How One Company Scammed Big Oil

Bloomberg Businessweek is one of the few magazines I still get in print. There’s always something interesting in the back pages, like the May 23-29, 2011, issue. Page 65 tries to figure out why Red Bull is such a rocket ship of a brand.

(I might be a bit partial, though… In my younger years, I had a part-time job driving around Charlotte, N.C., handing the energy drink out for free. I even talked my way into the Charlotte Motor Speedway during time trials with a full cooler of Red Bull.)

But every once in a while, a “front page” story hits that really grabs my attention.

This latest issue did just that. The cover said, “No Apologies: The ingenious plan that’s helping the owner of Deepwater Horizon stick it to BP — and walk away unscathed.”

Now, this is right up my alley. I love writing about the crude oil industry. Supply and demand, geopolitics, the environment, gas prices, the Gold-Oil ratio… There’s always something to uncover, and it’s always relevant.

Particularly when it comes to investments.

Here’s the gist of the story in Bloomberg. Transocean, Inc. (RIG:NYSE) was the owner of Deepwater Horizon, the oil rig that was the site of the huge disaster in the Gulf of Mexico last April. Eleven men lost their lives in an explosion that sent 5 million barrels of crude oil into the water.

Transocean has denied any wrongdoing and pinned all the blame on BP plc (BP:NYSE).

Transocean did compensate some of the victims’ families, though. Nine of the people killed worked for Transocean. But as far as paying for any of the clean up? Forget it…

Transocean hasn’t shelled out a dime.

In the meantime, BP has paid out $17 billion so far, and you can bet there’s more to come. BP wants Transocean to share some of the costs. The courts are starting to get involved, and here’s where the twist of the story comes in…

Transocean tried to get the courts to limit the amount of damages it would have to pay out to a mere $27 million if it was found even partially responsible for the blowout.

Want to know when they filed this paperwork? In mid-May 2010, only three weeks after the Deepwater Horizon explosion. Thousands of gallons of crude oil were still spilling out into the Gulf, and Transocean was already trying to cover its butt.

At the same time, Transocean, logged a $270 million “accounting gain” from the insurance on the Deepwater Horizon… 10 times the amount it was willing to pay in death and personal injury claims.

In all fairness, Transocean is not that big a company compared to BP. Transocean’s market cap is $19.82 billion (as of Friday). BP’s market cap is $139.59 billion. “Sharing” the costs wouldn’t exactly be fair if the cleanup would bankrupt Transocean.

So while Transocean does have a responsibility to its shareholders, what about its responsibility for its own actions?

(Don’t forget to sign up for Smart Investing Daily and let me and fellow editor Jared Levy simplify the market for you with our easy-to-understand articles.)

Transocean is hiding behind an indemnity clause in its contract with BP. It says that BP:

…shall assume full responsibility for and shall protect, release, defend, indemnify, and hold contractor harmless from and against any loss, damage expense, claim, fine, penalty, demand or liability for pollution or contamination, including control and removal thereof, arising out of or connected with operations under this contract.

Whew! That’s a whole lot of b.s. to say, “If anything happens, it’s not our fault.”

Unfortunately, this behavior is par for the course when it comes to oil companies — though we’re used to seeing this more from the big buys like Exxon Mobil and BP. It’s just a small consolation that for the disaster in the Gulf of Mexico last year, BP voluntarily waived a $75 million liability cap under the Oil Pollution Act of 1990.

But even this act brings up some serious questions… $75 million is a drop in the bucket compared to Big Oil’s coffers. These guys make tens of billions each quarter in profits. Oil is still at $95 a barrel.

Back in 1990, crude oil was less than $20 a barrel! Of course a cap at $75 million makes sense with oil at $20 a barrel. At $100? Not so much.

The standards we hold these big companies to are weak, and it’s allowed greed and laziness to creep into the industry. It’s deplorable when we see U.S. companies gouging our military for more than $61 million during a time of war.

But that’s what Halliburton did. It overcharged the government by 138%. An audit found that Halliburton charged the U.S. $2.38 for a gallon of gas when the true cost should have been around $1.

So stories like Transocean and BP don’t surprise me anymore. The crude oil industry is ruthless, and Sandy Franks and I thought a spade deserved to be called a spade.

That’s why we wrote Barbarians of Oil.

We are so addicted to crude oil that we let oil companies get away with murder… literally. Our economy is so fused with crude that we are held hostage by tight oil supplies and $100 price tags. Crude oil imports account for one-third of our total deficit, and we’re on the verge of default.

We want to show you how desperate the situation is getting.

This issue has gone way past the “pain at the pump.” We’re at a major tipping point when it comes to our energy resources, and everyone — not just governments, but regular folks like you and me — could get caught on the wrong side of the line.

But we also want you to know about new energy resources. Technology today holds so much promise. This is not just an environmental cause, though the spills and hazards of getting oil from ever more difficult places is a huge concern. This is an economic cause, and a survival cause. Our economy can’t grow with oil prices over $100 a barrel. We can’t fight endless wars over oil resources — it’s just not feasible.

We have to come up with other solutions… They are out there, and we’ve already made great strides in bringing these solutions into the mainstream. There’s going to be another wave of investment in these industries as oil prices climb and the geopolitical climate gets even more dangerous.

Editor’s Note: Barbarians of Oil is on shelves now, and one of the best ways to get inside Big Oil’s head is to understand the facts in this book. Knowing how these guys tick is important. You must protect yourself from their greed.

Pick up a copy of Sara and Sandy’s latest book and save 35% off the cover price by visiting this link.

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