October 18, 2011 8:19 pm

Deepwater a warning for junior partners

The repercussions of the Deepwater Horizon accident have shaken the oil industry worldwide over the past 18 months.

As the consequences for legal liabilities and regulatory enforcement start to become clear, the disaster is having a renewed impact on oil companies’ strategic and operational decisions.

BP’s agreement this week with Texas-based Anadarko Petroleum, which had a 25 per cent stake in the stricken Macondo well, was a warning to any company acting as a junior partner with a minority stake in a project operated by someone else.

Anadarko has agreed to pay $4bn to BP to settle claims between the two companies and is still liable for its share of civil and criminal penalties imposed by the government.

That is a huge cost considering that, although Anadarko was kept regularly informed by BP about the progress of the well, the official US government inquiry found no other evidence that it was “directly involved in decisions related to the design or drilling of the Macondo well”. All of those decisions were led by BP.

At first, Anadarko said BP was likely to be guilty of “gross negligence or wilful misconduct”, which could have relieved it of its share of the costs, but it has been forced to give up in its attempt to prove that.

A project that would never have delivered a huge pay-off to Anadarko has ended up overshadowing all the company’s strengths, such as its exploration successes in Africa.

The process of farming in, in which a lead operator lets other companies take minority shares in a project, is universal in the oil industry as a way to spread the risks of exploration and development. It works only if the junior partners can trust the operator taking the day-to-day decisions.

Jim Noe, executive director of the Shallow Water Energy Coalition, representing smaller companies operating in the Gulf of Mexico, said: “The significant liability faced by the non-operating partners on the Macondo well should make exploration companies think even harder about who they are partnering with, especially on prolific wells.”

He said non-operating partners would ensure they were fully comfortable that the operator had properly designed the well, and was ready to respond to a blow-out with systems to cap the well and capture any oil spilt.

Companies have generally been unwilling to admit that they are having to tighten up their practices about how they farm in to wells and act as junior partners, but off the record many executives admit to intensive reassessment since the BP disaster.

Gary Adams, US oil and gas leader at Deloitte, the consultancy, said that as a result of the disaster, oil and gas companies were carrying out a “detailed and rigorous” review of their contracts.

“They are examining how risk is apportioned in contracts, to see if there are any holes that need to be covered,” he said, “[and] making contracts more clear with regard to responsibility”.

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