Energy Law. TRIBAL LANDS: THE NEXT SOLAR RUSH Tara S. Kaushik. EDITOR S NOTE Victoria Prussen Spears

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1 JANUARY 2015 VOL PRATT s Energy Law Report EDITOR S NOTE Victoria Prussen Spears SHALE GAS THE SOLUTION FOR GLOBAL ENERGY DEMANDS? John Lurie POWER PURCHASE AGREEMENTS KNOW THE RISKS M. Seth Ginther and Roderick W. Simmons AN UNEVEN PROCESS: PROMULGATING RAIL CAR DESIGN STANDARDS Kyle Wamstad and Jessica Fore NINTH CIRCUIT UPHOLDS TERO REQUIREMENTS IN INDIAN COUNTRY MINERAL LEASING Mark S. Barron TRIBAL LANDS: THE NEXT SOLAR RUSH Tara S. Kaushik DEEPWATER HORIZON OIL SPILL LEGAL UPDATE: JUDGE MAKES FINDINGS OF GROSS NEGLIGENCE AND NEGLIGENCE Martin T. Booher IN THE COURTS Steven A. Meyerowitz LEGISLATIVE AND REGULATORY UPDATE Steven A. Meyerowitz INDUSTRY NEWS Victoria Prussen Spears

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3 Editor-in-Chief, Editor & Board of Editors EDITOR-IN-CHIEF STEVEN A. MEYEROWITZ President, Meyerowitz Communications Inc. EDITOR VICTORIA PRUSSEN SPEARS Senior Vice President, Meyerowitz Communications Inc. BOARD OF EDITORS SAMUEL B. BOXERMAN Partner, Sidley Austin LLP ANDREW CALDER Partner, Kirkland & Ellis LLP M. SETH GINTHER Partner, Hirschler Fleischer, P.C. R. TODD JOHNSON Partner, Jones Day BARCLAY NICHOLSON Partner, Norton Rose Fulbright BRADLEY A. WALKER Counsel, Buchanan Ingersoll & Rooney PC ELAINE M. WALSH Partner, Baker Botts L.L.P. SEAN T. WHEELER Partner, Latham & Watkins LLP WANDA B. WHIGHAM Senior Counsel, Holland & Knight LLP Pratt s Energy Law Report is published 10 times a year by Matthew Bender & Company, Inc. Periodicals Postage Paid at Washington, D.C., and at additional mailing offices. Copyright 2015 Reed Elsevier Properties SA, used under license by Matthew Bender & Company, Inc. No part of this journal may be reproduced in any form by microfilm, xerography, or otherwise or incorporated into any information retrieval system without the written permission of the copyright owner. For customer support, please contact LexisNexis Matthew Bender, 1275 Broadway, Albany, NY or Customer.Support@lexisnexis.com. Direct any editorial inquires and send any material for publication to Steven A. Meyerowitz, Editor-in-Chief, Meyerowitz Communications Inc., PO Box 7080, Miller Place, NY 11764, smeyerow@optonline.net, , or Victoria Prussen Spears, Editor, Meyerowitz Communications Inc., PO Box 7080 Miller Place, NY 11764, vpspears@optonline.net, Material for publication is welcomed articles, decisions, or other items of interest to lawyers and law firms, in-house energy counsel, government lawyers, senior business executives, and iii

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5 PRATT S ENERGY LAW REPORT Deepwater Horizon Oil Spill Legal Update: Judge Makes Findings of Gross Negligence and Negligence By Martin T. Booher * The author of this article discusses a recent district court ruling that allocated liability in the United States Clean Water Act enforcement action against BP, Transocean, and Halliburton. The court s analysis provides insight into the actions and events that it found particularly significant and, in some respects, gives useful guidance to the industry regarding which best practices could be used to help head off a finding of gross negligence in the future. BP has already asked the court to alter or amend the Phase 1 Findings discussed below. The court denied this request in November. Given the extraordinarily high stakes involved, the author believes that there is a strong possibility that BP will continue to appeal at least portions of the court s liability rulings as additional phases of the trial are completed. While the Deepwater Horizon oil spill has largely disappeared from the news headlines, for the parties involved in the litigation, the legal machinations, particularly with respect to liability, have a long way still to go. CLEAN WATER ACT LIABILITY In the first of several related rulings, U.S. District Judge Carl Barbier (the presiding judge of MDL 2179, the limitation and liability action regarding the Deepwater Horizon oil spill) recently issued a ruling allocating liability in the United States Clean Water Act ( CWA ) enforcement action against BP, Transocean, and Halliburton. Specifically, the court ruled that BP was grossly negligent and 67 percent at fault, Transocean was negligent and 30 percent at fault, and Halliburton was negligent and three percent at fault. The finding that BP s actions were grossly negligent lifts the maximum CWA civil penalty from $1,100 per barrel of oil discharged to $4,400 per barrel. Using the EPA s estimate of 4.9 million barrels discharged, which BP has strenuously disputed, the penalties assessed could be in excess of $20 billion. Additionally, the court found that BP s actions would typically have merited a punitive damages award, but held that punitive damages are prohibited in this instance by specific Fifth Circuit precedent. In October 2013, the court completed the trial regarding the total number of barrels discharged but has not yet released its findings. Additionally, the court is set to commence the Penalty Phase of the trial in which the parties will present evidence related to the CWA penalty factors, which will be used to determine the fine to be assessed per released barrel in January Once the court determines the * Martin T. Booher is a partner at Baker & Hostetler LLP. He practices within the oil and gas, renewable and clean energy, utilities, power, and pipeline industries. He may be contacted at mbooher@bakerlaw.com. 32

