Deepwater Horizon BP Well Blowout Contractual Indemnities/Statutory Liability/Effect on US Gulf of Mexico Oil and Gas Industry Ben H. Welmaker, Jr. Partner Baker & McKenzie Houston, Texas 77002-2746 ben.welmaker@bakermckenzie.com Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a partner means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an office means an office of any such law firm.
Deepwater Discovery 2
CHRONOLOGY April 20, 2010: Blowout of the BP Macondo Well and explosion of the Deepwater Horizon drilling rig. [Definition of blowout: an uncontrolled escape of oil and/or gas erupting from an offshore well being drilled.] July 15, 2010: flow stopped. 4.9 million bbls of oil discharged into the Gulf of Mexico. 1.2 million bbls burned, captured, or skimmed off the surface of the water approx 1/4 of the 4.9 mm bbls. 3
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Largest International Oil Well Blowouts by Volume April-July, 2010 Macondo Well, GOM, USA 4.9MM bbls June 79-April 80 Ixtoc 1, Bay of Campeche 3.5MM bbls* October 1986 Abkatun 91, Bay of Campeche 247M bbls April 1977 Ekofisk Bravo, North Sea, Norway 202.3M bbls January 1980 Funiwa 5, Forcados, Nigeria 200M bbls October 1980 Hasbah 6, Persian Gulf, Saudi 105M bbls December 1971 Iran Marine intl., Persian Gulf, Iran 100M bbls January 1969 Alpha Well 21, Pacific, CA, USA 100M bbls March 1970 Main Pass Blk 41, GOM, USA 65M bbls October 1987 YumII/Zapoteca, Bay of Campeche 58.6M bbls December 1970 South Timbalier B-26, GOM, USA 53M bbls *(March 1989 Exxon Valdez (spill) 260Mbbls) 11
Allocation of Liability: Operator/Drilling Contractor 12
Allocation of Liability: Operator and Drilling Contractor Contract Reference: International Drilling Contract (Indemnity Provision): Injury to third parties: each party responsible for its own actions; Personal Injury: each party takes care of members of its own group regardless of cause; Loss of the drilling rig, regardless of cause: Drilling Contractor; Loss of the well due to Drilling Contractor fault: Drilling Contractor (but only to drill a new well). 13
Allocation of Liability: Operator and Drilling Contractor Contract Reference: International Drilling Contract (Indemnity Provision): Costs of regaining control of a well: Operator, regardless of Drilling Contractor fault; Pollution Drilling Contractor if pollution originates from the drilling rig above the surface of the water; Otherwise, Operator liable for all fines and costs of control and clean up and damages to third parties resulting from a blowout. 14
Allocation of Liability: Operator and Drilling Contractor Contract Reference: International Drilling Contract (Indemnity Provision): Loss of property of third parties caused by a blowout: Operator; Summary - Drilling Contract makes following risk allocations: Loss of drilling rig: Drilling Contractor; Liability for pollution and damage from a blowout: Operator. 15
Allocation of Liability: Operator/BOP Contractor 16
Allocation of Liability: Operator and BOP Contractor Contract Reference: Master Service Agreement (Indemnity Provision) Operator and BOP Contractor indemnify each other for any claims by members of their respective groups for injury or property loss: knock for knock; But, if BOP lost or damaged below rotary table or in a well, Operator pays for repairs or replacement of the BOP. 17
Allocation of Liability: Operator and BOP Contractor Contract Reference: Master Service Agreement (Indemnity Provision) BOP Contractor indemnifies Operator for any pollution which originates above the surface of the earth from BOP Contractor s equipment while under control of BOP Contractor; Operator indemnifies BOP Contractor for any pollution which originates from below the surface of the earth including pollution from a blowout; All indemnities are without regard to cause. 18
Allocation of Liability: Operator and BOP Contractor Contract Reference: Master Service Agreement (Indemnity Provision) What if the BOP Stack Fails? What claim does Operator have? Sole Remedy: BOP Contractor will repair or reperform defective services; or Repair or replace the defective BOP. 19
Allocation of Liability: Operator/Non- Operators 20
Allocation of Liability: Operator and Non- Operators (US) Oil and gas lease over Block 252, Mississippi Canyon; OCS-G32306, the block on which the Macondo well was drilled: BP: 65% Anadarko: 25% MOEX (Mitsui): 10% Are Non-Operators Anadarko and MOEX liable under the operating agreement for any damages being paid by BP for the blowout? 21
Allocation of Liability: Operator and Non- Operators (US) Contract Reference: AAPL (810-2007) Model Form of Offshore Deepwater Operating Agreement. 5.2 Workmanlike Conduct: The Operator is not liable to Non-Operators for losses except where losses result from Gross Negligence or Willful Misconduct of Operator. 22
