There’s nothing like a credit downgrade to focus the mind.
After Moody’s cut Anadarko’s rating to junk late on Friday, the US oil company (and 25 per cent non-operating investor in the Macondo well) broke its eight-week silence with this broadside from CEO Jim Hackett.
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.
Under the terms of the joint operating agreement (JOA) related to the Mississippi Canyon block 252 lease, BP, as operator, owed duties to its co-owners including Anadarko to perform the drilling of the well in a good and workmanlike manner and to comply with all applicable laws and regulations. The JOA also provides that BP is responsible to its co-owners for damages caused by its gross negligence or willful misconduct.
The operator of a well determines the detailed planning and execution of the well, and is responsible for the day-to-day activities of, and decisions executed by, personnel on the rig. Consistent with standard industry practice around the world, non-operating investors rely upon the operator to make the appropriate decisions on the rig.
So, Anadarko is trying to invoke a clause in a Joint Operating Agreement that challenges its share of any costs related to the oil spill on the grounds of gross negligence by BP. In other words this is going to arbitration, according to Merrill Lynch.
Anadarko highlights BP’s responsibility under the Joint Operating Agreement (JoA) to perform the drilling of the well in a good and workmanlike manner, to comply with all applicable laws and regulations and that BP is responsible for damages caused by its ‘gross negligence or willful misconduct’
Our understanding is that all of the above appears to invoke the ‘Workman Conduct’ clause that is normally included in Standard Form Joint Operating Agreements (JoA). This states that:
‘Operator shall timely commence and conduct all operations in a good and workmanlike manner, as would a prudent operator under the same or similar circumstances. Operator shall not be liable to non-operators for losses sustained or liabilities incurred, except as may result from operator’s Gross Negligence of Willful Misconduct. Operator shall never be required under this Agreement to conduct an operation that it believes would be unsafe or would endanger persons, property or the environment. Unless otherwise provided in this Agreement, Operator shall consult with Non-operators and keep them informed of all important matters’.
In practice that means Anadarko has decided to side with the US government, says Merrill:
Under the terms of the JOA all partners are joint and severally liable for the costs to clean up and associated damages – except where the operator is found to have acted with Gross Negligence or Willful Misconduct. APC has not explicitly stated its intentions as it relates to paying any share of the spill; but with a formal dispute now evident, arbitration is the likely next step – however we would also expect that any out of pocket costs ultimately payable will also be deferred.
Anyway, the Anadarko statement has triggered a furious response from BP on Monday morning:
Anadarko Petroleum Corporation has announced it is refusing to accept responsibility for oil spill removal costs and damages, claiming that, under an exception to a joint operating agreement’s cost and liability sharing provisions, BP Exploration & Production Inc. (BPXP) was “grossly negligent” or engaged in “willful misconduct” as operator for Mississippi Canyon, Block 252 (MC252).
BP strongly disagrees with these allegations and will not allow the allegations to diminish its commitment to the Gulf Coast region. “These allegations will neither distract the company’s focus on stopping the leak nor alter our commitment to restore the Gulf coast,” said BP’s chief executive officer Tony Hayward. “Other parties besides BP may be responsible for costs and liabilities arising from the oil spill, and we expect those parties to live up to their obligations. But how the costs and liabilities are eventually allocated between various parties will not affect our unwavering pledge to step forward in the first instance to clean up the spill and pay all legitimate claims in an efficient and fair manner.”
Jeez, this is getting nasty.
That said, Anadarko’s fury is understandable as its very existence is at stake.
Anadarko is a much smaller company than BP (market cap $20bn, cash reserves of $3.5bn and a credit line of $1.3bn) and would probably not survive being forced to pay pro-rota claims for the spill. (All of which probably explains why the US government is going after BP and not Anadarko or the other shareholder in Macondo, Mitsui of Japan).
On top of that, Anadarko is in the most aggressive exploration phase in its history and has been seeking partners to develop nine deepwater discoveries.
From the FT:
Anadarko Petroleum started the year the envy of the majors, with unprecedented exploration success yielding nine significant deep-water discoveries in 2009. These discoveries stretched from the Gulf of Mexico to Brazil and along west Africa’s oil coast from Ghana to Sierra Leone.
The expectation then was that the US independent would seek partners to help it develop all the finds, with each costing billions of dollars to bring on production if appraisal activity determined them large enough to be commercially developed. Now it may need to sell some of the finds outright, thanks to its 25 per cent stake in the Macondo oil well leaking in the gulf.
Meanwhile, the BP falling knife is er, falling again. In early trading in London it is down 11p at 346p unsettled by reports that BP is looking to boost its warchest to cover both the claims resulting from the spill and the restoration of investor confidence.