THE BLOG
07/06/2010 01:35 pm ET | Updated May 25, 2011

BP Dragging Partners into the Mess

Over the last 78 days since the blowout of BP's Mississippi Canyon Block 252 well, I have been primarily focused on the technical aspects of the disaster, the mechanics of the well itself, the relief efforts, and issues surrounding BP's decisions before and after the incident.  I've felt from the beginning that the blowout was certainly preventable and was caused by BP's deafness while the well was screaming at them it was going to get away from them.  I also believe that Transocean contributed to the disaster by allowing BP to make wrong decision after wrong decision, setting up the perfect set of conditions for a blowout.  BP's initial response after the blowout was anemic, allowing the well to flow uncontrolled for weeks as they stared at the video feeds, trying, in vain, to close the BOP with ROVs.  Regulators, the Congress, and the Administration had to drag BP by the hair to pick up the pace, provide the video feeds, and become more transparent in the effort, even while the company underestimated flow rates, denied culpability, and put their British CEO on national television, somehow managing to enrage the entire country every time he opened his mouth.  What I haven't talked about, though, are the other parties involved here... the working interest partners.  In this well, the partners are, of course, BP, who, at 65% ownership, is designated operator.  The other partners are Anadarko Petroleum, at 25%, and Mitsui Oil Exploration Company from Japan, at 10%.

First, a little on operating agreements. In the oil and gas industry, reserves are added by exploring in new areas.  The deepwater of the Gulf of Mexico is the last frontier for big domestic oil reserves, and, as is now well known, both risky and very expensive.  For this reason, deepwater operators, even the big ones like BP, Shell, Exxon, and Chevron, "sell down" or take on minority investors to spread the risk.  These partnerships are governed by a set of agreements between the parties laying out development plans and operations. 

The operating agreement generally establishes who is the operator, the authorities the operator has, how the costs are paid, and how revenues and expenses are to be divided.   It also contains terms for which an operator can be removed, or, when the non-operated partners can delay, or not pay, billed expenses.  Most of these agreements contain the magic words: gross negligence and willful misconduct.  If a partner invokes those words, they are communicating a very specific message.  Operating agreements lay out the terms of cash calls, which are pre-billing of AFE'd expenses (AFE stands for Authorization for Expenditure), usually agreed to before operations commence.  Cash calling, a very common practice, keeps the non-ops from "riding the float" of the operator, who takes on 100% of the obligation when services or equipment are purchased.

BP, after being cattle-prodded during Congressional hearings in April and May, have said they are going to pay all the costs for the clean-up and "all legitimate claims."  Under the general terms of the operating agreement, this obligation also falls to the non-ops, that is, unless, the operator is guilty of gross negligence or willful misconduct.  The magic words.  Anadarko invoked those words just last week after getting a bill from BP for expenses and cash calls for $272 million, most of which was for the cleanup, claims, and relief wells.  In a statement, Anadarko CEO Jim Hackett said,

"The mounting evidence clearly demonstrates that this tragedy was preventable and the direct result of BP's reckless decisions and actions. Frankly, we are shocked by the publicly available information that has been disclosed in recent investigations and during this week's testimony that, among other things, indicates BP operated unsafely and failed to monitor and react to several critical warning signs during the drilling of the Macondo well. BP's behavior and actions likely represent gross negligence or willful misconduct and thus affect the obligations of the parties under the operating agreement."

By using the magic words, they have communicated to the world that they believe the operating agreement has been violated by BP, and that they are not going to pay.  Frankly, I'm surprised that Anadarko didn't make this announcement long before now, and based on what we've all seen so far, I think they've got a really strong claim.  Mitsui, the other partner, has not been as public after they received a bill for their share, totalling $111 million.

This dispute will drag on for years, hanging like the Sword of Damocles over Anadarko and Mitsui, even though they had nothing to do with the blowout itself.  Leases and operating agreements are joint and several, meaning that all partners are liable for the entire cost of a disaster like this.  The non-ops' only option here is to get a judgment in court that affirms their assertion that BP was grossly negligent or exercised willful misconduct.

The Magic Words.

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