Allocation of Liability: Operator and Non- Operators (US) 22.5 Liability for Damages: Non-Operators will bear their share of liability for losses and damages from activities under the Operating Agreement but Operator will bear 100% of such costs where liability arises from gross negligence or willful misconduct of Operator. 22.7 Damage to Reservoir and Loss of Reserves: No party liable to the other for damage to a reservoir or loss of hydrocarbons except such damage which arises from a party s gross negligence or willful misconduct. 23
Allocation of Liability: Operator and Non- Operators (Int l.) Contract Reference: 2002 AIPN Model Form International Operating Agreement: (Limitation on Liability of Operator). Operator responsible only for its participating interest share of damage or loss resulting from (or failing to perform) the duties and function of Operator. Regardless of Operator negligence, gross negligence or willful misconduct. 24
Allocation of Liability: Operator and Non- Operators (Int l.) Contract Reference: 2002 AIPN Model Form International Operating Agreement: (Limitation on Liability of Operator). Optional clause: if senior supervisory personnel of Operator engage in gross negligence or willful misconduct which causes the loss, then Operator: (choose one): bears all such damages; or bears only actual damages to repair, replace or remove damaged joint property; or bears the loss up to a certain dollar amount. 25
Allocation of Liability: Operator and Non- Operators (US and Int l.) How is Operator liability for Gross Negligence or Willful Misconduct implemented? US and International Operating Agreements and their Accounting Procedures allow the Operator to collect money monthly from Non-Operators and require the Non-Operators to object only on audit later after the year costs were incurred. 26
Allocation of Liability: Operator and Non- Operators (US and Int l.) Can the Non-Operators just quit paying? WSJ, Tuesday October 26, 2010, page B2: Anadarko Q2 Report released in August, 2010, BP has billed Anadarko $1.2 billion for spill related costs. Anadarko accused BP of gross negligence and will not pay while the federal investigation into BP is ongoing. Non-Operators risk being placed in default under the operating agreement. If Operator denies gross negligence, only litigation can settle the gross negligence/willful misconduct issue. What happens while the case is litigated? 27
Legal Liability 28
The Oil Pollution Act of 1990 (33 USC 2701) Damages Cap The liability of a responsible party shall not exceed all removal costs plus $75MM. Cap May Be Lifted Where incident was proximately caused by gross negligence or willful misconduct of the responsible party $75MM cap on damages lifted. Question Is a Non-Operator a responsible party under the Act? 29
The Oil Pollution Act of 1990 (33 USC 2701) Contractual risk allocations between: Operator and the drilling contractor; Operator and the BOP Contractor; and Operator and Non-Operators. Not effective on the potential liability of those parties under the Act: Liability under the Act is not transferred by agreements between responsible parties. 30
The Clean Water Act (33 USC 1321) Damage Cap vs. Civil Penalties Although there is a damages cap under the Oil Pollution Act, Civil Penalties may be assessed under the Clean Water Act: $1,100/bbl liability for prohibited discharges $4,300/bbl liability if the violation was the result of gross negligence or willful misconduct 31
The Clean Water Act (33 USC 1321) The Numbers: $1,100/bbl X 3,700,000 bbls = $4,070,000,000. $4,300/bbl X 3,700,000 bbls = $15,910,000,000. 32
Third Party Legal Actions A number of lawsuits have already been filed against BP and others such as: ED La., shareholders' derivative suit against BP, 15 individual directors and officers including Tony Hayward. The defendants include Transocean, Cameron which manufactured the BOP, and Halliburton which cemented casing on the well at the time of the blowout. Suit in Alabama by property owners. Transocean filed a suit under the Limitation of Shipowner s Liability Act of 1851 to limit its exposure. 33
Future Impact 34
Impact on US and Int l. Offshore Drilling Operations Liability Insurance Requirements Permanent Ban on Drilling in the Gulf? discourage operations by other than the top 2 or 3 oil companies? discourage drilling contractors from operating in the Gulf? deepwater oil rig insurance up more than 50% since the BP blowout. ABA NR&E Vol 25, No 2, page 55, Fall 2010: Instead of drilling in the Gulf, why not reduce our demand for gasoline? Make our fleet more efficient or reduce miles traveled, or both. 35
Impact on US and Int l. Offshore Drilling Operations National Oil Companies in their home countries may be in a stronger negotiating position when US and other Operators come calling to replace Gulf of Mexico acreage with offshore blocks in the NOC s home country. 36
Deepwater Horizon BP Well Blowout Contractual Indemnities/Statutory Liability/Effect on US Gulf of Mexico Oil and Gas Industry BEN H. WELMAKER, JR Partner Baker & McKenzie 711 Louisiana Street, Suite 3400 Houston, Texas 77002-2746 +1 713 427 5011 +1 832 566 0600 (cell) ben.welmaker@bakermckenzie.com Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a partner means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an office means an office of any such law firm.