloomberg) — Anadarko Petroleum Corp., the Texas oil company that owns 25 percent of the damaged well pouring crude into the Gulf of Mexico, said BP Plc, the project’s operator, should pay the costs from the spill because it acted recklessly and unsafely at the drilling site.

BP didn’t monitor or react to warning signs as the Macondo well was drilled, Chief Executive Officer Jim Hackett said yesterday in a statement. BP is responsible for damages under such conditions, Anadarko said.

“BP’s behavior and actions likely represent gross negligence or willful misconduct and thus affect the obligations of the parties under the operating agreement,” Hackett said in the statement.

This discussion re Anadarko just occurred on theOilDrum.com’s daily discussion thread, and it’s well worth reading if you want to get further understanding of the legal games that are about to get started in earnest. The comments also explain the significance of Anaradko’s public statement if you’re not clear on what’s actually going on. (Read only subthread).

ROCKMAN on June 19, 2010 – 1:15pm Permalink | Subthread | Comments top

FOR ALL

Given the recent headlines re: Anadarko a quick primer on offshore drilling partnerships. Anadarko owns 25% of the well with a Japanese company owning 10%. BP owns the balance. BP’s partners may have been in the deal from the original lease sale or bought in later. Between the lease bonus and seismic/overhead costs the partnership could have been $50 -$100 million in the red before the first well was spudded.

THE JOA
Such drilling partnerships are governed by a very sophisticated and court tested contract: the joint operating agreement. These can be well over 100 pages long with enough detailed legalize to choke a football stadium full of attorneys. Covers virtually all possible scenarios of what might happen while drilling a well. Obligations, authorities, mandates, restrictions, etc. More later on one of THE critical aspects as to who pays for the accident.

THE AFE
When the operator (in this case BP) proposes to drill a well they prepare a rather detailed cost estimate for the project. This Authorization For Expenditure is another legal document like the JOA. The partners can sign the AFE or not. Don’t sign it and the JOA covers very specific penalties for not doing so. The AFE process follows hundreds of hours of joint meetings between the partners to work out the details. And there are always tech disagreement. And with very few exceptions the operator wins these debates. At most all the partners can do is not participate and be penalized as per the JOA.

ANADARKO: BP’S WORSE NIGHTMARE
Since I don’t have access to the history I can only speculate on the details. But to some degree these generalities are correct. BP has been criticized for making various tech decisions on the well design. Anadarko may have a long and well documented paper trail showing they had disagreed with every choice BP has made. Or to some lesser number of choices. But to whatever degree the documentation wasn’t casual. It’s done by every partners in every joint venture as a negotiation tool. By signing the AFE the partners agree to pay their share of the ultimate actual cost. But it often doesn’t go just like that. The operator (Company A)plans to do the X Procedure. Partner B strongly disagrees and says doing X is risky and could waste money/lose the well/cause a blow out. But the operator almost always wins these debates and drills the well and does X. And surprise…it was a mistake to do X and it runs the well costs up $16 million. When the well is finished the operator mails out the bill to the partners. Company’s B share (25%) is $4 million. But B sends a note back to A and says we need to chat. They get together and B hands them the documentation of how they strong disagreed with doing X so let’s just deduct our $4 million (or some lesser amount)share of that “mistake” from the final bill. This is a very common situation in all joint ventures. That’s why I’m certain Anadarko had a well documented list of potential “ammo” long before the blow out occurred. They might have had their own personnel onboard for short periods of time to document such potential screw ups. As a consultant I’ve been sent out tasked with that exact job. It is exactly as it sounds: a very serious “gotcha” game.

