On September 4, 2014, a court in Louisiana ruled that BP committed “gross negligence” and “willful misconduct” in connection with the April 2010 Deepwater Horizon disaster, which sent millions of barrels of oil spewing into the Gulf of Mexico. This ruling opens the door for BP to be hit with about four times more in fines than would otherwise occur. In real dollars, this means an increase in the potential fine from $4.6 billion to over $18 billion.
Here’s an explanation and update:
Background
In 2008, a subsidiary of BP acquired an oil lease about 5,700 acres of the outer continental shelf off the coast of Louisiana. BP contracted with Transocean Holdings LLC (“Transocean”) to drill a well on the lease in about 5,000 feet of water, to access a deposit of oil anticipated to be roughly 20,000 feet below the surface of the ocean. The Deepwater Horizon was a mobile drilling rig used by Transocean to drill the well.
Oil wells are drilled into underground rock formations with significant pressure – it’s the pressure that helps the oil flow into and ultimately out of the well. The formation being drilled here – the Macondo formation – was a particularly high-pressure formation. This pressure must be managed through well construction techniques and constant monitoring of good pressure.
Transocean encountered numerous problems in drilling the well, prompting one person to call Macondo the “well from hell.” In short, the well passed through deposits of fragile limestone made it very difficult to maintain a balance of the pressure in the well. Pressure must be slightly higher inside the well than outside to prevent the high pressure in the rock formation from forcing oil and other underground fluids up and out of the well. A “blowout” occurs when these fluids flow up a well in an uncontrollable way, often leading to explosions and fires due to the flammability of oil and gas.
Transocean reached about 18,300 feet of depth when geologists decided they could go no further. Transocean then proceeded to place a temporary cap on the well to allow BP to begin producing it later when a new production rig could be brought in. However, the cap failed to properly seal the well. As crews finished the job, a massive blowout occurred, sending oil gushing up the well, which was ignited and exploded. The Deepwater Horizon sank and the good tube buckled, sending oil spewing into the water. It took crews 87 days to finally seal the spill, during which time somewhere around 4 million barrels of oil were spilled into the Gulf.
Whether BP Is Subject to Increased Civil Penalties
One of the main claims in the case is that BP is liable for monetary fines (called “civil penalties”) under the Clean Water Act. The Clean Water Act allows a Court to award civil penalties against a company that is responsible for discharging harmful levels of oil into the waters of the United States. 33 U.S.C. Section 1321(b)(7)(A). However, the amount of penalties that can be awarded depends on the level of misconduct of the responsible party.
If a company was merely “negligent” in committing a harmful oil spill, the company is subject to a maximum fine of $1,100 per barrel of oil spilled. 33 U.S.C. Section 1321 (b)(7)(A). Negligence means the company failed to exercise the degree of care that a company of ordinary prudence would have exercised under the same circumstances.
However, the law allows for nearly 4 times the amount of civil penalties if the company acted with “gross negligence or willful misconduct” in connection with the spill. 33 U.S.C. Section 1321(b)(7)(D). These penalties can amount to $4,300 per barrel of oil spilled. 40 C.F.R. Section 19.4. In general terms, “gross negligence” means the company committed an extreme departure from the care required under the circumstances or failed to exercise even slight care. This is a slightly lower standard than “willful misconduct.” Willful misconduct involves an intential act done with at least a reckless disregard of the probable consequences that would result, or a failure to act under circumstances where the failure to act implies at least a reckless disregard of the probable consequences.
BP Was Grossly Negligent in Conducting Well Pressure Tests
In this case, the BP engineer responsible for overseeing the drilling of the well was responsible for conducting a pressure test following the drilling process. This test was necessary to ensure the well was isolated from the pressure outside in the formation as part of the process of temporarily closing the well before production occurred. If the well was not pressure-isolated, the well could experience a sudden increase in good pressure from the formation, leading to a blowout.
Here, the BP engineer, a man named Don Vidrine, reviewed the results of a pressure test in the well but reached the incorrect conclusion about what the results showed. He concluded that the test showed the well had achieved pressure isolation, when in fact it had not. On the day of the blowout, he called BP engineers in Houston to discuss the test. Critically, the BP engineer in Houston, Mark Hafle, told Mr. Vidrine that the test results showed inconsistencies that meant the test could not be certified as successful. However, Mr Vidrine nonetheless certified the test as successful and ordered crews to move ahead with drilling. And Mr. Hafle, knowing this was occurring, failed to order the drilling to cease or otherwise respond to the situation. All of the experts that testified in the case — including BP’s experts — concluded that Mr. Vidrine’s interpretation of the pressure test was erroneous and that the test could not have been deemed successful.
This conclusion was particularly egregious in light of known problems that had been experienced in other phases of the well drilling. BP personnel, including Mr. Vidrine and Hafle, knew that the cement and casing in the well were suspects. Indeed, Mr. Hafle told BP investigators that the cement job was “shittie” due to certain complications resulting from the fragile limestone encountered during drilling. Given these known problems, according to the Court, BP personnel should have been extra vigilant in conducting the pressure test, since it is the main way to determine if the cement and casing are providing a barrier to flow, as intended.
These errors were compounded by a laundry list of technical errors committed during good drilling, including ignoring certain protective measures and cutting a number of corners in the drilling process. Each of these should have put BP personnel on higher alert about the importance of the pressure test.
The Court found that Mr. Vidrine’s failure to conduct a new pressure test, and Mr. Hafle’s failure to take any corrective action after speaking with Mr. Vidrine, were an extreme departure from the ordinary care that would be required under the circumstances. The Court also found they were a conscious disregard of a known and unreasonable risk of harm. These actions, therefore, constituted both gross negligence and willful misconduct. This makes BP subject to up to $4,300 in fines per barrel of oil spilled. The high-end estimate of barrels spilled is roughly 4.2 million, leading to roughly $18 billion in fines.
BP, Transocean, and Halliburton Are All Partially Responsible for the Disaster
In addition, Transocean and Halliburton were also found to be partially responsible for the disaster, though not as responsible as BP.
As to Transocean, the Court found the drilling crew made a number of mistakes that contributed to the disaster, including the misinterpretation of the pressure test, a failure to perform safety checks, and a failure to properly maintain and activate disaster prevention mechanisms.
Halliburton was responsible for performing cement work during the process of closing the well. The Court found Halliburton’s conduct was “egregious” in certain respects and led to a failure of parts of the cement to stabilize. However, these problems were not actually a cause of the blowout. As such, the Court finds Halliburton less responsible for the disaster.
The Court concluded that the ratio of responsibility was:
- BP – 67%
- Transocean – 30%
- Halliburton – 3%
However, Transocean and Halliburton had indemnification and release of liability provisions in their agreement with BP. Because their conduct did not rise to the level of “gross negligence,” the Court held these provisions are valid and enforceable against BP. This will minimize the ultimate amount of penalties these companies will need to pay.
Conclusion
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