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How To Blow $13 Billion In 30 Minutes

BP sign
photo by Mike Mozart

Oil flowed into the Gulf of Mexico for 87 days following the Deepwater Horizon explosion in 2010. More than four years later, a federal judge has concluded that not enough money has flowed out of BP.

U.S. District Judge Carl Barbier has issued a hefty 153-page ruling that lays out, in painstaking detail, the sequence of events that Barbier believes led up to the disaster. In places, it reads like the treatment for a big-budget film adaptation of the incident. But given what the ruling could cost, BP is unlikely to offer much acclaim.

As Barbier observes, the Clean Water Act provides that any person who discharges oil into protected waters can be fined up to $1,100 per barrel. However, if the offender is found grossly negligent or willfully causes the discharge, that penalty goes up to $4,300 per barrel. The flow rate for the leak in the Gulf is still a matter of contention. But according to most published estimates, BP could be exposed to nearly $18 billion in fines in the latter case, or around $5 billion in the former.

Barbier’s ruling says that someone made a $13 billion mistake.

That’s because Barbier concluded that BP was grossly negligent. He found oil rig operators Transocean Ltd. and drilling subcontractor Halliburton Energy Services merely negligent, and ultimately less responsible for Deepwater Horizon than was BP. He assigned blame for the spill at 67 percent BP, 30 percent Transocean and only 3 percent Halliburton. (While the judge found that Halliburton made mistakes, he ultimately concluded that it would not have mattered much in the chain of events that occurred.)

I read the ruling closely because I wondered how the judge reached his conclusion that BP was grossly negligent, and whether this was merely a case of Monday-morning quarterbacking.

Gross negligence, as Barbier himself acknowledges, is a nebulous term. The Clean Water Act distinguishes between gross negligence and willful misconduct; the United States and BP generally agreed on the definition of the latter but not the former. BP argued that gross negligence “requires an extreme departure from the ordinary standard of care,” but also requires that the actor have a “culpable mental state.” In other words, BP said, the operator who is grossly negligent must at least be aware that it is acting dangerously or recklessly. The government contends that gross negligence requires only the first of these - that is, objective and not subjective proof. Barbier sided with the United States, finding that gross negligence is different from ordinary negligence in degree, but not necessarily in kind. If you are sloppy enough, you are grossly negligent even if you don’t realize it.

For context, it is useful to walk through the version of events Barbier constructed out of the extensive testimony involved in the case.

On April 20, 2010, BP was trying to temporarily seal and cap the Macondo well after completing it. During drilling, oil is prevented from following into a well in progress by a mixture of slurry called drilling mud. The drilling mud needed to be removed from the Macondo well and replaced with (lighter) seawater, which meant the pipe needed to be empty, since water alone is not sufficient to hold back the oil. To that end, valves should be closed, and cement is placed in the “annulus,” or space between the metal pipe and the oil-bearing rock, to prevent hydrocarbons from infiltrating any breaches.

Once the new barriers are in place, a test determines whether it is safe to remove the mud. That test involved removing some smaller portion of the mud and pumping out the tube to a pressure reading of zero. The rig crew then waits to see if the tube maintains its zero pressure reading. If the pressure increases, something could be presumed to be flowing into the well, indicating a breach.

In his ruling, Barbier leaves no margin for doubt, citing a Transocean expert and an expert witness for the United States to support the position that “If there is either pressure or flow, then the test has failed.” In his view, anything other than a perfect test should count as a failure.

Don Vidrine, one of two well site leaders on the Deepwater Horizon rig, stated in later interviews that the pressure test results looked “squirrely.” There was pressure on the drill pipe itself, but none in a secondary pipe, called the kill line. There was nothing apparently flowing, either. The two men most directly responsible for interpreting these results were Vidrine and a supervising engineer back in Houston, Texas, named Mark Hafle.

