Financial giant Morgan Stanley has released a comprehensive, although very preliminary, report on the financial implications of the Deepwater Horizon incident in the Gulf of Mexico and its potential impact on the various players involved. Although plaintiffs’ attorneys are likely to have a field day filing lawsuits, some of the companies will have less exposure to liability than others.
The Transocean-owned Deepwater Horizon drilling rig was leased to BP. It had a crew of 126 when it was struck by an explosion on April 20 and sank two days later. Eleven workers are missing and presumed dead. At this writing, crude oil continues to pour into the ocean, and the resulting “oil slick” still has not come ashore as of this writing. Predictions are it could make landfall anywhere from the Mississippi delta in Louisiana east to the west coast of Florida. Some experts believe currents may take the oil south to the Florida keys where it could enter the Gulf Stream and move up the US East Coast.
Prominent New Orleans attorney Keith Hall of Stone Pigman predicts a “wave of litigation” in the wake of the explosion, fire, worker deaths, and the subsequent sinking of the Deepwater Horizon, which was known as a state-of-the-art unit with a highly professional and experienced crew and a long record of exemplary safety. The continuing crude oil spill and its potential damage add to the complexity of the issue. Another consequence, says Hall, will be more stringent enforcement of government regulations, new regulations, and even congressional hearings concerning offshore drilling and production, particularly deepwater exploration.
On April 30, Morgan Stanley hosted a conference call with several industry experts for a technical, legal, and political discussion on the incident. The Wall Street firm brought together a 15-year Transocean veteran; an Oil Pollution Act litigation expert; a former US Government career attorney with over 27 years’ experience dealing with ocean policy; several political consultants; and the firm’s equity research analysts.
Companies with some degree of exposure to the incident include BP, Transocean, Halliburton, Smith International (through M-I SWACO, a 60%/40% joint venture of Smith and Schlumberger), and Cameron. Although there are conflicting accounts as to the cause of the accident, the consensus among Morgan Stanley’s experts is that contractual protections likely provide legal cover for Cameron and Transocean, while legal contacts and the practical difficulties of investigating the incident likely limit exposure for Smith International and Halliburton.
The rig had discovered oil after drilling BP’s Macondo well, located in 5,000 feet of water, at a depth of about 18,000 feet below the seabed. The rig was approximately 40 miles offshore Louisiana when the incident occurred. BP operates the well and owns a 65% stake. Partners include Anadarko (25%) and Japan’s Mitsui (10%). Transocean was the drilling contractor; Halliburton performed cementing operations; M-I-SWACO handled drilling fluids; and Cameron manufactured the blowout preventer (BOP) purchased for the rig about 10 years ago.
Conflicting reports from industry contacts and survivors make it difficult to know the precise chain of events that occurred leading up to the accident, so much of the information about the incident remains speculative.
Morgan Stanley’s experts believe that Cameron and Smith International have the least to worry about from a liability standpoint given that the BOP was past warranty and the drilling contractor (Transocean) is responsible for its maintenance, while the operator (BP) is in charge of determining the mud density appropriate to use in a given wellbore. Halliburton also has relatively limited exposure, say the experts, because investigating the cement plug, if it had even been installed, which the company denies, would be very difficult.
Transocean is responsible for the fuel leaking out of its unit, but likely is contractually protected from any environmental liability resulting from a blowout. The experts went on to say that Transocean’s $1 billion insurance policy should cover the majority of liabilities resulting from diesel spill from the unit and loss of life.
In addition, the experts went on to state that they see potential regulation deriving from the accident as a positive for the drilling equipment industry, as drilling rigs may require more redundancy of equipment as well as more frequent servicing and replacement of equipment. On the drilling side, they expect established offshore drillers with the newest deepwater units to benefit as demand for their rigs is likely to increase. Those with older fleets and higher exposure to the Gulf of Mexico are more likely to be disadvantaged.
Morgan Stanley’s conclusion is that the operator and the other lease interest owners will absorb the lion’s share of the financial liability for the oil spill and any potential punitive damages. The firm expects the following outcome: 1) Cameron and Smith International to be fully absolved of liability; 2) Transocean’s potential liability to be relatively small and well within insurance policy; 3) Halliburton unlikely to be held responsible, as the company claims it had not plugged the well, and even if it had plugged the well, it would be extraordinarily difficult to demonstrate flaws with the cement; 4) industry-wide implications to be a long-term positive for equipment manufacturers and somewhat mixed for offshore drillers; and 5) impact on shipping lanes in the Gulf of Mexico to trigger a congestion-like effect on tanker rates. The spill could also spur tighter tanker regulation in the US and could help accelerate the ban on single-hull vessels in the US. This would make the long-term supply outlook for tankers more favorable, says the firm.
PennWell and Oil & Gas Financial Journal will provide continuing coverage of the business and financial implications of the Deepwater Horizon incident in the coming days and weeks.
