US Issues Oil-Spill Violations to BP, Halliburton, Transocean

Deepwater Horizon Gulf of Mexico Oil Spill

WASHINGTON (Dow Jones Newswires), Oct. 13, 2011

U.S. offshore-drilling officials issued their first violations stemming from the 2010 Deepwater Horizon oil spill Wednesday, accusing BP and two of its contractors of breaking several rules.

The citations were widely expected against BP, the operator of the Deepwater Horizon rig. But the government's decision to pursue contractors Transocean and Halliburton 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 follow a months-long 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.

BP spokesman Scott Dean said the violation make clear "contractors, like operators, are responsible" for their actions and "accountable to the U.S. government and the American public for their conduct."

BP also used the findings to chide its partners in developing the Macondo well, which was being drilled by the Deepwater Horizon rig.

"We continue to encourage other parties, including Transocean and Halliburton, to acknowledge their responsibilities in the accident," Dean added.

A Transocean representative 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."

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 has since been 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 did not 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.

Bromwich, who is set to testify Thursday at a House hearing on the spill investigation, has said contractors should not 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 if the government officially brands the contractors as violators, it could weaken their legal position against victims of the spill and BP. That is why the contractors are likely to contest the violation and any accompanying fines in court.

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, 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.

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 (R., La.), who questioned the legal basis for fines. "There needs to be a full accounting of the legal analysis behind Interior's expansion of authority," Vitter said.

In response to Vitter, 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," Bromwich wrote in a letter to the senator earlier this year.

In addition to the Interior Department action, Transocean also on Wednesday faced new scrutiny from the U.S. Department of Justice. Justice Department officials sued Transocean to seek the enforcement of subpoenas related to the blast that destroyed the Deepwater Horizon rig.

U.S. 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 Deepwater Horizon rig explosion, which killed 11 people in April of last year.

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 them heftier rates.

"It's potentially a very big deal," said Charles Landgraf, a partner at law firm Dewey & LeBoeuf who represents insurers.

Copyright (c) 2011 Dow Jones & Company, Inc.

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Paul Wilson | Oct. 17, 2011
I believe that BP should have to relinquish operation control of all operations in the Gulf Of Mexico. They could remain partners in operations, but could not have any say so in the daily operations of any drilling or production operations in the Gulf Of Mexico. I also feel that they should keep their word and pay the poor working man such as myself for the wages lost because of the moratorium issued by the Federal Government because of the Horizon accident Thousands of people such as myself have filed claims against BP for lost wages only to be told by Mr. Feinstien that BP doesn't pay claims for lost wages to individuals. I really believe BP has used the Federal Government and they are laughing all the way to the bank. Why doesn't someone in the government stand up to BP and fight for the small poor man like myself that was unemployed for 8 months because of this accident that could have been prevented.

Thomas B. Smith | Oct. 14, 2011
This government is just trying to stir things up and take attention away from the wild things they are doing to our country.

Mickey | Oct. 14, 2011
What I'd like to know is, were the government to levy these "fines", where would the money go? BP has been paying practically every claim that's be brought to them for damages and loss of wages. They paid for the clean up. They've set aside 40 billion to further aid in the response to the issue. Who is following this department and what it intends to do in setting such a precident as this and where the money will go? I mean, were talking about 21.2 billion dollars conservatively. We know they wont use it to pay down the national debt.

Philippe Landras | Oct. 14, 2011
Having worked for SEDCO on offshore drilling semi, I have some understanding as to the responsibilities split between the major oil company or client, the operator or owner of the drilling vessel, the contractors. The client contract the drilling mud subcontractor. The BOP is as per the client specification and the BOP number and position of RAMs including Shears RAM are as per the client requirement. The BOP made is , more time than not, as per the client choice. The operating procedures are approved by the client prior the drilling contract been sign. Usually the client makes all decisions regarding the drilling operations. The operator has little choice in challenging the client drilling operations. The safety of operations is split between the safety of the equipment and the safety of the men working it. The client which pay for the contractors: BOP, Mud engineer and the ingredients, the drilling 24/7 monitoring, the casing subcontractor and the casing tubular. The operator will provide qualify manpower to operate the equipment under the client subcontractor. In some cases the client contract a team of workers for a specific job, casing is an example. The cost of drilling shutdown is at the cost of the owner of the equipment causing the stoppage. This translate in the drilling day rate and the standby rate. Should the operator equipment provoke a drilling shutdown, the operator will absorb the cost differential between the drilling and standby day rate. This can be hundred of thousand dollars per day. Making the Client, operator and client subcontractor share responsibilities, is a departure and will change the client operator relationship. The reputation of majors will increase the cost of drilling. Some majors will see their contract cost go up, because of their drilling requirements. What I mean is that some majors will push the operator equipment as much as possible, if the derrick is tested at 1000 tons some client will push it at 999 tons. There will have to be more procedures in the contracts to cover the ability of operators to challenge the clients decisions. drilling cost will go up, especially in the GOM. This will make some field marginal from a profitable point of view. Profit is asset as per percent of the WTI price. This mean that the WTI will have to be high for a production operation to be profitable.

Philip L. Brown ee/me | Oct. 14, 2011
This scenario is liken to a Bus accident that injures several persons and spills 100s gals of diesel fuel into a Creek or River stream. The person who chartered the Bus (BP) should only be responsible, in part, for the persons being conveyed that were injured in accident. The Charter Company (Transocean) should be responsible for any and all peripheral and personal liability damages incurred in the accident from either a Sleeping Operator,Tire Blowout or Mechanical failure. Even though the Crude Oil legally belonged to (BP) other parties were responsible for its containment and handling. These types of incidents, even sporadic as they are, are going to happen and all of the Regulations will not cure it, as it is a dangerous business in a dangerous environment. Increased Inspection, Safety and Monitoring Programs are the only answer.

Alan | Oct. 13, 2011
Making all parties liable for their actions will ultimately raise the overall sense of safety for our environment. However, in such circumstances, the operator should bear a heavier responsibility. So, I agree with the Interior Department.

Hassan Saleh | Oct. 13, 2011
The citations are significant deviation from norms which were set in the E&P industry for years. It is well understood that the operator is sole responsible for issues related to HSE. If contractor equipment was not functioning as it should have, the operator could replace the contractor/equipment during the function testing before getting into the job. Nevertheless, justifications of the citations are to be thoroughly looked at to find out if any basis for such deviation.

James vslowey | Oct. 13, 2011
If you study the history of Bop testing in a real time situation if the unit Fails to function test, who gives the ok to pull the stack The deeper The water depth the more cost for the well. This has always been the case offshore the operative word by an expert in a known malfunction His advice would be It would be prudent to investigate. There needs to Be firm legislation to ensure a situation like this never occurs again. Or re design the complete deepwater Bop device. James V Slowey

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