THE BLOG

Halliburton In Settlement Talks To Control Its Macondo Cement Liabilities

04/27/2013 01:50 pm ET | Updated Jun 27, 2013

(This article is published in "The Louisiana Weekly" in the April 29, 2013 edition.)

Houston-based Halliburton Co. is in talks to settle private claims related to the Deepwater Horizon rig explosion three years ago, company officers said when they released quarterly earnings last Monday. The Gulf spill trial's first phase wrapped up in U.S. District Court in New Orleans less than a week before Halliburton's announcement. At the eight-week trial, BP, Transocean and Halliburton blamed one another for the deadly April 20, 2010 accident that led to the nation's worst offshore spill. Judge Carl Barbier conducted the first segment of the three-part trial without a jury, and will rule on liability at a later date.

On Monday, Halliburton said it took a $1 billion pretax charge, or $637 million after taxes, for a possible settlement with private claimants. That was in addition to a pretax $300 million or after-tax $191 million that the company set aside for litigation a year ago.

Dave Lesar, Halliburton's president and chief executive officer, said Monday the company has been in court-assisted talks to settle a substantial share of private claims from the Macondo disaster. BP operated the well, Halliburton was the cement contractor and Transocean owned the Deepwater Horizon rig. Lesar said "we believe that an early and reasonably valued resolution is in the best interests of our shareholders." In the now-advanced talks, the company has offered stock and cash to claimants. Lesar didn't discuss the number or types of claimants.

Last week, attorney Stuart Smith with Smith Stag, L.L.C. in New Orleans, said "Halliburton is most likely talking with the Plaintiffs' Steering Committee," a group of attorneys appointed by Judge Barbier to represent businesses and residents with claims. "It's not unusual in a case like this, where there's been some significant discovery abuse, to try to settle claims," Smith said. The abuse centers on Halliburton recently revealing cement evidence that probably should have been turned over to the U.S. Justice Dept. two years ago.

"It appears that the court was unhappy with Halliburton's actions during the discovery phase of the litigation," Smith said, referring to phase one of the trial. He said the benefit to Halliburton of settling private claims would be to minimize uncertainty about their cost.

Last week, Dave Falkenstein, spokesman for the Plaintiffs' Steering Committee, said the attorneys' group doesn't comment on settlement discussions. Houston-based Halliburton spokeswoman Susie McMichael said her company couldn't comment on the talks aside from what officers had said Monday.

So how did Halliburton fare in Judge Barbier's courtroom? The company ran into trouble several weeks after the trial began on Feb. 25. Under cross-examination in early March, Timothy Quirk, Halliburton's former cement lab manager, said he tested cement samples following the rig explosion and then destroyed some of the samples and test notes. After Quirk's testimony, Halliburton attorney Don Godwin told Judge Barbier on March 12 that the company that week had discovered cement samples from the Kodiak well at its Broussard, La. lab.

Leftover, dry cement from the Kodiak well, which BP and partners drilled in 2008, was used at the Macondo well with the approval of BP and Halliburton.

In late March, BP asked Judge Barbier to sanction Halliburton for withholding evidence at the lab. More than a year earlier, BP had filed a motion in December 2011 for sanctions against Halliburton, alleging samples tested after the rig explosion had been destroyed. Since then, Halliburton attorneys have said testing was done on off-the-shelf lab materials that had little relevance to the case.

Barbier hasn't ruled on sanctions against Halliburton yet. If sanctions are imposed, however, Halliburton might find it tough to challenge any findings against the company in the Horizon rig explosion.

At the phase-one trial, Halliburton's cement expert Jesse Gagliano, who was embedded in BP's Houston office in 2010, testified that BP ignored a number of his recommendations for the rig's cement job, particularly his advice to use twenty-one centralizers. Centralizers keep a well's metal casing pipe centered while cement is poured around its sides. Late in the trial, BP's Houston-based, wells team leader John Guide said he supported using six centralizers because the additional ones that were to be shipped to the rig were of the wrong type.

BP raised questions in court about additives in Gagliano's cement design, saying some of them shouldn't have been used with a foam cement slurry. At the Macondo site, high-pressure nitrogen was injected into a base cement slurry on April 18 and 19, generating foam cement that was pumped into the well.

A week before Gagliano's early-April testimony, Transocean vice president Bill Ambrose said at the trial that a study by his company concluded the "precipitating cause" of the rig's explosion was a failed cement job.

During the trial, Judge Barbier chastised Halliburton for a slow drip of evidence. Relevant samples were concealed, then suddenly discovered, he said. Halliburton's release of evidence in March consumed some of the court's time as Barbier tried to control the sprawling trial's length.

Last Wednesday, Judge Barbier gave attorneys a June 21 deadline to file their conclusions about evidence presented in the trial's first phase. The judge also asked them to consider six questions related to gross negligence, and said he wants to hear back on them by July 12.

One of Barbier's questions is: can an act or omission that didn't cause the accident be considered in determining whether a party was engaged in gross negligence? That query could prove thorny for Halliburton. The company's alleged withholding of cement evidence and destruction of notes on post-accident tests didn't make the rig explode but could be used to weaken Halliburton's defenses.

If Barbier finds BP, Transocean or Halliburton grossly negligent, the company involved could face billions of dollars in punitive damages.

Over the winter, the U.S. Justice Department reached separate settlements with BP and Transocean in connection with the rig explosion. The agency hasn't filed suit against Halliburton to date. In late January, BP pleaded guilty to fourteen criminal counts, including eleven counts of manslaughter, and agreed to pay $4 billion in penalties in the biggest criminal resolution in U.S. history. Eleven workers died when the rig exploded.

In mid-February, Transocean pleaded guilty to one count of violating the Clean Water Act and agreed to pay $400 million in criminal penalties.

Regarding Halliburton's efforts to settle, the company's chief financial officer Mark McCollum said in a conference call with analysts Monday that if current talks aren't successful, "we're fully prepared to see this matter to conclusion in the courts." Halliburton's shares, traded on the New York Stock Exchange, declined in value during the spill trial but rose after Monday's better-than-expected, first-quarter earnings, along with word of the settlement attempt. Halliburton supplies products and services to the global energy industry, including oil drilling and natural gas fracking.

In mid-May 2010, President Barack Obama said BP, Transocean and Halliburton executives fell over one other to point the finger of blame in Congressional hearings during the oil spill.

The second phase of the New Orleans trial, starting in September, will assess how much oil was spilled. end