Court Asks: Could BP Have Handled Gulf Spill Better?

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During the first phase of BP’s (NYSE:BP) civil lawsuit, the aim of the New Orleans district court was to apportion blame between BP and its contractors — rig owner Transocean (NYSE:RIG) and cement provider Halliburton (NYSE:HAL) — and determine whether any or all of those companies acted with gross negligence during the events that precipitated the oil spill in April 2010.

At issue now, in the second phase of the three-part trial that began Monday, is how much oil spilled was from the blown-out well, whether BP prepared enough for an accident like the well explosion, and if the company responded correctly once oil began to spill.

Lawyers for the plaintiffs in the civil trial — which include the federal government, several gulf states, and private individuals harmed by the spill — have claimed in court documents that BP not only misrepresented the size of the leak but also caused delays by complicating efforts to cap the well. Hanging in the balance for BP is the size of fines that could be levied under the U.S. Clean Water Act. In the worst-case scenario, the company could be fined as much as $18 billion.

“BP refused to spend any time or money preparing to stop a deepwater blowout at its source,” Brian Barr, a lawyer for the plaintiffs, told Reuters. “BP then made the situation worse by lying about the amount of flow from the well,” a point that has been made in court filings, as well. As evidence, the prosecution presented internal company emails on Monday that showed while BP was publicaly stating in April 2010 that 5,000 barrels of oil per day were leaking into the ocean, the company actually knew that figure was closer to 100,000 barrels per day.

The exact number of barrels that spilled into the ocean from the blown-out well is of particular importance because BP’s Clean Water Act fine will be calculated per barrel. That fact alone makes this stage of the trial the most crucial for the company’s finances and for the company’s shareholders. Since the beginning, 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.

The government will argue that 4.2 million barrels of oil were released into the sea over a period of 87 days, the equivalent of nearly one-quarter of all the oil that is consumed in the United States in a single day. For its part, BP’s lawyers will counter that number of spilled barrels was closer to 2.45 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.

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, which would bring 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 a fine of that size would drain the $42.2 billion BP has set aside for its spill bill. Such a massive payout would be hard for the company to sustain given its annualized earnings, which, 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 nearly $18 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, but 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, which were worth $39 billion and once generated $5 billion in cash flow, or approximately one-fifth of the company’s 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.”

As for the capping of the well, witnesses told the court they were surprised when BP decided to not to put a new blowout preventer on top of a similar device, which was the original plan. “It was BP’s decision,” Transocean engineer Robert Turlak, who worked on the well-capping team, told Reuters. “We were so close, we’d come a long way … We had the equipment ready.”

As different capping methods were attempted, oil spilled into the ocean for 87 days, befouling marshes, fisheries, and beaches along the Gulf coast and affecting local businesses and residents. BP lawyer Paul Collier denied that the problem was indecisiveness, telling the court the company carefully assessed how to mitigate risks associated with the various capping options, according to Reuters. He further explained that the well-capping team had a mantra of “don’t make things worse,” and he called experts who testified that the method Turlak preferred was not ready.

One method that BP expected to work — a top kill that pumped heavyweight drilling mud into the well — failed to halt the seepage, which frustrated U.S. officials. “I believed the words [BP Senior Vice President] Kent Wells used, that this is a slam dunk,” former U.S. Energy Secretary Steven Chu said in a videotaped deposition played in court on Monday, Reuters reports. After that, “we began to be much more critical about what BP planned to do,” Chu added. In the end, a capping stack,” which took weeks to construct, was able to shut the well. Now, that piece of equipment is crucial for similar disasters.

In its defense, the company’s lawyers have argued that BP did not misrepresent the oil flow, and that it followed U.S. standards before and after the Macondo well exploded, which precipitated the oil spill. “BP had a response plan that was fully consistent with U.S. standards for spill preparedness,” BP lawyer Mike Brock told Reuters. “BP did not misrepresent the flow rate in a way that caused a delay in the shut in of the well. It made reasonable decisions based on what was known at each step along the way.”

Judge Carl Barbier will not assign penalties until the third phase of the nonjury trial, a ruling that is expected early next year.

Follow Meghan on Twitter @MFoley_WSCS

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