An independent review of corporate bond covenants for the sophisticated investor

The Parties.

      •   BP, a company registered in England and Wales, owns 65% of the Macondo Well
          through its ...

All content is copyright 2010 by Covenant Review, LLC. The recipient of this report may not redistribute or r...
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  1. 1. An independent review of corporate bond covenants for the sophisticated investor July 13, 2010 BP & Anadarko: Negligence Arguments This is the abridged version of a report originally prepared on June 25, 2010 by Adam B. Cohen and F. Holt Goddard, attorneys and Covenant Review analysts, and Blane G. LeCesne, an Associate Professor of Law at Loyola University in New Orleans. Professor LeCesne specializes in Louisiana Civil Procedure, Criminal Law, Torts, and Trial Advocacy. He graduated from Columbia University and Columbia Law School and joined Loyola’s faculty in 1991 after a career in government and private practice. Overview. The Macondo Well continues to gush oil into the Gulf of Mexico and create mounting liabilities with each barrel that rises off the ocean floor. The well is owned by BP p.l.c. (“BP”), Anadarko Petroleum Corporation (“Anadarko”), and Mitsui & Co., Ltd. (“Mitsui”) either directly or through subsidiaries, and the respective liability of each has not surprisingly become a matter of contention. Joint venture partners are friends when a venture begins – and enemies when things turn bad. As BP has become the villain in the press, its former friends like Anadarko and Mitsui will want to make sure that BP is the villain in contract and court as well. The war of words has begun, as demonstrated by the June 18, 2010 press release from Anadarko stating that BP’s operations of the Macondo Well “likely represent gross negligence or willful misconduct.” We examine the October 1, 2009 Operating Agreement that governs the “Macondo Prospect”1 and review relevant legal standards that may affect the relative liabilities of the three owners. It is not possible at this time to accurately predict how liability will be divided between these parties because too many facts remain unknown. This report is intended to be a general guide that will be helpful in thinking about these liabilities as more information is revealed. 1 The Operating Agreement was filed by Anadarko as an exhibit to a June 21, 2010 8-K and can be found at: Contact: Adam B. Cohen / F. Holt Goddard Covenant Review, LLC 1-212-716-5780 230 Park Avenue, Suite 812 / New York, NY 10169 Copyright © 2010 by Covenant Review, LLC.
  2. 2. The Parties. • BP, a company registered in England and Wales, owns 65% of the Macondo Well through its subsidiary BP Exploration & Production Inc. (“BPXP”). Under the Operating Agreement, BPXP is the “Operator” of the Macondo Well, which means that it “has the exclusive right to conduct… all activities or operations under this [Operating] Agreement.” • Anadarko owns 25% of the Macondo Well, including 2.5% that it holds directly and 22.5% that it holds through its subsidiary, Anadarko E&P Company LP (“AEP”). Anadarko and AEP are “Non-Operating Parties” under the Operating Agreement. • Mitsui owns 10% of the Macondo Well through its 70% owned subsidiary MOEX Offshore 2007 LLC (“MOEX”), and MOEX is a “Non-Operating Party” under the Operating Agreement. The Bottom Line: • Anadarko may escape contributing to claims and get paid by BP if BP was “grossly negligent” or engaged in “willful misconduct.” While those are tough standards to meet, the magnitude of the disaster and the bad allegations against BP may put Anadarko in a good position. • The Operating Agreement calls for disputes between the parties to be submitted to arbitration, which means any direct dispute between Anadarko and BP will play out differently than it would in front of a jury and the influence of public opinion may be reduced. • We caution that the state law used in any litigation and the particular facts that come to light in the months ahead will be critical – this report is merely a guide to thinking about the issues and cannot be a prediction. The Operating Agreement. The Operating Agreement was executed by BPXP and MOEX on October 21, 2009, and Anadarko and AEP signed a Ratification and Joinder to that Agreement on December 17, 2009. Key provisions. • Section 5.1 – Exclusive Right to Operate generally gives BP, as Operator, the right to conduct and direct operations as “an independent contractor, not subject to the control or direction of Non-Operating Parties,” except for matters subject to approval, which include plans for drilling and development of the Macondo Oil Field. • Section 5.2 – Workmanlike Conduct deals with BP’s obligations and potential liability as Operator. It states: “The Operator shall timely commence and conduct all activities or operations in a good and workmanlike manner, as would a prudent operator under the same or similar circumstances. THE OPERATOR SHALL NOT BE LIABLE TO THE NON-OPERATING PARTIES FOR LOSSES SUSTAINED OR LIABILITIES INCURRED, EXCEPT AS MAY RESULT FROM OPERATOR’S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. UNLESS OTHERWISE 2
