Interesting Times - The Nightmare of Macondo

Drilling an exploration well is always a tense time for those involved in it, even the lawyers and contracts specialists whose contribution is usually finished before the well is begun.

The tension starts as soon as the well is spudded. Drilling is always a complex and risky operation, and even more so when the well is in deep water. Things can go wrong at any stage of the process. Tools may be lost down the hole, in which case they have to be recovered before drilling can continue (an operation known as ‘fishing’). The hole may collapse or become blocked by the casing, cement or some natural obstacle. In such cases the well may be completely lost and the money spent on it wasted.

If the well does indeed reach its target formation, the tension mounts further. With a deep water exploration well costing in the region of $100 million, and a success rate of around 20% there is something of the excitement of the casino – will this throw be lucky?

There are worse possible outcomes than the loss of the well. The most feared is a blowout, a dangerous and unpredictable occurrence which results in the uncontrolled flow of hydrocarbons from the well. The driller’s worst nightmare is a blowout in very deep water, where divers cannot go and any remedial action has to be taken by robots controlled from the surface.

This was the nightmare faced in 2010 by BP with Macondo, a deep water exploration well in the Gulf of Mexico. Macondo was ironically a success, in the sense that it discovered commercial quantities of oil, but the ensuring blowout was a disaster in every sense, leading to the deaths of eleven men, the total loss of the drilling rig by fire, and the uncontrolled flow of millions of barrels of oil into the rich marine habitat of the Gulf.

Usually an exploration well that makes a commercial discovery will merit only a brief paragraph in the business papers, but Macondo was front page news across the globe. So BP’s nightmare unfolded in a blaze of publicity on the doorstep of the most power, energy hungry and litigious nation on earth.

Under pressure from the US administration, BP placed $20 billion in a fund to recompense the victims of the blowout in and around the Gulf. This was in itself remarkable in a country which so loudly proclaims the rule of law. Under the rule of law compensation is a matter for the courts and not the politicians.

While BP gained some grudging recognition for this action, few commentators remarked how fortunate it was that the operator of Macondo was a company with such huge resources. Very few operators drilling in the Gulf could afford to pay compensation on this scale.

Litigation over these huge liabilities was inevitable. Numerous actions have been launched against BP and these will go on for years. The great majority are actions for damages in tort (meaning essentially that the plaintiffs have no pre-existing relationship or contract with BP).

Of more interest to industry connoisseurs will be the two sections of actions in contract:

1. The actions between BP, as operator, Transocean, the drilling contractor, and Halliburton, the contractor engaged to cement the well, to determine who was responsible for the blowout. The question is whether , in view of the terms of the contract and the events which happened, BP’s contractors are liable to contribute to these liabilities.

2. The actions between BP and its partners. BP was not the sole owner of the Macondo well but was operating the well on behalf of itself and its partners Anadarko and Mitsui. The partners have refused to contribute their share of the compensation paid by BP and BP has sued them for it under the joint operating agreement. The critical question is whether BP was guilty of ‘gross negligence or wilful misconduct’ in operating the well. If so, BP will have to bear all the compensation costs. If not, the partners will have to contribute their share.

So the disaster at Macondo has huge implications, not just for BP but for the global industry as a whole, The industry in general, and the lawyers in particular, are watching with great interest and a profound feeling of relief that this nightmare happened to somebody else and not to them.