THE DRILL: Et Tu, Anadarko?

By Edward Tan and John E. Morris Of DOW JONES INVESTMENT BANKER NEW YORK (Dow Jones Investment Banker)--Anadarko Petroleum Corp.'s (APC) accusation that BP PLC (BP.LN) committed gross negligence or willful misconduct has consequences far beyond the division of liability between the two companies. If Anadarko eventually presses that position in court--and its survival could depend on it--other plaintiffs could piggy-back on a finding against BP, increasing its exposure and accelerating claims against it. Anadarko's charge also signals another potential risk for BP: With the rest of the oil industry publicly questioning BP's drilling and safety practices, it may become harder for BP to find exploration and development partners. For Anadarko, the gross negligence/willful misconduct allegation is a talisman: If it can establish that in court, it would be freed from what would otherwise be a pro rata, 25% share of any liabilities for damages from the Deepwater Horizon blow-out. If BP was more than merely negligent, under the joint venture agreement for the well, it becomes 100% liable for those actions. The potential liability is already taking a toll on Anadarko. Its finger-pointing at BP Monday came just hours before Moody's downgraded Anadarko's debt to junk level, Ba1. Anadarko's estimated operating cash flow for 2010 is only $5 billion versus $33 billion at BP, according to CreditSights, and Anadarko has bank credit facilities of only $1.3 billion compared with BP's $10 billion (excluding funding for BP's $20 billion escrow account agreed to last week). Anadarko thus would find it much harder to bear its 25% of any liability than BP would its 65%. When the inevitable litigation between the two companies gets under way, BP will face an adversary with a strong motivation to prove gross negligence and the wherewithal to mount an aggressive case. (BP was already planning to sue Anadarko last week, The Telegraph reports.) That will play into the hands of smaller, less well-financed plaintiffs because, under the legal doctrine of collateral estoppel, if BP loses to Anadarko on the gross negligence issue, it could be barred from contesting the issue in other suits. Other claimants would be spared the enormous costs of discovery and expert witnesses and would only have to prove their damages. A finding of gross negligence or worse would also void statutory limits capping regulatory fines and penalties, including the $75 million limit set under the 1990 Oil Pollution Act, according to E. Gail Suchman, an environmental attorney with Stroock & Stroock & Lavan. Already the markets seem to be assuming that BP will shoulder more than its pro rata share of the liability. Its shares are down 49% since the explosion while the smaller, theoretically more vulnerable shares of Anadarko have slumped just 41%. Anadarko's salvo also signals a second potential problem for BP: The rest of the oil industry appears to have genuine concerns about BP's operating prowess. In an industry long viewed as an old boys club that looked after its own, the image of oil executives queuing up to testify before the U.S. Congress that BP's conduct didn't measure up to their standards was remarkable. If BP is seen as incompetent or congenitally careless, that could create discord in joint ventures where it acts as operating manager and could cause other oil companies to pause before partnering with BP for fear of being exposed to mismanagement. The revelation that there are some 18 deepwater wells in the Gulf of Mexico where BP employed the "long-string design" used in Horizon only reinforces concerns that the company had a habit of cutting corners on safety. These wells could be at risk for spills unless remedial actions are taken to improve their safety and the government may choose to indefinitely suspend their operations until full safety procedures are instituted. As more information surfaces about BP's decision-making and practices, the fallout is extending beyond the scale of its liability. The reputational damage could spread to its on-going business. It doesn't help that one of BP's partners now has a vested interest in demonstrating that it was more than incompetent. (This column first appeared on Dow Jones Investment Banker. E-mail investmentbanker@dowjones.com to subscribe to the service or visit http://www.dowjones.com/product-investment-banker.asp to learn more.) -By Edward Tan,Dow Jones Investment Banker; +1 (212) 416-2104; ed.tan@dowjones.com; and John E. Morris, Dow Jones Investment Banker; +1 (212) 416-2842; john.morris@dowjones.com (END) Dow Jones Newswires June 22, 2010 06:36 ET (10:36 GMT)