6 DEEPWATER HORIZON OIL SPILL LEGAL UPDATE number of barrels discharged and the applicable fine per barrel, it will determine BP s ultimate liability in CWA fines (the fines assessed will vary depending on the allocation of fault, but BP is indemnifying both Halliburton and Transocean). LEGAL THEORIES In reviewing the court s decision, there are a number of important legal theories that the court relied on in making its decision, which should be takeaways for the oil and gas industry: Causation: According to the court, liability under the CWA requires more than simple but for causation but less than many proximate causation tests. If a company s negligent act is a substantial factor in causing the injuries, then it may be found liable under the CWA. Gross Negligence: The court described gross negligence under the CWA as an extreme departure from the care required under the circumstances or a failure to exercise even slight care. Further, it stated that a finding of gross negligence requires only objective proof and does not additionally require subjective proof of a culpable mental state as BP argued. It is possible that BP will challenge the gross negligence standard used by the court on appeal. Attribution of Employee Conduct: The court found that a corporation is vicariously liable under the CWA... for the gross negligence and/or willful misconduct of its employees and rejected BP s contention that the company is liable only for authorized employee actions or actions that are subsequently ratified by the company. Punitive Damages: The court stated that BP s conduct was sufficiently egregious to justify an award of punitive damages, but held that Fifth Circuit law prohibits punitive damages in this scenario. 1 The court went out of its way, however, to state that it would have awarded punitive damages under First and Ninth Circuit law. BEST PRACTICES The court s findings of fact and corresponding analysis also give insight into the actions and events that the court found particularly significant and, in some respects, provide useful guidance to the industry regarding which best practices could be used to help head off a finding of gross negligence in the future. The following is a list of some of those findings: The court focused intensely on whether certain decisions actually were or 1 The court found that, in the Fifth Circuit, operational recklessness or willful disregard is generally insufficient to support an award for punitive damages. Instead, there must be a showing that the offensive conduct emanates from corporate policy or that a corporate official with policy-making authority participated in, approved of, or subsequently ratified the egregious conduct. Citing P & E Boat Rentals, Inc. v. Ennia Gen. Ins. Co., 872 F.2d 642, (5th Cir. 1989). 33

7 PRATT S ENERGY LAW REPORT theoretically could have been motivated by profits or based on financial pressure. The court viewed deviations from the original drilling plan or from established best practices skeptically, particularly if those decisions saved time or money. However, in at least once instance, the court determined that following the drilling plan and best practices was insufficient. The court took a more favorable view of deviations when there was formal deliberation and debate prior to making the change to the drilling plan. If a test result deviated from the expected or modeled result, the court generally expected the test to be rerun or the results to be investigated and understood before moving forward. The court stated that a greater degree of care is required when the circumstances present a greater apparent risk and found that cumulative decisions that increased risks, even when the individual decisions themselves were not unreasonable, further raise[d] the standard of care required. In other words, when the drilling is difficult or complicated, an even higher standard of care (and perhaps even more testing) must be taken during each subsequent step in the drilling process. For example, the court found that, due to the previous drilling complications, the negative pressure test at the Macondo well demanded a level of care exceeding the high care typically required during such a test. The court took a favorable view of explicit actions prioritizing safety (e.g., demonstrable responsiveness to kicks) when determining that Transocean and Halliburton were only negligent. While the court did not find that violating a regulation or law itself constituted negligence as a matter of law, regulatory violations were given significant weight in the analysis. Complying with the applicable regulations was not sufficient, however, as the court stated that [a]lthough MMS regulations at the time did not explicitly require a negative pressure test, no party disputes that it is a safety-critical test. The misinterpretation of this unrequired negative pressure test was one of the court s main bases for the finding of gross negligence against BP. The court undertook a formalistic analysis of entity responsibility, looking to the contractual documents for allocations of responsibility. Some harmful evidence was generated during BP s post-accident internal investigation. For instance, while neither participant to the 8:52 pm phone call regarding the interpretation of the negative pressure test testified at trial, the court relied on notes regarding their post-accident statements to BP s incident investigation team to establish BP s actual knowledge that the negative pressure test was unsuccessful. The court s decision provides useful insight into how a reviewing body, in the wake of a significant environmental, health, and safety incident, may view the decisions 34

8 DEEPWATER HORIZON OIL SPILL LEGAL UPDATE and actions taken by major players in the oil and gas sector, both pre- and post-incident. As a result, the sector has an opportunity to learn from the incident and to adjust or adopt new best practices in order to promote increased safety in the oil patch and to avoid the unfortunate string of events that led to the Macondo well blowout. 35