Last week’s ruling that BP Plc (BP/)’s Macondo well dumped less oil into the Gulf of Mexico than the US government claimed may trigger a settlement before a decision on the amount it must pay after a trial set to begin this week.
A federal judge determined on January 15 that the penalty will be based on the size of the spill being 3.19 million barrels, about 25% less than estimated by the government.
That ruling, which was followed by a 5.3% jump in BP shares, reduced the potential maximum pollution fines for the 2010 spill to $13.7 billion from $18 billion and increased the incentives for a settlement.
“There’s a very good chance — about 75% — that they’ll settle,” said David Berg, a Houston trial attorney who has been following the litigation.
Even if the case doesn’t settle before a trial verdict, BP probably won’t face a maximum fine against BP, Berg said. The range will likely be from $8 billion to $10 billion, he said.
Even a fine of that size would be the largest civil penalty under the Clean Water Act, according to the Environmental Protection Agency.
The current record is the $1 billion settlement Transocean Ltd. (RIG), which owned the Deepwater Horizon drilling rig that burned and sank in the Gulf spill, reached with the US in 2013.
The blowout of the Macondo well off the coast of Louisiana in April 2010 killed 11 people aboard the rig and spewed oil for almost three months into waters that touch the shores of five states.
The accident sparked thousands of lawsuits against BP, as well as Vernier, Switzerland-based Transocean and Houston-based Halliburton Co. (HAL), which provided cementing services for the project.
The trial beginning Tuesday before US District Judge Carl Barbier in New Orleans is the third phase over the 2010 incident, the largest offshore oil spill in US history.
In the first phase, Barbier determined that BP was grossly negligent before the well blowout, allowing for potential pollution fines to be almost quadrupled.
The second phase ended with last week’s decision that the US overestimated the size of the spill, reducing the possible fine.
The judge also gave BP credit for capturing oil as it spewed from the sea floor.
“Barbier’s done a very shrewd thing by setting a cap on damages,” Berg said in an interview.
By limiting the government’s maximum fine, the judge, who will decide the case without a jury, increased the pressure on both sides to settle before he sets the penalty, Berg said.
“He’ll say that BP’s had enough, paid enough and done enough,” to avoid the maximum fine, Berg predicted. “The penalty will hurt, but it won’t kill the company.”
The trial is expected to last three weeks, with no decision until after BP and the US Justice Department file post-trial suggested findings in April.
The London-based company has set aside $3.5 billion to cover the pollution fines. It has already spent more than $28 billion in spill response, cleanup and claims.
It reached a $4.5 billion settlement of criminal allegations in 2012.
The company had taken a $43 billion pretax charge to cover all the costs, according to an October 28 earnings statement.
The ultimate cost is “subject to significant uncertainty,” BP said in the statement.
The possibility of a fine higher than $3.5 billion doesn’t require a greater reserve because BP still hasn’t spent or committed to spend the $43 billion set aside, said Fadel Gheit, an analyst at Oppenheimer & Co.
“The provision of $43 billion has $7.6 billion of breathing room,” he said.
Gheit said he expects the fine to be no higher than $9.2 billion. It may be as low as $3.5 billion, he said. BP deserves credit for its response to the spill, which should bring down the ultimate fine, Gheit said.
In his September ruling that BP’s exploration unit acted with gross negligence, Barbier apportioned fault at 67% for BP, 30% for Transocean and 3% for Halliburton.
He found that Transocean and Halliburton were merely negligent. That decision triggered BP’s exposure to maximum Clean Water Act fines of $4,300 for each barrel spilled.
The maximum otherwise would have been $1,100 a barrel. BP has appealed that decision.
The January 15 ruling on the number of barrels spilled included a finding that the company didn’t extend the spill by lying about its size or misrepresenting the efforts to contain it.
Barbier determined that BP also wasn’t grossly negligent or reckless “in source control planning and preparation.”
In the penalty phase, Barbier will consider eight criteria in setting the fine, including the seriousness of the violation, the degree of culpability, any history of prior violations, any other penalties for the same incident, and what BP has done to minimize or mitigate the effects of the spill.
