Contract With BP Has Clause To Limit Anadarko Liability-Source

BP PLC's (BP) contract to operate the leaking Macondo well contains a clause that could limit the liability of minority partner Anadarko Petroleum Corp. (APC), a person familiar with the agreement said.

The contract, the person said, is similar to others used in offshore drilling in which the operator assumes the cost of mistakes in case of gross negligence, the person said.

Anadarko, which owns 25% of the well, has seen its shares hit hard in recent weeks as investors brace for the possibility that the Houston-based company could be on the hook for a proportional share of the costs resulting from the leak--an amount that could reach tens of billions of dollars. The confirmation that the joint operating agreement with BP contains a gross negligence clause could substantially reduce the company's potential liability and that of fellow minority partner Mitsui & Co. Ltd. (8031.TO).

BP could be liable for 100% of damages if gross negligence is proven, said Jacqueline Weaver, who teaches energy law at the University of Houston Law Center. U.S. lawmakers said this week that BP made decisions that increased the risk of a blow-out at the well to save the company time or expense. BP didn't immediately respond to requests for comment.

The uncertainty about Anadarko's liability underscores the unprecedented nature of the crisis that began in April, when a Transocean Ltd. (RIG) drilling for BP in the U.S. Gulf exploded and sank, unleashing the largest offshore spill the country has ever seen. BP so far has spent more than $1.6 billion dollars in cleaning up the spill, and its ultimate liability could be much higher. On Wednesday, the company agreed to establish a $20 billion escrow account to pay for damages.

Anadarko said Wednesday it had been invoiced by BP for its share of clean-up costs, although it didn't disclose the amount.

Analysts with investment bank UBS estimate that the total cost of the operation could reach between $20 billion and $50 billion, a figure based on what Exxon Mobil Corp. (XOM) paid for the 1989 Exxon Valdez spill. But the analysts said that if Anadarko ends up paying a quarter of that cost, it could survive.

If Anadarko's liability comes in at the low end of the range, or $5 billion, the company could "easily" afford it, UBS analyst William Featherston said. Anadarko currently has $3.7 billion in cash and an unused credit capacity of $1.3 billion. Additionally, it has assets that are not producing cash in the onshore U.S. and offshore Africa with an estimated value of $14 billion.

If the price tag is larger than that, Anadarko would have to issue equity and sell a large percentage of its international and U.S. Gulf of Mexico nonproducing discoveries. But even if it had to pay $12.5 billion, the company will be able to bear the financial burden, Featherston said.

Investors have been bracing for a worse outcome than what analysts have imagined. Anadarko's shares have tumbled 40% since April 20, the day the rig exploded. The decline sharpened last week--Anadarko was down 19% on Wednesday alone--in a move that Barclays Capital analysts said was "disproportionate" to the highest amount of money Anadarko could be liable for. The stock was trading Wednesday afternoon at $42.70, down 4.5% from the previous session.

BP has said it won't be limited by the $75 million cap on oil spill economic damages established under the Oil Pollution Act of 1990 and that it won't seek reimbursement from a federal trust fund. But Anadarko has refrained from openly joining BP in that stance: Spokesman John Christiansen said in an emailed statement that the company will do what is "right" and that questions regarding its liability will be answered "at the appropriate time."

-By Isabel Ordonez, Dow Jones Newswires; 713-547-9207; isabel.ordonez@dowjones.com

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