BP (NYSE:BP) has argued that in a rush to punish the oil producer for the worst offshore oil spill in United States history, the American government miscalculated the number of barrels of crude that flowed into the Atlantic ocean.
This is of particular importance at this moment in the oil producer’s civil trial, which began its second phase at a federal district in New Orleans last week. The outcome of this phase of trial depends heavily on whether the court company’s lawyers are able to convince the court that its estimate of spilled oil, not the federal government’s calculation, is correct.
In April, the first phase of a civil trial aimed at apportioning blame between BP and its contractors — rig owner Transocean (NYSE:RIG) and cement provider Halliburton (NYSE:HAL) — and determining whether any or all of those companies acted with gross negligence during the events that precipitated the oil spill in April of 2010 came to an end. Opening statements began Monday.
The government argued that 4.2 million barrels of oil flowed from the blown-out Macondo well for 87 days, the equivalent of nearly one-quarter of all the oil that is consumed in the United States in a single day. BP’s lawyers will countered that number of spilled barrels was closer to 3.26 million barrels. Both figures include the 810,000 barrels of oil that BP and the U.S. government agree were collected at the wellhead, preventing additional seepage into the ocean.
Determining the exact number of barrels that seeped out of the well is difficult to estimate because Macondo was exploration well, rather than a production well, which would have had highly accurate gauges to measure flow rates. As Department of Justice lawyer Steve O’Rourke argued in court, oil flowed at a rate of approximately 62,000 barrels per day just after the explosion and “waned down to 53,000 toward the end,” as Reuters reported. He likened the magnitude of oil that flowed into the Gulf of Mexico to a spill the size of Exxon (NYSE:XOM) Valdez’s disaster occurring about every 4.5 days for the duration of the leak. The Valdez tanker reportedly carried 260,000 barrels at the time of the 1989 spill.
O’Rourke also contended that BP has changed its estimates over time. They “told their shareholders that the flow was about 4 million barrels,” he said. “Today they’re going to say it was 2.4 to 3.6 million.” Supporting the government’s case, according to the Justice Department lawyer, is the fact that four government experts employed four different methods and reached very similar estimates. “Why four different methods? Because this is an unusual problem,” he said.
Despite the use of four methods, BP’s lawyers say that in their rush to make a spill estimate, which would appease the public, the government’s scientists made a technical error when calculating the barrel total. The company’s lawyer Mike Brock said that relied too heavily on hydraulics calculations that require detailed information about daily changes in the well.
“The government cannot account for all those changes,” Brock said, according to Reuters. In particular, the government experts assumed that the well could tap the entire underlying reservoir of oil, while BP’s petroleum engineering experts calculated that the well only had access to as little as 10 percent of that reservoir, he testified. To support his argument, Brock showed a portion of a June 2013 video deposition given a government witness, Dr. Ronald Dykhuizen, who said his estimate for spilled barrels ranged from 3.5 million to 6.5 million, with 5 million barrels as his best guess.
The number of barrels of oil that spilled is not incidental, the figure will determine the size of the fines BP will have to pay after Judge Carl Barbier, who is presiding over the nonjury trial, rules on the question of gross negligence, which will come sometime early next year.
Under the Clean Water Act, a charge of gross negligence comes with penalties amounting $4,300 for each barrel of oil that seeped into the ocean, bringing the total fine close to $17.6 billion. But if BP is found to be “no more than negligent,” a $1,100-per-barrel fine will be used to calculate the company’s penalties, which would then amount to $4.5 billion or $2.7 billion if the court determines only 2.45 million barrels spilled.
In preparing for civil fines, the company only set aside $3.5 billion. The maximum penalty is almost five times that figure, and in that case, BP’s would drain the $42.2 billion it has set aside for its spill bill. Such a massive payout would be hard for the company to sustain given its annualized earnings, based on last quarter, are running at about $17 billion.
“They would have to sell assets to keep the company afloat,” Fadel Gheit, a senior oil analyst at Oppenheimer & Company, told The New York Times, describing how the $17-billion fine would affect BP. “It would wipe out all of their cash.” However, legal experts say the likely fine will fall somewhere between the two extremes. BP has already found its post-spill reality difficult.
Since the disaster, BP’s shares have lost about a third of their value, as the company divested less-profitable assets in the North Sea and Angola that were worth $39 billion and once generated $5 billion in cash flow, or approximately one-fifth of its earning power. Before the oil spill, BP was the second largest oil company by assets — now it is fifth.
Even worse, Moody’s Investors Service said on Tuesday that the company’s credit ratings would not be affected by a moderate penalty, but “a severe penalty resulting from a finding of gross negligence could change the equation.”
Ed Sherman, a Tulane Law School professor, told NPR that Barbier has some discretion in the size of the fine he awards. “That $18 billion upper limit doesn’t mean that he has to award it,” Sherman said. “He can consider the negligence of other parties, the difficulties that they encountered and so forth.” Sherman also noted that the trial is one of the most complex in legal history.
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