The company doesn’t believe it deserves the maximum Clean Water Act fine, Geoff Morrell, a BP spokesman, said in an e-mailed statement January 15.
“BP believes that considering all the statutory penalty factors together weighs in favor of a penalty at the lower end of the statutory range,” he said.
The penalty sought by the US is “a gross outlier compared to penalties in any other case or settlement,” BP said in court papers December 19.
“Even in cases involving serious environmental harm or highly culpable conduct, courts frequently affirm CWA penalties that are a small percentage of the statutory maximum.”
BP cited multiple cases in which judges set penalties “well below the statutory maximums,” the company said.
Most were below 10% of the maximum fines and several were less than 1%, BP said.
In a lawsuit brought by the US over the dumping of pollutants into wetlands in Virginia Beach, Virginia, a federal judge set Clean Water Act fines at $90,000, BP said in court papers.
That penalty, assessed in 2009, was 0.2% “of the statutory maximum found by the court,” the company said.
A federal judge in Statesboro, Georgia, determined that the maximum penalty facing a logging operation for polluting the Ogeechee River wetlands was almost $28 million.
The judge, whose ruling was also cited by BP, set the penalty at $78,000 in a 2010 order, citing mitigating factors, according to court filings.
Ignoring the spill response by BP’s exploration unit in determining the fines is “bad public policy,” the company said in court papers. “If the US’s position is adopted, future violators would have a disincentive to engage in a robust response.”
BP said it spent more than $14 billion on the response. About 82,000 of the 100,000 responders to the incident worked on its exploration unit’s behalf and “devoted over 70 million hours responding to the spill,” it said.
The unit, “working with the US and others, mounted the largest and most effective response in history,” BP said.
The company said it mobilized responders and procured thousands of vessels to mitigate the impact of the spill.
As a result of that effort, which included widespread use of chemical dispersants, less than 10% of the oil reached shore and that was cleaned up at a removal rate “roughly two to five times greater than in a typical spill response,” the company said.
BP also asked Barbier to take into consideration the economic effect on the company if a large fine is imposed, particularly as the price of oil has fallen to less than $50 a barrel.
The US said in court papers before Barbier issued his decision on the size of the spill that it was seeking $16 billion to $18 billion from BP’s exploration unit. The U.S. based that amount on a spill of 4.2 million barrels.
“If ever there was a case that merits the statutory maximum, this is it,” Justice Department lawyers said in a December 19 filing.
The fine shouldn’t be reduced because BP spent money on clean-up and claims, the U.S. said.
“The vast majority of those dollars were required to be spent by law,” the US said. “There is no reason that BP should get a reduced civil penalty merely for funding response actions required by law, and paying claims authorized by law.”
Anadarko Petroleum Corp., which owned a 25% share of the Macondo well, will also be a defendant in the penalty phase of the trial.
Barbier previously ruled Anadarko wasn’t responsible for the spill and is on the hook for pollution fines as a part-owner of the well.
The US said last month that The Woodlands, Texas-based Anadarko should pay more than $1 billion in Clean Water Act penalties.
Anadarko has argued it shouldn’t pay any pollution fine because it had no fault in the spill and paid $4 billion in a settlement with BP, with the money earmarked for claims to those harmed by the spill.
The seriousness of the incident means BP’s arguments probably won’t persuade Barbier to levy a minimal pollution penalty, Berg, the Houston lawyer, said.
“There’s no doubt there’s permanent damage to marine life in the gulf, and to the coastline itself and to the people and communities along the coast,” he said. “They’ll have problems from the spill forever.”
Barbier won’t issue the maximum fine because he has to consider the company’s “all-in” response to stop and clean up the spill, Berg said. “He has to reward BP to some extent for its behavior since the spill.”
The case is In re Oil Spill by the Oil Rig Deepwater Horizon in the Gulf of Mexico on April 20, 2010, MDL-2179, U.S. District Court, Eastern District of Louisiana (New Orleans).
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