Vidrine, who was at direct risk of his life from an incorrect decision, declared the negative pressure test a success, squirreliness notwithstanding, attributing anomalous pressure to what would later be termed a “bladder effect.” In his ruling, however, Barbier noted that no witnesses had heard of this effect as something that would justify labeling the pressure test successful. The judge suggested that it may have originated, in some form, with the Transocean crew, but said that BP employees, including Vidrine, should have had the experience to dismiss it.

Hafle did question the reading, but Vidrine did not call off the order to remove the remaining mud as a result of his phone conversation with the engineer - at least not before the accident, which occurred about a half-hour after the call. Barbier homed in on this action, or failure to act, writing that “The risk of foreseeable harm associated with misinterpreting a negative pressure test was great in terms of severity and probability.” Returning to the point that inconclusive results should have indicated failure, he argued against the idea that misinterpretation could have been “an ‘honest mistake’ or ‘mere inadvertence.’”

Barbier also focused on the moment at 9:38 pm, 11 minutes before the first explosion, when combustible fluids rose above the level of the blowout prevention mechanism, or BOP. As long as the fluids were below the BOP, he ruled, the disaster could have been prevented, at least in part, as the pipe could have been sealed and the spill would have been minimized.

The bottom line of Barbier’s ruling is that BP is exposed to about $13 billion of additional penalties because two men did not clearly and immediately issue an order to halt the removal of the drilling mud in the half-hour between the Vidrine’s conversation with Hafle and the ensuing explosion. Even Barbier realized that this seems extreme on its face, and he spent much of the more than 600 paragraphs in his ruling laying out, in detail, the chain of bad decisions by BP that created the circumstances making this failure possible.

“While not all of these decisions may have contributed to the ultimate mode of failure, and perhaps not all were necessarily unreasonable decisions (at least when viewed in isolation), each of these decisions and their associated risks should have increased the caution surrounding the negative pressure test beyond the ‘high alert’ status it already demanded,” he wrote.

Debris clogged the kill line, the judge said, due to the nature of the rock being drilled for the well. Also, the way they welded the pipe was faulty. BP declined to evaluate the cement annulus using a cement bond log, as per a decision tree the company had created specifically for the Macondo well. And there were only eight spacers, instead of a recommended 20, to center the pipe. Whether the spacers were to blame for the fact that the drill pipe was off-center remains a matter of dispute; the pipe being off-center, however, meant that the BOP’s blind shear rams did not effectively cut it off as they were designed to do. This failure was why the oil continued to flow for months.

Throughout his descriptions of the various problems, Barbier held that many of them were the results of profit-driven choices, though he did acknowledge that other tradeoffs sometimes came into play. Yet he returned, mainly, to the negative pressure test.

This insistence makes his ruling seem arbitrary and unfair. For example, Barbier found Transocean merely negligent, without the recklessness he attributed to BP, yet he acknowledged that “both BP and Transocean are responsible for the misinterpretation of the negative pressure test.” If the Transocean crew had felt strongly that the decision was faulty, they could have declined to follow instructions that they believed to be unsafe. Yet they did not.

BP has accepted blame from the beginning. It has never been a question of whether the company would pay, but of the extent of the real damages and penalties. Barbier’s ruling more or less states that as long as BP has any money left, it has not been penalized sufficiently.

Is it reasonable, rational or what Congress intended to charge BP an additional $13 billion because, four years later, a judge found that it should have seen an irregular pressure test as an outright failure, and that it should have reached that conclusion and acted upon it within about 30 minutes? It seems like clear Monday-morning quarterbacking. If the decision stands, it could also have profound implications that reach far beyond BP.

BP has already said it will appeal. The British government has also, separately, urged the Supreme Court to review prior appeals court rulings against BP, suggesting that the treatment BP has faced undermines the trust necessary for international commerce.

Either the judge is wrong, and the appeals courts will eventually find as much, or Congress needs to step in. This decision so raises the risk of an enterprise being found guilty of gross negligence that the price of insurance, if available at all, will skyrocket. Ultimately, those costs are not only borne by corporate shareholders; they pass through to consumers, too.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us” and Chapter 4, “The Family Business."

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