Federal moratorium at center of oil-company lawsuits

06 09, 2012 by Daily Comet

Oil companies drilling in the Gulf of Mexico thought they had identified everything that might go wrong, even ''acts of God,'' such as hurricanes and other natural disasters.

They didn’t anticipate an act of government.

The drilling moratorium that President Barack Obama enacted after the Deepwater Horizon spill has left many energy companies grappling with the question of who should pay for business lost during the five-month shutdown of deepwater operations in the Gulf.

Last week, two Houston-area companies, Anadarko Petroleum Corp. and Noble Corp., came close to answering that question. With a trial looming, the companies settled what would have been the first contract dispute involving the drilling moratorium to go before a judge.

Several similar cases have already been settled, leaving unanswered the key question of who bears the cost for the moratorium.

In its lawsuit, Anadarko argued it could break its contract with Noble, a rig owner, under what’s known as force majeure, a legal term meaning ''acts of God.''

''Force majeure provisions are generally drafted to address the loss imposed by events such as hurricanes or acts of war in a foreign venue,'' said Houston attorney Rachel Clingman, who represents Transocean, the owner of the Deepwater Horizon, in the oil spill litigation pending in New Orleans. That case doesn’t involve force majeure issues.

''While the moratorium was arguably as unexpected or unusual as a natural disaster and was obviously costly, it is not what most parties would contemplate as a force majeure event, and this case and others will test stretching the concept of force majeure.''
Difficult case to make?

Force majeure provisions are designed to relieve financial obligations when business is interrupted through no fault of the companies involved, said John Zavitsanos, a Houston attorney who specializes in energy cases.

But did the moratorium make drilling impossible? It halted new deep-water drilling for five months, but some other drilling continued, and the moratorium didn’t pertain to wells in shallower water.

''To try to argue force majeure is a very difficult argument,'' Houston attorney Thomas Ajamie told me.

In some cases, drilling contractors accepted reduced rates that kept the rigs

in place but lessened the financial impact on leaseholders. In other cases, rigs were released and sent elsewhere.

The government had never intervened in offshore drilling operations in the Gulf. The only precedent for the moratorium came in 1969, when the Nixon administration briefly halted offshore operations on the West Coast after a Union Oil spill off Santa Barbara, Calif., said Tyler Priest, a former University of Houston professor who has written books about the history of offshore drilling.

Yet U.S. history is full of presidential decrees that affect business. To name just a few: Richard Nixon imposed wage and price controls in 1971 to combat inflation; Ronald Reagan fired 11,000 striking air traffic controllers in 1981, slowing commercial air travel; and Barack Obama circumvented bankruptcy rules in bailing out General Motors and Chrysler in 2009.
Forced to act

After the Deepwater Horizon blowout unleashed a flow of oil that persisted for 87 days, the government realized the industry lacked the ability to respond to such a disaster, let alone prevent it. The crisis, in other words, forced the government’s hand.

''It’s not the moratorium that added the element of unpredictability,'' Ajamie said. ''The event that preceded it was the bizarre nature of this rupture and the inability of BP to respond to it and cap the oil flow properly.''

Lawyers I spoke with said the industry is likely to add provisions in future force majeure clauses that include interruptions by the government. The wording, though, has to protect companies from government intervention without giving them an excuse to break contracts they simply don’t want to honor.

''I would always make it more difficult to trigger the force majeure than not,'' Zavitsanos said. In the Anadarko case, for example, he thinks Anadarko should have had to prove it was clearly impossible for Noble to do any work.

Even if none of the disputes actually go to court, it’s likely the industry will continue to feel the moratorium’s impact for years.