Saturday, June 05, 2010

service side liability

It has been interesting to see many news articles and editorials speculate on the potential liabilities of the service companies associated with the Deepwater Horizon. In particular, most of the articles discuss Transocean (rig), Cameron (blow-out preventer, aka: BOP), and Halliburton (cement). If you want an explanation on what each service company does and is responsible for, check out the infographics on the WSJ article I discussed in my last post. If that’s not enough, leave a question in the comments, though I’ll say that I think about one-third to one-half of my regular readership already received a pretty lengthy e-mail on the subject of cementing.

What has been most interesting is how many of the early articles seemed to be on a quest for blame beyond BP. There was much speculation about potential liability and responsibility of the service companies with little actual fact to back it up. Frankly, the relationship between service companies and oil and gas operators is somewhat strange and tortuous, but the liability is usually quite clear. Again, this is not meant to convey particular knowledge of the contract situation between BP and its service providers, but meant to explain what is common in the industry. Operators bear liability most of the time because they also reap the most rewards. Let’s put it this way. If a project/job/whatever goes well, the most a service company can expect to make is what was agreed upon in the contract. The least they should expect to make is nothing if they were late, didn’t deliver all items, had some service delivery failure, etc. The upside is limited and so is the downside. For the operators, their upside is much higher, meaning whatever they can extract from the ground. However, the cost of that upside, is that their potential downside is much greater.

5 comments:

Anonymous said...

BP hives off "toxic"...

What do you think about Piper Alpha?
Piper Alpha

So many workers died but not a big news because most of them were Americans.

smallchou said...

Are you surprised by the difficulty in finding a way to stem the oil coming through the leak? As a (very) naive outsider, I find it bizarre that there aren't any safeguards to, say, shut off the flow of oil to a particular section of a pipeline. I'm thinking some valve every X miles to be used in case of emergency.

Brian said...

Anonymous
I assume there is a "not" missing from your last sentence.
As for Piper Alpha, the same fundamental problems that existed then are really what has led to Deepwater Horizon.

mom said...

You are correct. Most killed weren't Americans. But the company was Occidental, which is an American company.

Brian said...

smallchou
No, I'm not at all surprised by the difficulty. You have to keep in mind that this is a damaged well head and not a relatively simple pipeline that is leaking. This is oil straight out of the reservoir.