Deepwater Horizon: Halliburton Under the Microscope

The headline on CNN'S story reads BP still wants Halliburton to pay for whole Gulf oil spill cleanup. Many readers may ask themselves "still?" Does this mean BP may pass the liability for the Gulf oil spill onto Halliburton? Here is what the article has to say:

BP and Halliburton sued each other in April 2011 claiming each is to blame for the deadly explosion on the Deepwater Horizon rig and resulting disastrous oil leak. Halliburton was in charge of cementing the Macondo well and claims that its contract with BP indemnifies (releases) Halliburton of any legal action resulting from its work as a contractor...

Halliburton was in charge of cementing the Macondo well and claims that its contract with BP indemnifies (releases) Halliburton of any legal action resulting from its work as a contractor.

In a response filed Sunday, BP asserted that "maritime law prohibits indemnification for gross negligence."

As part of that four-page filing, BP reiterated that it was seeking to recover from Halliburton "the amount of costs and expenses incurred by BP to clean up and remediate the oil spill." BP has estimated in the past that the total cost will be around $42 billion, and by the end of November 2011 the oil company it has paid out or agreed to pay out $21.7 billion to affected individuals, companies and governments around the Gulf.

In an e-mail to CNN, Halliburton spokesperson Beverly Stafford said "Halliburton stands firm that we are indemnified by BP against losses resulting from the Macondo incident."

So what is really going on? In my day job, I sell pressure relief devices (including "burst disks" similar to those provided by a competitor for use in the 16" subs on the Macondo well). So I have an informed, but disinterested, perspective on this user/vendor dispute. Every time we sell a device, it is intended to be used as a safety device in what could become a dangerous situation. Often, the danger is due to a rare situation, such as a fire. So if you never have a fire in your manufacturing plant the "fire case" never comes into play and the burst disk is a redundant safety device. (When you hear government regulators talk about a "safety case" management scheme, they are referring to a system whereby you try to imagine every possible fault condition and devise a plan to mitigate any danger it presents.) If a fire were to occur, that relief device is expected to work, no excuses accepted. And with that expectation comes a potential legal liability, which is why you hear so many manufacturers demand tort reform!

Since the Deepwater Horizon took place well offshore, in federal waters, it is within the jurisdiction of federal courts under Admiralty law, not the venue shopping state or local courts so favored by tort lawyers. (See the United States Constitution Article III, Section 2 " all cases of admiralty or maritime Jurisdiction...") As a manufacturer, I take a certain amount of pleasure in seeing the ambulance chasing tort lawyers engage in turf battles over trying to divvy up the potential jackpot of legal fees they see in their dreams. But the dispute between BP and Halliburton will come down to the nature of that user/vendor contract and admiralty law.

As a vendor, I can build a device that will do a defined task and then provide a limited warranty that it will do that defined task. I cannot be expected to provide a warranty for some action by the user that violates the definition of the task the device is intended to perform. An example of such an action would be that taken by the former Chief of Naval Operations, Arleigh "31 Knot" Burke, when he routinely had his engineers tie down the safety levers on the boiler relief valves of his destroyers as they raced into battle in the Pacific during World War II in order to make more speed! It seems "31 knots" due to a blown boiler tube was awfully slow compared to his normal 34 knots!!  (Now you know who inspired the character Scotty on Star Trek!)

The point to be taken is that as a vendor I cannot control what the user ultimately does with my device, so it is necessary to contractually restrict my limited warranty to what has been defined therein. But the device still must perform the task it has been defined to do. So what we see here is that Halliburton defense to this point has been that BP indemnifies it because BP has final authority over the application. BP's claim is that Halliburton's cement did not perform up to the defined standards of what BP could reasonably expect cement to do within Halliburton's limited warranty. BP's position in its filing is that Halliburton cannot provide a defective cement job and then assert it has zero responsibility. As BP's filing states, "maritime law prohibits indemnification for gross negligence."

So now BP is philosophically aligned with the government regulators that the contractors (Halliburton, Transocean et al) to leaseholders (BP) also need to step up their game and improve the quality of their training and products and services. We will see if the federal courts agree by holding Halliburton at least partially responsible for the failure of their cement job.