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Money Morning Mailbag: Relief Wells Near Finish, But Oil Spill Blame Game Continues

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While BP PLC (NYSE ADR: BP) closed in this week on finishing relief wells to permanently plug the oil spill, stormy weather threatened to delay the final steps as clean up crews were called in to shore.

BP capped the blown-out Macondo well last week and has been conducting pressure tests to ensure the cap's strength. A relief well is close to completion but work has been halted until the storm passes. All work could be stopped for 10 – 14 days if the area is evacuated.

While the leak may finally be close to plugged, the financial aftermath is far from over. Corporate entities and the U.S. government continue to point fingers at each other.

The disaster has strained U.S.-British relations as U.S. President Barack Obama critized BP for not acting fast enough to contain spill and forced the company to cut its dividend and create a $20 billion escrow fund. While an investigation into whether or not BP was negligent continues, the Interior Department has taken steps to tighten regulation on deepwater offshore drilling, while banning it altogether in the meantime.

Readers have been writing to the Money Morning Mailbag to ask: What is going to happen, and whose fault is this, anyway?

Question: It would be interesting to have an impartial and objective account of where the blame really lies for the gulf oil spill. I am British and from my perspective it looks like a xenophobic witch hunt on the part of an unpopular president to appeal to the worst kind of prejudice of any nation; maybe combined with natural dislike of the British. He is certainly not acting like the president of a so-called friendly nation. 

As I understand it the owner of the rig was Transocean – did they drill the well? Who operated the rig? Where does Halliburton come in all of this, and what about the partners who leased the rig alongside BP? What about the American company that designed the seal that failed? What about the lax regulations in the first place that were created by the politicians in Washington?

BP is being taken to the cleaners it seems and all the other companies get a slap on the wrist, because they are American.

Just letting off steam. 

–  Simon L.

Transocean Ltd. (NYSE: RIG) owned the Deepwater Horizon rig and drilled the Macondo well that was designed by BP. Transocean employees are now the focus of a government investigation into the rig explosion.

A joint investigative panel made up of the U.S. Coast Guard and Interior Department have named five employees as parties of interest who could face criminal charges in the accident that killed 11 people. Because Transocean owns the vessel, it is ultimately responsible for the safety of those on board. Even if employees acted under the requests of the client BP, they could be liable if their actions led to the explosion, spill, and multiple deaths.

A survey released this week showed that workers on the rig were concerned about its safety, but failed to voice their observations for fear of managers' reactions at the corporate level. 

The confidential survey included worker comments about poor equipment reliability and lack of safety inspections.

Transocean's credibility has come under fire due to questionable practices and associations. Its operations in Myanmar have been examined because of U.S. trade sanctions on the country, and it has done business with nations associated with terrorists, such as Syria and Iran. It's also under investigation in Norway for tax fraud. 

But while nine corporate entities have been named as parties of interest, BP was operating the rig and calling the shots.

"It's becoming pretty clear as the testimony goes on that the rig was under BP's control and BP was giving the orders," Pat Fanning, a lawyer for one of the Transocean employees, told Bloomberg.

Halliburton Co. (NYSE: HAL) was the cementing contractor and has documented warnings to BP to install devices to make sure a pipe was centered in the well to prevent "a severe gas flow problem." BP failed to install all the devices – BP installed just six devices instead of the recommended 21 – and allegedly failed to follow up on Halliburton's warnings that the cement might not seal properly, hindering the well's safety.

Halliburton has remained relatively unscathed through the oil spill blame game, claiming its contract with BP indemnifies it against the claims BP is facing. Halliburton this week reported an 83% increase in second-quarter earnings and a 26% increase in revenue.

Other companies that invested in the well are working to disassociate from the incident. Anadarko Petroleum Corp. (NYSE: APC) and MOEX Offshore 2007 LLC, a subsidiary of Mitsui Oil Exploration Co., yesterday (Thursday) presented testimony to a panel of the U.S. Senate's Homeland Security Committee claiming their minority role prevented them from making decisions regarding the well or drilling operations.

"The operations of the Macondo well were conducted with BP controlling all operating decisions," Anadarko chief executive James T. Hackett said in a prepared statement.

Anadarko owned a 25% interest in the well lease and MOEX had a 10% stake, with the remaining 65% controlled by BP.

While the companies claim reimbursement responsibility should lie with BP, they said all profits collected from Macondo-well oil would be donated to people affected by the spill.

BP has been taking the brunt of the blame, but the oil spill has put a spotlight on the ineffective and outdated disaster plans permeating the entire oil industry. Many of these plans are based on a U.S. government model that accounts for the spilled oil being broken up by waves and weather before reaching shore – a belief that's proven inaccurate.

Scientists and researchers voiced concerns for years over oil spill projections, but the model has not been updated since 2004. The model instilled confidence in both oil companies and the government that a spill even larger than the BP Deepwater Horizon disaster would be easily contained and never reach U.S. coastline.

But the models failed to adjust to the changing environment of deepwater drilling, which has plunged so far below the surface that oil behaves differently than when spilled from a more shallow depth.  

While the government works with researchers to improve its oil spill risk analysis, four of the biggest global oil companies announced Wednesday that they were contributing $1 billion to start a rapid-response system for Gulf of Mexico deepwater oil spills. The voluntary move is designed to prove to the U.S. government that the oil industry is taking drilling regulation and safety seriously, and is able to improve procedures enough to lift the offshore oil-drilling ban.

The response system includes the use of modular containment equipment that could be deployed within 24 hours of an offshore spill and could fully contain the spill within weeks.

"It's doubtful we will ever use it, but this is a risk-management gap we need to fill in order for the government and the public to be confident to allow us to get back to work," Rex W. Tillerson, the chairman of Exxon Mobil Corp. (NYSE: XOM), said in an interview with The New York Times.

Oil companies continue to fight the drilling ban and energy experts say deepwater drilling is key to providing the world with an increasing oil demand.

"All indications point toward deepwater drilling as the source for a rising amount of crude oil needed internationally," said Money Morning Contributing Writer Dr. Kent Moors, in an article outlining the two nightmare scenarios that could result from the relief wells. "As demand levels surge, supply is questionable. That magnifies the problem from the BP spill. It is not the volume lost from that well alone. Rather, as the Macondo experience causes a rethinking of deepwater-drilling-production plans, the tragedy may result in the loss of a far greater volume of supply from elsewhere around the world."

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