BP Settlement Claims

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BP, Contractors Face Fines Over Oil Spill

October 13, 2011, 9:13 am

Originally posted by Wall Street Journal - Tennille Tracy - October 13, 2011

WASHINGTON—U.S. offshore-drilling officials issued their first violations related to the Deepwater Horizon oil spill Wednesday, accusing BP PLC and two of its contractors of breaking several rules.

While citations against BP were widely expected, the government's decision to pursue the contractors Transocean Ltd. and Halliburton Co. for infractions jolted the contracting industry, which traditionally avoids liability in such accidents.

The decision to penalize the contractors "reflects the severity of the incident," the Interior Department said in a statement. Interior officials are committed "to holding all parties accountable."

The citations, which are expected to lead to fines, follow an investigation by the Interior Department and Coast Guard. Interior said Wednesday it had identified 15 incidents of noncompliance with federal rules. Among them were the failure to perform operations in a safe manner and the failure to conduct accurate pressure integrity tests.

A Transocean spokesperson said the company "intends to appeal its citations." Halliburton spokeswoman Tara Mullee Agard said "Halliburton believes it is fully indemnified by BP against any loss resulting from the Macondo incident and any penalties arising from the violations alleged." BP wasn't available for immediate comment.

The U.S. is expected to levy fines against the companies as a result of the citations. The Outer Continental Shelf Lands Act allows the government to collect $35,000 per day per violation in the Deepwater case(the fine was later raised to $40,000). The well leaked oil into the Gulf of Mexico for 87 days before it was closed and sealed in July 2010.

The government's decision to issue violations against Transocean and Halliburton didn't come as a total surprise. Interior's offshore-safety chief, Michael Bromwich, suggested in recent weeks that the contractors were likely to be targeted.

That triggered a lobbying campaign by contractors and some lawmakers who say fining the contractors, typically hired by big oil companies to perform specific tasks at a drilling project, lacks precedent and may be illegal.

By pursuing Transocean and Halliburton, regulators "give a green light for others[such as Gulf Coast residents or businesses] to go after them—on the same basis and on the same level" as primary operators, said Brian Petty, executive vice president of government affairs at the International Association of Drilling Contractors.

Mr. Bromwich, who is set to testify Thursday at a House hearing on the spill investigation, has said contractors shouldn't be exempt from regulatory action, especially when the contractors' conduct is "egregious."

By themselves, the fines won't make a significant dent in the bottom lines of any of the companies. But now that the government has officially branded the contractors as violators, it could weaken their legal position against spill victims and BP.

The process of assigning blame for the Deepwater Horizon spill is already a high-stakes game involving billions of dollars. In April, BP sued Halliburton, Transocean and Cameron International Corp., the company that made a safety device known as a blowout preventer. BP, which has set aside more than $40 billion for spill-related costs, said the other companies contributed to the disaster.

Transocean called the BP suit "specious and unconscionable." Cameron filed counterclaims, saying at that the time that the companies would try to protect their indemnity rights. Halliburton said it intended to "vigorously defend" itself against any litigation, fines or penalties relating to the incident.

Mr. Petty of the drilling contractors' group said decades of precedent support the idea that only operators should be targeted for rule violations. Contractors say they don't make enough money to shoulder the risks of oil spills or other major events.

The contractors have won support from Sen. David Vitter, a Louisiana Republican, who questioned the legal basis for fines. "There needs to be a full accounting of the legal analysis behind Interior's expansion of authority," Mr. Vitter said.

In response to Mr. Vitter,Mr. Bromwich played down the department's ambitions, saying it will continue to hold operators responsible for the majority of future infractions. "We will be careful and measured in applying our regulatory authority to contractors," Mr. Bromwich wrote in a letter to the senator earlier this year.

Officials can seek spill-related penalties under a variety of laws. Among them is the Clean Water Act, which allows the government to impose up to $4,300 in fines for every barrel of oil spilled—equal to $21 billion for the 4.9 million barrels spilled as a result of the rig explosion, which killed 11 people in April 2010.

The Environmental Protection Agency oversees compliance with the Clean Water Act. The agency hasn't yet issued fines under that law to companies involved in the spill.

If contractors face new liabilities, insurance companies are likely to charge higher rates. "It's potentially a very big deal," said Charles Landgraf, a partner at law firm Dewey & LeBoeuf who represents insurers.

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