Will a Government Miscalculation Lower BP’s Spill Bill?

Gulf_of_Mexico_Oil_Spill_Observed_From_the_ISSSince the beginning, 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, an estimate that was made by a team of scientists from all over the country. But, until now, the company’s own calculations have never been released. Instead of showing its figures, BP had only said that it believed the official calculation overestimated the flow rate by at least 20 percent.

Previously sealed court documents show a detailed accounting of BP’s defense to the government’s official estimate. In a 209-page report prepared last month, Martin Blunt, a petroleum engineering professor at London’s Imperial College, calculated that 3.26 million barrels of oil were released from the company’s undersea Macondo well, which 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 800,000 barrels of oil that BP and the U.S. government agree were collected at the wellhead, preventing additional seepage into the ocean.

Excluding the oil collected, the government estimates that 4.1 million barrels of oil entered the Gulf and Blunt has calculated that just 2.46 million barrels made it into the ocean.

The disparity in estimates will be the primary point of contention during the second phase of the civil trial that is currently in progress in a federal court in New Orleans. The new numbers have the potential to cut the maximum Clean Water penalties BP could have to pay by $7 billion.

If BP is found to be “grossly negligent,” a key determination that will be made during the trial, its fine under the Clean Water Act could be as much as $17.6 billion based on the government’s calculations and a maximum fine of $4,300 per barrel. But if BP is not found to be ”no more than negligent,” a $1,100-per-barrel fine will be used to calculate the company’s penalties. Based on Blunt’s calculation, the maximum penalty would be $10.6 billion.

A ruling on negligence is expected later this summer, while the second portion of the trial is scheduled to begin in September.

BP has already committed $8.5 billion to plaintiffs in one settlement, a figure that could increase as payments are still being made. The company also paid $9 billion in other claims, settled 14 criminal charges with a guilty plea and a fine of $4 billion, and incurred $14 billion in clean-up costs for the damage done to the Gulf of Mexico and surrounding coastline. This has put a huge strain on the company: accounting provisions have totaled $42 billion — a figure that represents close to 30 percent of its stock market value, and it has sold assets worth $38 billion to cover its financial obligations. Together, these moves have cut $5 billion per year from its cash flow — which is a basic money-making measurement.

The reason for the difference in the calculations, according to Blunt, is that  government experts switched the method used to calculate the flow rate, which caused the higher, and what he believes erroneous, total.  Blunt said that the main difference between his estimate and those of several U.S. experts is that they doubled the “compressibility from the value measured on Macondo rock samples.” Compressibility is a measure that determines how much oil is released for a reservoir as the pressure drops. He added that if U.S. experts used the same rock compressibility that he did, they would obtain about the same value for cumulative flow as he did.

Blunt also said that the U.S. experts did not have scientific justification for their decision to double the rock compressibility from the measured values. “We will see that this has been a repeated problem in the work of the government experts,” he wrote. Not only that, but investigators disregarded vital pieces of experimental evidence without justification, according to Blunt.

“There is a choice: either accept their calculation of (nearly) 5 million barrels, despite the lack of any scientific explanation of why the measurements are wrong, or perform a calculation consistent with the data and arrive at a lower value,” Blunt concluded. “I have chosen the latter approach.”

In a court document filed Thursday, which included a copy of Blunt’s report, Department of Justice lawyers said they want to call rebuttal experts to challenge his assessment at the trial, adding that some of BP’s own experts calculated higher rock compressibility values that Blunt used at the time of the spill.

A copy of Blunt’s report is included below.

Part 1:

Part 2:

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