Annual report pursuant to Section 13 and 15(d)


12 Months Ended
Dec. 31, 2012

18. Contingencies

Federal Grand Jury Investigation. The United States Attorney’s Office for the Eastern District of Louisiana, along with the Criminal Investigation Division of the U.S. Environmental Protection Agency (the “EPA”) conducted a federal grand jury investigation beginning in late 2010 of environmental compliance matters relating to surface discharges and reporting on four of our offshore platforms in the Gulf of Mexico in 2009. In December 2012, an agreement was reached that resolves these environmental violations and the agreement was approved by the federal district court in January 2013. Under the agreement, the Company on January 3, 2013 (i) pled guilty to one felony count under the Clean Water Act for altering monthly produced water discharge samples for the Ewing Banks 910 platform in 2009 and one misdemeanor count under the Clean Water Act for negligently discharging a small amount of oil from the same platform in November 2009 and (ii) paid a $0.7 million fine and $0.3 million for community service and (iii) entered into an environmental compliance program subject to a third-party audit. Under the agreement, the Company was placed on a three-year term of probation. The probation terms require that the Company: a) commit no further criminal violations, b) pay in full amounts pursuant to the agreement, c) comply with an Environmental Compliance Plan during the probation period, and d) take no adverse action against personnel who cooperated in the investigation. The agreement further stipulates that the Government will not seek any further criminal charges against the Company in this matter.

Cameron Parish Louisiana Claim. Since 2009, certain Cameron Parish landowners have filed suits in the 38th Judicial District Court, Cameron Parish, Louisiana against the Company and Tracy W. Krohn as well as several other defendants unrelated to us. In their lawsuits, plaintiffs alleged that property they own has been contaminated or otherwise damaged by the defendants’ oil and gas exploration and production activities and they are seeking compensatory and punitive damages. During 2012, we settled claims with certain landowners and paid $10.0 million. We assessed the remaining claims to be probable and have accrued $1.3 million in our contingent liabilities as of December 31, 2012. However, we cannot state with certainty that our estimates of additional exposure are accurate concerning this matter.

Qui Tam Litigation. On September 21, 2012, the Company was served with a complaint in a qui tam action filed under the federal False Claims Act by an employee of a Company contractor. The lawsuit, United States ex rel. Comeaux v. W&T Offshore, Inc., et al.; CA No. 10-494, was filed in the United States District Court for the Eastern District of Louisiana, against the Company and three other working interest owners related to claims associated with three of the Company’s operated production platforms. A qui tam action, also known as a “whistleblower” action, is a lawsuit brought by a private citizen seeking civil penalties or damages against a person or company on behalf of the government for alleged violations of law. If the claims are successful, the person filing the suit may recover a percentage of the damages or penalty from the lawsuit as a reward for exposing a wrongdoing and recovering funds on behalf of the government. The complaint was originally filed in 2010 but kept under confidential seal in order for the federal government to decide if it wished to intervene and take over the prosecution of the qui tam action. The government declined to intervene in this suit and the complaint was unsealed and made public in June 2012, thereby giving the plaintiff the opportunity to pursue the claims on behalf of the government.

The complaint alleges that environmental violations at three of the Company’s operated production platforms in the Gulf of Mexico violate the federal offshore lease provisions so that the Company, among other things, wrongfully retained benefits under the applicable leases. The alleged environmental violations include allegations of discharges of relatively small amounts of oil into the Gulf of Mexico, the failure to report and record such discharges, and falsification of certain produced water samples and related reports required under federal law. The events are alleged to have occurred in 2009. These are largely the same allegations involved in the federal grand jury investigation described above. We have filed a motion to dismiss the claim. The plaintiff dismissed his claims against the three other working interest owners after they filed motions to dismiss. The plaintiff conceded that certain of his claims should be dismissed in his reply to the Company’s motion to dismiss. The motion remains pending before the court.

The Company intends to vigorously defend the claims made in this lawsuit. At this early stage of the lawsuit, the Company has determined that although the likelihood of an adverse outcome is reasonably possible, the range of potential loss cannot yet be estimated, and accordingly, no accrual has been made.

Insurance Claims. During the fourth quarter of 2012, underwriters of W&T’s excess liability policies (Indemnity Insurance Company of North America, New York Marine & General Insurance Company, Navigators Insurance Company; XL Specialty Insurance Company and Liberty Mutual Insurance Co.) filed declaratory judgment actions in the United States District Court for the Southern District of Texas seeking a determination that such policies do not cover removal of wreck and debris claims arising from Hurricane Ike that occurred in 2008. The court consolidated the various suits filed by underwriters. W&T has not yet filed any claim under such excess policies, but W&T anticipates that such claims may reach $50.0 million in aggregate. In January 2013, the Company filed a motion for summary judgment seeking the court’s determination that such excess policies do in fact provide coverage for such removal of wreck and debris claims. The motion for summary judgment is pending. If successful, we expect to receive reimbursement for these costs once costs have been incurred and claims submitted. Costs that have been incurred in connection with potential claims have been recorded in Oil and natural gas properties and equipment on the Consolidated Balance Sheet. Any recoveries from claims made on these policies related to this issue will be recorded as reductions in this line item.

Royalties. In 2009, the Company recognized $5.3 million in allowable reductions of cash payments for royalties owed to the Office of Natural Resources Revenue (the “ONRR”) for transportation of their deepwater production through our subsea pipeline systems. In 2010, the ONRR audited the calculations and support related to this usage fee, and in the third quarter of 2010, we were notified that the ONRR had disallowed approximately $4.7 million of the reductions taken. We recorded a reduction to other revenue of $4.7 million in the third quarter of 2010 to reflect this disallowance; however, we disagree with the position taken by the ONRR and we are pursuing our claim to resolve the matter.

Other Claims. We are a party to various pending or threatened claims and complaints seeking damages or other remedies concerning our commercial operations and other matters in the ordinary course of our business. In addition, claims or contingencies may arise related to matters occurring prior to our acquisition of properties or related to matters occurring subsequent to our sale of properties. In certain cases, we have indemnified the sellers of properties we have acquired, and in other cases, we have indemnified the buyers of properties we have sold. We are also subject to federal and state administrative proceedings conducted in the ordinary course of business. Although we can give no assurance about the outcome of pending legal and federal or state administrative proceedings and the effect such an outcome may have on us, management believes that any ultimate liability resulting from the outcome of such proceedings, to the extent not otherwise provided for or covered by insurance, will not have a material adverse effect on our consolidated financial position, results of operations or liquidity.

Contingent Liability Recorded. We recognized expenses related to accrued and settled claims, complaints and fines of $9.3 million, $1.7 million and $0.7 million for the years 2012, 2011 and 2010, respectively. These expenses are reported in General and administrative expenses on the statement of income and reflect the items noted above and other various claims and complaints. As of December 31, 2012 and 2011, we have recorded a liability of $1.3 million and $2.0 million, respectively, which is included in Accrued liabilities on the balance sheet, for the loss contingencies matters that include the events described above and other minor environmental and litigation matters which we are addressing in the normal course of business.