  3. 3. PROVIDED IN THIS AGREEMENT, THE OPERATOR SHALL CONSULT WITH THE NON-OPERATING PARTIES AND KEEP THEM INFORMED OF IMPORTANT MATTERS. The Operator shall never be required to conduct an activity or operation under this Agreement that it, as a reasonable and prudent operator in similar circumstances, believes would be unsafe or would endanger persons, property, or the environment.” [Emphasis in the original.] • Section 5.7 – Information to Participating Parties governs the information and data that the Operator must provide to the Non-Operating Parties as drilling is conducted, which includes significant technical information and “real time” data.2 • Section 5.10 – Health, Safety, and Environment addresses BP’s obligation to “promote the effective management” of HSE (Health, Safety, and Environmental) risks, apply HSE systems “consistent with those generally applied in the petroleum industry,” and to conform to HSE related statutory requirements.3 • Under Article 8 – Approvals and Notices, depending upon the type of drilling activity, approvals from the Parties would either be by vote or election. An approval by vote generally requires an affirmative vote by a majority in operating interests and more than one Party. An approval by election generally means that a Party can decide whether or not to participate in a particular activity under the agreement but does not have a right to prevent the activity from happening with a negative vote. Generally speaking, approvals are required to commence drilling and production and to make material changes to drilling plans, but not for day-to-day decisions. • Article 22 – Liability, Claims, and Lawsuits governs the various Parties’ liabilities for various damage claims, including from a spill. Section 22.5 – Liability for Damages generally requires that each Party be liable for its proportionate share of its damages “except that when liability results from the gross negligence or willful misconduct of a Party, that Party shall be solely responsible for liability resulting from its gross negligence or willful misconduct.” That section goes on to say that no Party is liable to another for “punitive damages, consequential, indirect, unforeseen, loss of profit, or other indirect [damages].” Section 22.7 – Damage to Reservoir and Loss of Reserves states that no Party is liable to another for “damage to a reservoir or loss of hydrocarbons, except if that damage or loss arises from a Party’s gross negligence or willful misconduct.” Section 22.9 – Dispute Resolution Procedure calls for disputes to be resolved according to Exhibit H, which requires the Parties to submit to binding arbitration. • Under Section 26.4.1 – Applicable Law, the Operating Agreement will be governed “under Federal law and the laws of the State of Louisiana.” Contact Covenant Review for the full report – / 1-212-716-5780. 2 This includes “copies of drilling prognoses” and “copies of well test results, bottomhole pressure surveys, Hydrocarbon analyses, and other similar information, including PVT analyses.” 3 Exhibit K to the Operating Agreement also specifies HSE plan and reporting requirements, including reference to the American Petroleum Institute’s API RP 75 guidelines. 3
  4. 4. Disclosures All content is copyright 2010 by Covenant Review, LLC. The recipient of this report may not redistribute or republish any of the information contained herein, in part or whole, without the express written permission of Covenant Review, LLC. The use of this report is further limited as described in the subscription agreement between Covenant Review, LLC and the subscriber. The information contained in this report in intended to generally describe certain covenant features. This report is not comprehensive, is not confidential to any person or entity, and should not be treated as a substitute for professional advice in any specific situation. Covenant Review, LLC makes no warranty, express or implied, as to the fitness of the information in this report for any particular purpose. If you require legal or other expert advice, you should seek the services of a qualified attorney or investment professional. Covenant Review, LLC does not render, and nothing in this report constitutes, legal or investment advice, and recipients of this report will not be treated or considered by Covenant Review, LLC as clients or customers except as described in the subscription agreement between Covenant Review, LLC and the subscriber. The covenants discussed herein may be based on those published in the preliminary offering memorandum distributed by the issuer in connection with the issuance of the notes, and the covenants published in the final offering memorandum or contained in the final indenture may differ from those presented herein. The reader should be aware that the final interpretation of any bond indenture will generally be determined by the issuer or its counsel, or in certain circumstances, by a court or administrative body. 4