Watch Out BP, Latest Fines May Be Five Times Your Estimate
After eight weeks, the first phase of a civil trial, aimed at apportioning blame between BP (NYSE: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 2010 oil spill, came to an end.
On April 18, Judge Carl Barbier, who is hearing the case without a jury at the federal district court in New Orleans, said he would allow 60 days for brief to be filed and an additional 20 days for reply briefs. That time period has based, and beginning Monday, BP’s lawyers will begin defending the company in the second of the three-phase trial brought the United States government, individuals, and businesses harmed by the spill, as well as Gulf coast states.
The outcome of this phase of trial depends heavily on whether the company’s lawyers are able to convince the court that its estimate of spilled oil, not the federal government’s, is correct, and on how responsible the court deems BP to have been in failing to stop the spill for a period of 87 days.
BP has acknowledged responsibility for the Gulf of Mexico oil spill that killed 11 men and spewed millions of barrels of crude oil into the ocean, it has spent more than $25 billion on cleaning up the marshes, fisheries, and beaches along the coast and compensating victims. Furthermore, that spending is just the tip of the company’s spill-bill iceberg — $42.4 billion has been spent or earmarked for spending on clean-up, compensation, fines, and other costs. BP has even sold assets that generated $5 billion of cash flow a year to pay those expenses.
Up until approximately six months ago, BP attempted to cooperate with the mountain of litigation that government agencies, private individuals, and businesses dumped on its docket. But in February, that changed. The company stopped pursuing a settlement for the federal government’s civil charges and the trial began in the New Orleans district court.
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 federal government miscalculated the number of barrels of crude that flowed into the Atlantic ocean, an estimate that was calculated by a team of scientists from all over the country. “United States experts employ unproven methods that require significant assumptions and extrapolations in lieu of available data and other evidence,” BP’s lawyers wrote in a filing seen by Reuters.
Previously sealed court documents show a detailed accounting of BP’s defense to the government’s official estimate. In a 209-page report prepared in May, Martin Blunt, a petroleum engineering professor at London’s Imperial College calculated that 3.26 million barrels of oil were released when the company’s undersea Macondo well exploded 50 miles off the Louisiana coast on April 20, 2010.
Comparatively, the government has said that 4.9 million barrels were discharged. 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.
The problem for BP is that the backdrop to the civil trial — the company’s efforts to halt settlement payments to victims of the oil spill — appear to have painted the company in a worse light. Several months ago, when the restitution payments started to overshoot its original estimate, BP began to contest the manner in which restitution payments were awarded, arguing that court-appointed fund administrator Patrick Juneau has compensated “fictitious and inflated losses.” But Barbier has so far denied BP’s attempts to pause the payouts, and the former plaintiffs’ attorney born and bred in Louisiana even told one of the company’s lead outside litigators that the company’s perspective on the case “doesn’t make sense to most people down here.”
In an interview with Bloomberg Businessweek, BP Chief Executive Officer Robert Dudley noted that the results of the settlement have been strange. However, Joe Rice, who negotiated that settlement on behalf of more than 100,000 compensation claimants, has explained that BP “made a vast strategic error by fighting and shifting this whole battle to an attack on the people of the Gulf.” As he told Reuters, “Any goodwill they built on trying to do the right thing, they have destroyed.” BP also pleaded guilty last year to misleading Congress on the scale of the spill.
For shareholders, it is the second phase that will be most crucial to the company’s finances. 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 that 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.
In preparing for these civil fines, the company only set aside $3.5 billion. The maximum penalty is about five times that figure, and if that large a penalty is levied, BP 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.
Since the disaster, BP’s shares have lost about a third of their value, as the company divested assets worth $39 billion that generated $5 billion in cash flow, or approximately one-fifth of its earning power, before 2010. Before the oil spill, BP was the second largest oil company by assets, now it is fifth.
“Until the court case is over, the potential upside on asset value is a waste of time,” VSA Capital analyst Malcolm Graham-Wood told Reuters. “Other investments in the sector offer greater certainty of operating results, vastly better management — and a better ability to sleep at night.”
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