THE COCKED TRIGGER
Anadarko’s press release:”…BP operated unsafely and failed to monitor…” and “BP’s behavior and actions likely represent gross negligence or willful misconduct”. These wordings are not casual. They are based upon very specific language in the JOA. They are the basis for a legal action that would not only assign the full cost of the blow out on BP but also require BP to cover the cost of the original well and perhaps all pre-spudding costs. It would also be cause to remove BP as operator of any future development of the field. There is very specific language in the JOA that specifically gives Anadarko a “get out of jail card” if they can prove the assertion. And it might not even take a lawsuit to prove it. Many JOA require binding independent arbitration to settle such disputes. Someone said the Anadarko statement was a “shot across the bow” of BP. I would disagree: it was a bayonet to the liver. Anadarko is now on the hook for about $10 billion of these disaster costs. They are big but not as big as BP. If they can’t shed this liability they probably cease to exist. I can promise that within days of the blow out they had a world class legal/tech team put together to mount the strongest possible attack on BP. Wouldn’t be surprised if Anadarko hasn’t put $50+ million on the budget just for the legal fees. Any gov’t investigation will pale compared to the story Anadarko is putting together. But will it be heard? Might wake up in a couple of months and Anadarko has gone silent. BP could make a side deal to take Anadarko out of the mess. But that won’t make Anadarko that much less of a danger to BP. Anadarko isn’t going to destroy their records. Nor would they shade their statements if they are forced to testify IMHO. But it would keep them from making anymore damning press releases. It could also save BP from a lawsuit costing them 3X or more of Anadarko’s liability.

How close is BP coming to the gallows? Keep an eye on Anadarko. They may represent the best “leading indicator” of BP’s future.
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E L on June 19, 2010 – 3:51pm Permalink | Subthread | Parent | Parent subthread | Comments top

ROCKMAN:

Great post. Thanks. Anadarko has made itself the chief government prosecution witness in any criminal action (also a handy informant for Search Warrants) against BP and other individuals by these statements. Anadarko now is, I’m sure, under “a keep and preserve all records” order. And at a criminal, or even civil trial, of US v. BP confidentiality agreements don’t hold up when the judge says “Bailiff, take this witness to jail until he testifies.” So most of this will out. May take a while.

In addition, I posted above some of the “discretionary debarment” considerations including the catchall that could come BP’s way. I’m beginning to think BP’s executive were so giddy after the meeting with Obama because he told them “discretionary debarment” would not come their way if they paid $20 billion and kept throwing everything they had at the blow out.

Just your typical “shakedown.” Must have learned that from Capone in Chicago.
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aliilaali on June 19, 2010 – 4:13pm Permalink | Subthread | Parent | Parent subthread | Comments top

RM —

wow …i kinda expected Anadarko to break silence at some point …but i thought it would be after the BP incident report came to light publicly….and then hammer BP

Anadarko’s come out quiet early and seems ready to take the bull by the horns…i suppose Rex Tillerman’s statement backed up by the powers that be in Chevron and Shell at their testimony about the particular mechanical setup of this well setup a good foundation for this statement form Anadarko….

i’m sure Anadarko has a paper trail of disagreements as long as the Mississippi river itself …kinda expected considering the cash flows of Anadarko cannot survive their share of the liability …matter of survival from BP ..maybe not but this stinker will surely sink Anadarko …..

appreciate to hear your 2 cents (or any person with knowledge in these affairs …cuz it be way over my pay scale) on the following if/when you get a few minutes…i reckon it be likely that Anadarko and BP settle this out of court and if they do is there a mechanism in place to keep Anadarko from releasing their dis-agreements with BP to the justice dept or is this not an option ….cuz i reckon the justice dept just found their best friend in Anadarko otherwise…

what wouldn’t i give to be a lawyer in Houston for the next 2 yrs or so ….
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subsea on June 19, 2010 – 4:28pm Permalink | Subthread | Parent | Parent subthread | Comments top

Fantastic post Rockman. As I consider the whole of your arguments, It’s not much of a reach to imagine a case where the minority holders expected something like this would happen – not this level of severity – but a case where they knew that BP would violate the JOA by way of `gross negligence or willful misconduct’ thereby ceding drilling rights to this field which is arguably a nice find. Remains to be seen whether the minority partners can surf the rest of this wave, but Anadarko as informant and witness stands to come out smelling like a rose, and possibly with minority partners gaining control of the field if they covered their butt, and from their stance here early on, it looks like they did. Abundance of Hubris and extreme high stakes.

You can already see the jostling going on, now representative Markey says that BP Partners Anadarko, Mitsui Should Share Oil Woes

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