Its ambitious growth plans, and perhaps its existence, is threatened. Unless Anadarko can find a way out, its share of cleanup costs, fines, and victims' claims could easily add up to billions of dollars
James T. Hackett, chief executive officer of Anadarko Petroleum (APC), thought he was making a routine decision when he decided to buy a 25 percent share of BP's (BP) Macondo well last December. Anadarko was already a partner with BP in the nearby Pompano platform, which would pump the oil to shore. So developing a new field nearby made good economic sense. The well looked relatively simple, and Hackett says he had no reason to doubt the capabilities of BP, one of the world's most experienced deepwater drillers. "This is something that, with any kind of reasonable practices, should have been able to be drilled without a problem," he said in an interview at Houston's River Oaks Country Club.
But in the oil industry, even the easy jobs are high risk. On Apr. 20, the Deepwater Horizon rig drilling the well was rocked by an explosion and later sank in the Gulf of Mexico. Suddenly, everything changed for Anadarko. Under Hackett, the company had grown from a laggard to a star among medium-sized oil and gas players. His strategy: super-charging Anadarko's reliable oil and gas production on the U.S. mainland with successful wildcat exploration in the deep waters of the Gulf of Mexico, and off West Africa and Brazil. That appetite for risk turned Anadarko into one of the premier oil exploration companies.
Now Anadarko's ambitious growth plans and perhaps its existence are threatened. Unless it can find a way out, its share of cleanup costs, fines, and victims' claims could easily add up to billions of dollars. Analysts say obligations that large are likely to put a crimp on the investment capital needed to meet Hackett's 7 percent to 9 percent annual production growth targets.
Anadarko, based in The Woodlands, Tex., has a market value of about $23 billion—down more than $13 billion since Apr. 20—and had $3.7 billion in cash as of Mar. 31. Some estimates put total spill-related costs at as much as $60 billion, meaning Anadarko's share would be $15 billion, assuming it had to pay 25 percent. That sort of tab "would grind the whole company pretty much to a halt for a while," says Philip Dodge, an analyst at Tuohy Brothers.
Anadarko's predicament could turn into a watershed event for the oil and gas business. Exploration companies drilling in U.S. waters and elsewhere have assumed their drilling expertise minimized risks. Instead, it has become clear since the well blowout and subsequent spill that BP and its partners face huge liabilities they never anticipated.
Companies such as Anadarko have fueled the push into frontier areas from the deepwater of the Gulf of Mexico to offshore West Africa, where Anadarko owns 23.5 percent of the massive Jubilee discovery, estimated to hold as much as a billion barrels of oil. If the consequences of the Gulf spill end up endangering Anadarko's financial health, however, that could scare away other independent oil companies from pursuing the kind of lucrative-but-risky drilling that led to the BP spill.
Hackett says he still believes deepwater drilling can be done safely. After staying mum for two months, he lashed out on June 18, blaming the accident on BP's lapses. He said the oil giant's actions "likely represent gross negligence or willful misconduct." Anadarko also has refused to pay a charge of $272 million that BP has billed the company for its share of the cleanup costs. The spill had nothing to do with Anadarko, Hackett said, and was "caused by bad decisions on the rig floor and bad adherence to technical advice."
BP has fired back, saying the co-owners of the Macondo well, which also includes a unit of Japan's Mitsui Oil Exploration, were hardly in the dark about what was going on. In fact they "were involved in approving certain key decisions relating to the well," including its design, BP said in a statement. Mitsui Oil's MOEX Offshore 2007, which owns a 10 percent stake in Macondo, says it's reviewing BP's claims and is withholding reimbursement to BP of expenses other than costs not related to the incident.
BP's well design has been criticized by some engineers and other oil company executives as inadequate for a deepwater well like Macondo, which was drilled in a field known for high pressures. "If I'd seen that, I would have asked my company's drilling engineers to explain to me why we're doing it this way, because it doesn't look right," says Don Van Nieuwenhuise, director of petroleum geoscience programs at the University of Houston.
John Brock, an Anadarko shareholder and the former chairman of Ocean Energy, a company that merged with one run by Hackett in the 1990s, says the BP-Anadarko spat will likely change oil industry practices concerning oversight of jointly owned well projects. For years, a project's operator has made decisions, "and you just don't look over his shoulder that closely," Brock says. Anadarko likely saw an attractive prospect in owning a piece of Macondo without having to get its engineering people fully involved, he says. "They got enough fires going on in their own house to take care of to think about that."
Fadel Gheit, an Oppenheimer analyst who lauds Hackett's business skill, says he believes Hackett's very public dispute with BP should have been handled privately. "You're in a car crash, and you're fighting with one another," he said. "Let's try to get out of the ditch first before we say who's to blame for putting us in this ditch." Arthur Berman, a geologist who worked for Amoco until it was acquired by BP, says Hackett's attack might be part of a legal strategy. The joint operating agreement between BP and Anadarko calls for disputes to be resolved through arbitration, which should be faster and cheaper than going to court. BP and Anadarko also could reach a settlement.
Until the Gulf spill, Hackett, a Harvard MBA, had been an oil industry star who always seemed to make the right move. "He is one of the best guys out there," says Paul Anderson, a BP board member and former CEO of BHP Billiton (BHP). Anderson hired Hackett as his potential successor as CEO in the mid-1990s at pipeline company PanEnergy. After PanEnergy was acquired by what's now Duke Energy (DUK), Hackett left to run Seagull Energy in 1998. Less than three months later he agreed to merge his new roost with Ocean Energy. Even then, Hackett figured there was money to be made in the deep waters of the Gulf of Mexico and off Africa, and he pushed his company to increase its presence there. "It was a high-risk, high-reward sort of strategy, and it worked because he got the right people," says John Schiller, a former Ocean executive.
When Hackett took the job at Anadarko in 2003, the company was missing its financial targets and was rumored to be a takeover prospect. After quickly righting the ship, Hackett announced his boldest moves: The $21 billion takeovers of Kerr-McGee and Western Gas Resources in 2006, which added deepwater properties in the Gulf of Mexico and natural-gas fields in the Rocky Mountain region. Some investors panned the moves early on. Yet rising oil prices helped the deals pay off, and Hackett's reputation soared. "He's taken a company that is midsized and really turned it almost into a junior major," says Bruce Bullock, director of the Maguire Energy Institute at Southern Methodist University's Cox School of Business. Now Hackett just has to keep it that way.
The bottom line: Anadarko CEO Hackett used risky exploration to build his oil company. Now the BP spill risks Anadarko's future.