Halliburton recently became third company to admit to criminal wrongdoing in connection with the 2010 Deepwater Horizon explosion that killed 11 rig workers and spilled millions of barrels of oil into the Gulf of Mexico. In February, Transocean, which operated the Deepwater Horizon rig pled guilty to a misdemeanor charge and agreed to pay $400 million in criminal penalties, while in November 2012, BP was charged with, among other things, 11 felony counts and ultimately agreed to pay over $4 billion in connection with their involvement in the incident.
The latest charges stem from accusations that Halliburton, which performed the cement work on the well attached to the Deepwater Horizon rig, destroyed critical evidence related to the construction of the cement casing for the well. According to the Department of Justice, Halliburton had recommended that BP include 21 metal centralizing collars in order to stabilize the cementing prior to drilling the well; however, BP chose to only use six centralizing collars. Following the accident, Halliburton ordered its workers to destroy computer simulations that showed little difference between the use of six and 21 collars. However, Halliburton continued to maintain that BP was neglectful not to follow its advice, thus attempting to deflect much of the blame for the accident.
This revelation did not come as a surprise, however, as it had long been suspected that issues related to the cement placement had been a contributing factor to the magnitude of the disaster. During the Halliburton trial this year, several accounts regarding the firm’s knowledge of the flaws associated with its cementing process came to light. For example, a senior executive acknowledged that “the cement placement was going to be a job that would have a low probability of success,” and it was further revealed that tests found the cement to be unstable. The presidential commission that investigated the incident reported that Halliburton officials knew prior to the explosion that the cement mixture it planned to use to seal the bottom of the well was unstable, yet still continued with the cementing.
Under its plea agreement, Halliburton will face three years probation, pay a $200,000 fine (the maximum fine possible) and continue to cooperate in the Justice Department’s investigation of the Deepwater Horizon explosion. In addition, the company has volunteered to make a $55 million contribution to the National Fish and Wildlife Foundation. However, this admission of guilt is likely welcomed by Halliburton and its shareholders. The company has stated that, following its admission, “the Justice Department has agreed that it will not pursue further criminal prosecution of the company or its subsidiaries for any conduct relating to or arising out of the Macondo well incident.”
However, Halliburton’s recent admission of guilt is not the end of its legal woes- on July 25th the company also announced that it was a part of an antitrust investigation by the Justice Department into the hydraulic fracturing industry. According to the Justice Department it is “investigating the possibility of anticompetitive practices involving pressure-pumping services performed on oil and gas wells.”
Halliburton has stated that other companies have also been contacted by the Justice Department regarding this matter and that it does not believe that it was being singled out for particular scrutiny. In fact, the day before it announced this investigation, Baker Hughes stated in an SEC filing that it was facing a similar investigation.
According to PacWest Consulting Partners, a Houston-based industry adviser, the timing of this investigation is “confusing.” The increasing popularity of hydraulic fracturing in shale gas has led to significant competition and lowered costs for those engaging in this activity. According to another industry adviser, prices charged for U.S. fracking services dropped 14% in 2012, and are expected to fall another 6% in 2013. However, offshore fracking is a much smaller market with far less competition, leading some to speculate that the probe could deal with this aspect of its business.
While Halliburton’s shareholders should closely follow these developments, it is possible that these antitrust investigations present no significant issues for the companies involved. According to a partner at Paul, Weiss, Rifkind, Wharton & Garrison LLP, these investigations are fairly common and frequently close without any action.