BP Oil Spill Report May Prompt Big Damages Payout

Findings of the second major investigation by the U.S. government into the 2010 Gulf of Mexico oil spill, may press BP into putting over $30 billion on the table to quickly settle its outstanding legal headaches.

The joint Coast Guard and Bureau of Ocean Energy Management, Regulation and Enforcement probe into the Macondo well blow-out which led to the death of 11 men and the biggest offshore oil spill in U.S. history, put most of the blame on BP.

The report, issued Sept. 14, was even more damning of BP’s behavior than the Presidential panel’s findings, which were issued in January and February. Both reports also highlighted mistakes made by BP’s contractors, driller Transocean and cement specialist Halliburton.

The investigations have not left London-based BP eager to face the Department of Justice or civil claimants in court.

“We would like everything settled as soon as we can, otherwise you have lingering reputation issues and investor uncertainty,” one insider said after the latest report.

BP declined to comment on its legal strategy.

Companies often drag out litigation, as payments in the future have less value than payments now.

Exxon Mobil fought claims related to the 1989 Valdez spill for almost 20 years, confident it could beat down the massive sums sought by, and initially awarded to, its opponents. In the end, it was largely successful.

But BP’s case is not seen to be as strong. The Valdez spill happened when a drunk captain guided his tanker onto a reef, while the official investigations put most of the blame for Macondo on BP management structures and decisions.

The man hearing the civil damages claims against BP, Judge Carl Barbier, has set a February trial date. BP is likely to make a “significant” offer soon afterwards, the insider said.

“I expect that early next year you will see the mother of all settlements,” another source said.

$30 Billion?

BP estimates the cost of the oil spill will end up at around $42 billion, including all environmental costs, compensation, legal claims and fines. So far, it has spent around $25 billion.

It has paid around $7 billion to compensate fishermen, hoteliers and cruise ship owners, mainly through the $20 billion fund it created under President Barack Obama’s direction, and expects to pay out another $7.4 billion, according to its filings.

Lawyer Brent Coon, who is representing some of the claimants, says that from what he has seen, actual economic damages could be much higher. “So far they’ve been handling mainly the smaller cases.”

Coon sees BP being forced to pay out another $10-20 billion to cover economic claims. Some legal experts believe the total could even be much higher.

BP’s provision also includes $3.5 billion related to Clean Water Act fines. But if BP is found to have been grossly negligent, which it denies, it could be fined over $21 billion.

Even before the conclusion of the highly critical official investigations, the government indicated it would press for the higher level of fines associated with gross negligence.

However, the oil industry lobby’s growing strength, combined with the Obama administration’s wish to see the case resolved before presidential elections in November 2012, could mean the DoJ accepts a discount. Nonetheless, a fine of over $10 billion is possible, lawyers say.

BP’s provision also excludes punitive damages but Judge Barbier has ruled these can be claimed, at least in relation to maritime-related cases, such as losses by fishermen, which Coon estimated at around $5 billion.

Zygmunt Plater, professor at Boston College Law school, said claimants could receive a multiple of any compensatory award because the latest government report linked the accident to BP’s cost-cutting efforts. Even at a 1:1 punitive-to-economic damage ratio, BP may have to offer an additional $5 billion to cover punitive awards.

Combined, it appears BP may have to put over $30 billion on the table to cover the DoJ and civil claimant cases against it — some $20 billion above what it has budgeted for.

Plater, however, said the risk of a court awarding much more meant that if BP could put all criminal and civil cases against it to rest for $40 billion, it should jump at the chance.

BP insiders say the company is not willing to offer any amount to win legal peace. A third source familiar with the company’s thinking said the period around February could represent a window for cutting deals, but that if claimants were not “reasonable,” the company could take the Exxon route and litigate for 10 or 20 years.

Topics Energy Oil Gas