What Halliburton Has to Lose in BP Blowout Investigation

In the wake of new evidence that Halliburton knew or should have known that the cement they used in drilling the Macondo well was faulty, the precise stakes for the company are becoming clear.

Yesterday, the National Commission created to investigate the tragedy in the Gulf pointed a finger at the oil services firm, saying that several of the company's own tests showed their cement mix might have been unstable.

Halliburton issued a long denial with a multilayered defense of the company's actions. They argue first that there were substantial differences between the mixes they tested and the specific formulation used at the site. Further, they say that BP requested a change in the composition of the mix, but that the stability of the new batch was never tested. And in any case, BP didn't take reasonable safety measures despite warnings from Halliburton and didn't do the proper tests to ensure that the cement job had been done properly.

While Halliburton and BP are trying to deflect blame to each other, in the court of public opinion, there is more than enough blame to go around. Halliburton admitted that it poured a cement mix down a notoriously tough well without testing the stability of its exact composition, even though they had evidence in hand that not all mixes were stabilizing well. As the legal wrangling continues, let's not lose sight of that fact.

But what really matters to the companies, though, is the legal matter of who has to pay for damages. BP indemnified Halliburton, according to their contract. In the quote below, COMPANY is BP and CONTRACTOR GROUP is Halliburton:

COMPANY shall save, indemnify, release, defend, and hold harmless CONTRACTOR GROUP against all claims, losses, damages, costs (including legal costs) expenses and liabilities resulting from:
(a) loss or damage to any well or hole (including the cost to re-drill);
(b) blowout, fire, explosion, cratering, or any uncontrolled well condition (including the costs to control a wild well and the removal of debris);

One assumes, however, that if the contractor group did something shoddy, such indemnities would fall away, or at least that's what BP would argue. Halliburton, in fact, seemed to signal that BP might try to do so in its last quarterly earnings report:

"We believe that the indemnification obligations contained in our contract are valid and binding against BP Exploration. BP Exploration contractually assumed responsibility for costs and expenses relating to this event, including claims for gross negligence. Given the potential amounts involved, however, BP Exploration and other indemnifying parties may seek to avoid their indemnification obligations. In particular, while we do not believe there is any justification to do so, BP Exploration, in response to our request for indemnification, has generally reserved all of its rights and stated that it is premature to conclude that it is obligated to indemnify us. In doing so, BP Exploration has asserted that the facts are not sufficiently developed to determine who is responsible, and have cited a variety of possible legal theories based upon the contract and facts still to be developed. In addition, the financial analysts and the press have speculated about the financial capacity of BP, and whether it might seek to avoid indemnification obligations in bankruptcy proceedings. We consider the likelihood of a BP bankruptcy to be remote."

All this to say: expect a lot more arguments from both sides of this disaster about cement foam stability. This looks like it's going to get ugly.