Deepwater Tragedy Highlights Contract Negotiation Issues

On April 22nd, the Deepwater Horizon grilling rig in the Gulf of Mexico exploded and sunk, causing the deaths of 11 people and leading to oil spilling into the ocean.

Aside from being a human tragedy and an environmental hazard, the incident also highlights the importance of contract negotiation.

No doubt in the weeks and months to come there will be various legal ramifications surrounding the case that will have implications for contract negotiation in the future.

The US Department of the Interior and Department of Homeland Security have already announced a joint enquiry into the incident. The House of Representatives committee on energy and commerce's subcommittee on oversight and investigations and Senate committee on energy and natural resources have also announced investigations.

BP, the lease operator of the rig, has also launched its own investigation into the incident and has a team at work in Houston, Texas.

"As an industry, we must participate fully in these investigations and not rest until the causes of this tragedy are known and measures are taken to see that it never happens again," commented BP Group chief executive Tony Hayward.

Transocean, the contractor which runs the drilling rig, has also referred to an ongoing investigation.

Implications for Contract Risk Management

There are various parties implicated in the disaster, adding complexities to the contract negotiation issues surrounding the case.

Hayward has insisted that BP is not at fault for the incident, saying that the drilling rig belongs to Transocean.

"It was their equipment that failed, it was their systems and processes that were running it," he stated.

Since then, it has emerged that the UK Health and Safety Executive (HSE) issued Transocean with an improvement notice in 2006 which criticised the testing of a blow out preventer. This is the device which is thought to have failed and caused the explosion on the Deepwater Horizon rig.

The blowout preventers in question were said to not be "suitable for the purpose" in the notice issued by the HSE. These devices were fitted to traditional rather than deepwater rigs like the one in the Gulf of Mexico and were later improved. No further action was taken by the HSE.

Mounting Costs

Another company implicated in the incident is Halliburton. The firm issued a statement in which it confirmed that it performed a variety of services on the Deepwater Horizon rig.

Halliburton stated that it completed the cementing of the final production casing string in accordance with the well design approximately 20 hours prior to the incident. It also said that tests demonstrating the integrity of the production cashing string were completed.

The company said it would be "premature and irresponsible to speculate on any specific causal issues", adding that it was continuing to assist with efforts to identify factors leading up to the disaster.

Until liability is determined, however, the costs continue to mount up, once again highlighting the importance of contract negotiation prior to drilling activity. BP has already offered $25 million (£16.6 million) block grants to the states of Louisiana, Alabama, Mississippi and Florida to help accelerate the implementation of Area Contingency Plans.

BP estimates that the cost to contain the spill and secure the well is more than £6 million per day and said on May 4th that this figure was rising as activity increased. Transocean has confirmed that it is insured for total loss coverage and for wreck removal, to the extent that removal can be carried out and is required.

The total insured value of the rig is $560 million, the company said.

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