Make or break for BP as Deepwater Horizon lawsuits loom?

The events, causation and aftermath of 20 April 2010 when the explosion at the Deepwater Horizon drilling rig killed 11 workers and set off the worst environmental disaster the US has ever known, caused around 5mbbl oil to spill into the Gulf of Mexico from the ultra deepwater Macondo well. The efforts to cap the well, contain the spill and to clean up and restore afterwards were and are of epic proportions. The event also cast a very long and deep shadow about just how safe deepwater and especially, deepwater drilling, is should a disaster occur. Reportedly, BP has said that it estimates the clean up cost for the Deepwater Horizon disaster to be around US$42bn. It is understood the company has already spent around US$21bn and has approximately another US$20bn set aside in a fund for economic claims and restoration.

This year, 2012, and perhaps even running into 2013, should see the conclusion of hundreds of lawsuits on the behalf of tens of thousands of plaintiffs that are seeking damages from BP with the additional likelihood of the US government imposing a hefty fine on BP and other companies too. There has even been some speculation in the media that BP, as is, could be hard pushed to survive the legal consequences of Deepwater Horizon.

On 16 December 2011, BP revealed that it had come to an agreement with Cameron International Corp, the company that designed and manufactured the blowout preventer on the Deepwater Horizon rig. Under the terms of the settlement, Cameron will pay BP US$250m, which BP will apply to its US$20bn trust funds to meet individual and government claims in addition to the cost of the natural resource damages. “Today’s settlement allows BP and Cameron to put our legal issues behind us and move forward to improve safety in the drilling industry,” said Bob Dudley, BP group chief executive in a statement. “Cameron is the fourth company to settle with BP and contribute to economic and environmental restoration efforts in the Gulf. Unfortunately, other companies persist in refusing to accept responsibility for their roles in the accident and for contributing to restoration efforts.” In the statement BP went on to say that, “BP and Cameron each acknowledge that the Deepwater Horizon accident resulted from complex and interlinked causes involving multiple parties. They agree that the entire industry can and should learn from the accident in order to improve safety in the drilling industry by developing, among other things, standard specifications for blowout preventers and other drill through equipment.”

While BP has settled with four companies, the company that sealed the well against leaks, Halliburton Co reportedly based on BP’s design has not and retains a high profile in the media. BP has filed against Halliburton indicating that it wanted Halliburton to pay unspecified damages, equal to or alternatively to the proportion of Halliburton’s fault. BP has also alleged that Halliburton has destroyed testing evidence to prevent it from being used as evidence. In a statement, Halliburton said, “Contrary to BP’s assertions, the post-incident testing referred to in its motion was not conducted on rig samples or in a manner approved by Halliburton. Rather, the informal testing BP refers to used off-the-shelf materials that yielded results which Halliburton believes have little or no relevance to the case, particularly when pre-incident testing using rig samples and formal lab processes showed that the cement slurry was designed to be stable. In September 2011, the US Department of Interior reported testing done on the actual Deepwater Horizon rig sample, confirming Halliburton’s position that the slurry was designed to be stable. The Department further concluded that the cement likely did not fail in the annulus part of the well.”

Seemingly confirming multiple responsibility for the disaster, a new report from the US National Academy of Engineering and National Research Council said, “Despite challenging geological conditions, alternative techniques and processes were available that could have been used to prepare the exploratory Macondo well safely for, “temporary abandonment,” sealing it until the necessary infrastructure could be installed to support hydrocarbon production. In addition, several signs of an impending blowout were missed by management and crew, resulting in a failure to take action in a timely manner. And despite numerous past warnings of potential failures of blowout preventer (BOP) systems, both industry and regulators had a ‘misplaced trust’ in the ability of these systems to act as fail-safe mechanisms in the event of a well blowout.” In a statement, Donald C Winter, former secretary of the Navy, professor of engineering practice at the University of Michigan, and chair of the committee that wrote the report said, “Industry and regulators need to include a factual assessment of all the risks in deepwater drilling operations in their decisions and make the overall safety of the many complex systems involved a top priority.”

The whole legal affair is going be messy and possibly disastrous for one or more parties. US District Judge Carl Barbier is overseeing the litigation, which should start in February 2012. It is not clear at the moment if Barbier is going to give interim judgements as he goes along or one right at the end of the proceedings. Should it be the latter than it is highly likely that the judgment may spill over into 2013. However, if that is the case, there is a strong possibility that more settlements out-of-court may be reached. The US presidential election is on 6 November 2012. Incumbent president, Barack Obama, if he is to get any political capital out of being seen to punish the wrongdoers for Deepwater Horizon, is working to a deadline. As things stand, BP could prefer to go for the long option and stretch out the legal process. It would not be a surprise therefore, if behind the scenes horse trading resulted in a heavy enough, yet affordable, settlement against BP and others to give Obama the desired pre-election political capital. It’s a tricky path for Obama to navigate, too little penalty and the political capital will swing to his opponent, too much and defendants will probably not settle out of court. Hopefully, at the end of the day, lessons will have been learned all around.