A Year Later And Fireworks Still Flying

Jim Brown
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It has been a year since the initial explosion, fire and sinking of the Horizon drilling rig in the Gulf of Mexico but there are still quite a few fires remaining to be put out. Those fires are not on the rig. There is nothing but ocean over the well. No markers are left and no ships are anchored there but the billions spent to close that hole and clean up the resulting mess are still in dispute.

(BP) filed a suit on Wednesday against Transocean Offshore (RIG) for $40 billion in damages and accused the rig owner of causing the explosion on the rig. BP claimed it had already incurred $17.7 billion in expenses and took a pre tax charge of $40.9 billion in relation to the spill. BP said without Transocean's misconduct there would not have been any explosion, fire and deaths of 11 workers.

BP claims on April 20th every single safety device on the Horizon rig and the ocean floor failed and resulted in the tragedy. BP claims Transocean breached its contractual duties in failing to maintain the rig, fix engine problems and failed to adequately train its crew.

BP also sued Cameron International (CAM) asking the court to order Cameron to reimburse BP for "all or part" of its damages. BP claims the blowout preventer failed to work properly and perform the function for which it was designed. They claim this particular BOP had a faulty design and alternative designs existed that did not have these flaws.

An examination of the failed BOP by experts concluded a bent section of the drill pipe was lodged in the BOP in such a manner that the cutting shears designed to cut through the pipe were unable to operate.

BP was forced to put up $20 billion for the Gulf Coast Compensation Fund (GCCF) to reimburse Gulf residents and businesses for losses incurred as a result of the spill. The fund has already paid out nearly $4 billion and the fund administrator said there are billions more in claims.

BP is the subject of hundreds of suits for compensation ranging from several thousand dollars to multiple billions. An example would be the suit by Carnival Cruise Lines. They are suing for the additional cost to clean the oil off their ships and for the lost revenues from cancellations and decline in bookings from people who did not want to cruise anywhere close to beaches covered in oil.

The actual trial to determine who to blame for the disaster will not even begin until 2012 so these suits for damages will probably be on hold until that determination is complete.

Wednesday was the last day to file suits based on the event so there was plenty of paper flying across the various legal desks. However, I could not find evidence of a BP suit against Halliburton. (HAL) The latest analysis places blame on Halliburton for using an untested cement slurry to cement the well and that cement job failed. If the cement had been done correctly there would have been no blowout. I find it hard to believe BP would have left such an obvious target with deep pockets without a contingency claim just in case the suit against Cameron and Transocean does not go in their favor.

BP has one major problem with all these suits. Everyone working on the well as a contractor has a blanket indemnity agreement as part of their contract. In the case of Transocean is specifically says BP is responsible for everything and BP will indemnify Transocean "even in the case of gross negligence." That is pretty much a get out of debt free card for Transocean.

However, it is commonly believed that rather than go to court and have Transocean try to prove gross negligence on the part of BP with the U.S. government watching, they will settle out of court for some nominal amount. The biggest problem for BP is the charges by the government. If the Justice Dept finds BP was negligent they can significantly hike the penalties. All of these suits by BP are an effort to divert blame and attempt to spread it over multiple parties so the government can single out BP as the solely responsible entity.

These cases will likely still be active in 2013-2014 so the only ones who will be benefiting over this period is the lawyers. This is a case that will create millionaires in the legal profession.

BP has seen their market cap decline by $49 billion since the spill and that is generous since the stock has rebounded +65% since its bottom.

Cameron (CAM) and Transocean (RIG) both posted gains on Wednesday in spite of the suits.

Chesapeake Energy (CHK) suffered a blowout on a natural gas well in the Marcellus Shale on Wednesday. The well was in the process of being fractured when the blowout occurred. The millions of gallons of frac water and chemicals were pushed out of the well and overflowed into a stream and several families had to be evacuated. As blowouts go this one was relatively simple. Nobody was injured and it was quickly contained. The fact it occurred on the anniversary of the Horizon disaster was the only thing that made it newsworthy.

Jim Brown

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