UK: Macondo One Year On - Rules, Indemnities And Insurance

Last Updated: 27 June 2011
Article by Humphrey Douglas, Maurice Kenton and Wei Wu

Reactions to last year's Gulf of Mexico oil disaster continue to redefine regulatory, commercial, insurance and other arrangements in the shallow and deep water oil and gas industry, internationally.

Renewed attention was placed on the perceived inadequacy of international legislation in preventing or dealing with the effects of large-scale hydrocarbon disasters, with national regulators seeking to find local solutions and federal regulators seeking to impose in some instances, even extra territorial regulation of operations. In turn, operators, partners and the supply chain of contractors continue to better understand and negotiate the scope and scale of risks they are exposed to, with tertiary industries (including the insurance industry) reacting to regulatory and commercial attempts to reallocate risk.

Internationalisation of debate

Whilst the relevant arbitration provision in the Macondo joint operating agreement (JoA) may mean that certain disputes amongst joint venturers are held in private, the fact that the US Department of Justice is pursuing relevant parties in public (commencing February 2012), combined with the threat of visceral reputational damage, means that the world's regulators are perhaps more compelled to publicise their views and implement change promptly. The relative speed at which international regulators have moved, BP's recent published settlement with Mitsui and earlier fund contributions, are perhaps symptomatic and acknowledge negative perceptions of delayed settlements, given, for example, the 20 years or so over which the Exxon Valdez litigation took place.

Precedent for creeping US legislation

The fact that seemingly inadequate international legislation focused on oil spill, health and safety and environmental pollution from oil tankers (crossing national boundaries), rather than on static rigs, is something the US recognised following the Exxon Valdez sinking in 1989. The subsequent Oil Pollution Act 1990 (OPA) outlawed single-hulled tankers in the US and caused European regulators (concerned that outlawed single hulls would migrate from US to EU routes) to accelerate their planned phasing out of single-hulled tankers in European waters. Whilst rigs (even floating ones) are perhaps unlikely to migrate around the world in response to changing standards, there is clearly a precedent for greater US regulation to migrate abroad, and indeed maintaining, and being seen to maintain, best practice, remains in evidence over the past year. US amendment proposals following Macondo, including removal of the OPA $75 million liability limit, inclusion of non-pecuniary losses in the Death on the High Seas Act and Jones Act continue to be watched with interest in the US and internationally.

More immediate regulatory impact

In addition to the US drilling moratorium, the US National Commission's recommendations include goal-based regulation, building upon the implemented split of regulatory and HSE functions, further guidance under the existing system of notices to lessees or "NTLs" (in relation to spill response and containment resources for example), together with the new workplace and drilling safety rules.

Whilst the UK resisted EU calls for deep water drilling moratoria, by asserting that it is generally shallow water, post-Piper Alpha, goal-setting, duty-holder, and split regulatory regime was essentially "fit for purpose", Green Peace's recent judicial review of the Department of Energy and Climate Change's (DECC) grant of a deep water licence in November 2010, continues to focus coverage, despite recent North Sea tax rises stealing the limelight more recently still.

Whilst DECC and the Health and Safety Executive have issued additional guidance under the existing regulatory framework, Oil and Gas UK (the UK's oil and gas industry body) (OGUK) via its Oil Spill Response Advisory Group, rightly resisted some of the recent House of Commons Select Committee's (Select Committee) proposals (eg, prescribing two blind shear rams in blowout preventers) as being overly prescriptive, and which would perhaps fly in the face of the UK's goal-based (rather than box-ticking) scheme of regulation (eg, overreliance on two blind shear rams may in fact be insufficient).

However, OGUK, who modelled that not all UK spill (eg, deep water) damage may be covered by the recently increased Offshore Pollution Liability Association coverage limit of $250 million, are expected to take forward the Select Committee's insufficient cover allegation, by working towards industry guidance for additional insurance or other forms of: "financial responsibility". Indeed DECC issued a letter to operators in December 2010 now requiring confirmation of: "sufficient finance or insurance/indemnity provision" to cover the drilling of relief wells.

EU response

The European Commission's enthusiastic response, engagement and consultation documents have included proposals ranging from federal regulation of the oil and gas industry to even global regulation of EU-headquartered oil and gas companies. Whilst "respectful" resistance has characterised the response from UK quarters and certain other producing nations, the seemingly significant volume of management resources now devoted to EU initiatives post-Macondo, makes amendment to at least existing directives (such as the Habitats Directive) seem increasingly likely, eventually, even if EU consensus for root and branch regulation at an EU level remains more speculative.

Evolving contractual relationships

In the UK, potentially unlimited joint and several liability owed under licences, is typically contractually reallocated by co-venturers under a JoA, on a several basis to the extent of parties' respective equity interests.

An operator is usually appointed on a "no gain, no loss" basis whereby the operator should neither make additional profit nor take additional risk for acting as operator. The operator is typically not liable to other co-venturers except for: (i) "wilful misconduct"; and (ii) failure to place insurance. "Wilful misconduct" typically being defined as "an intentional or reckless disregard by senior managerial personnel of good oilfield practice", is difficult to prove.

The "no gain, no loss" principle has however come under renewed pressure following Macondo with the potential imposition of not only heavy civil liabilities, but also criminal liabilities under health and safety and environmental regulations. As criminal liability cannot be indemnified against (amongst other things for reasons of public policy), the burden will remain with operators.

Further, as BP has learned from its dealings with Anadarko and Mitsui (its co-venturers on the Macondo well), when potential liabilities are so large, contractual remedies are an imperfect risk transfer mechanism. By the end of May 2011, BP had recovered none of Anadarko's share and had settled Mitsui's share for less than 50 per cent of the sum claimed. Licensees facing unlimited liability to governments and third parties and that are unable to secure effective recourse against their co-venturers, may wish to insure the risk of their co-venturers' default.

We are also starting to see reallocation of certain risks under JoAs and beyond, more time spent negotiating indemnities and liabilities (particularly in relation to negligence and nuisance claims), and we expect that there will be even fewer instances of commercial arrangements being left undocumented.

Non-operators unable to negotiate effective limits on liability for blowouts and pollution, may also seek increased rights of oversight, albeit mindful of the liability implications of greater involvement with operations.

Such negotiations are also having a knock-on impact down the supply chain. Whilst operators traditionally indemnified drillers for blowouts and pollution, some, especially smaller North Sea entrants, may now argue the risk is unaffordable. Drillers conversely will argue that their need for indemnities has never been greater, with each well potentially being a "bet the company" event.

Implications for insurance

The insurance market has hardened with, for example, well control insurance costing more and with wider exclusions. That being said, with more effective blowout preventers (BOP) and other initiatives following Macondo, there is an argument to say that factually, such wells should now become less risky. Nevertheless, enhanced appreciation of the magnitude of the risks may enhance demand for higher limits and acceptance of higher premiums on renewal and possibly greater acceptance of functioning BOP warranty requirements.

In addition, contractual reallocation of liabilities both between co-venturers and between operators and contractors will present challenges when disclosing and assessing the insurable risks faced by individual industry participants.

Capacity for upstream insurance, however, remains robust with even a slight increase in 2011. Further, there are opportunities for insurance products to meet the demands of new challenges and new application to roles historically performed by other financial products. DECC and others recently put down a marker for the insurability of relief well provisioning but insurance or alternative risk transfer products could (with a fair regulatory wind) perhaps also find a role as alternative decommissioning security and expand into the roles historically performed by letters of credit and on demand guarantees in the North Sea and elsewhere. These are interesting times for the insurance industry and its potential role has never been greater.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.