Final phase of BP trial begins tomorrow

From Wall Street Journal

BP faces as much as $13.7 billion in Clean Water Act fines stemming from the 2010 Deepwater Horizon oil rig disaster in the Gulf of Mexico.

By
Daniel Gilbert and
Justin Scheck
Jan. 18, 2015

After its oil-well explosion in the Gulf of Mexico in 2010, BP PLC caught one lucky break: Oil prices surged and boosted its cash flow, helping it to cover billions of dollars in legal and oil-spill cleanup costs.

Now BP is facing up to $13.7 billion in federal fines—about $10 billion more than it has set aside—in much less comfortable economic circumstances now that oil prices have plunged. The company is set to go to trial Jan. 20 in federal court in New Orleans over how much it must pay the U.S. government for each barrel of crude that spilled into the Gulf, in the final phase of litigation stemming from violations of the Clean Water Act.

A global oil glut has sent prices tumbling since the summer. Crude now sells for about 40% less than it did in April 2010, when the explosion of the Deepwater Horizon rig killed 11 people and touched off the largest offshore oil spill in U.S. history.

The court’s decision on the fines comes at a vulnerable moment for BP. Once the pride of England—BP stands for British Petroleum—the company already has had to sell off a lot of assets to cover spill costs. One of its biggest bets is in suddenly hostile territory: Russia.

The company is carrying $53.6 billion in debt, $21 billion more than at the time of the spill. Some analysts have been speculating that a slimmed-down BP could become a takeover target once the Deepwater Horizon litigation concludes.

BP is already feeling the effects of lower oil prices. On Thursday it said it would lay off about 300 workers in Scotland, and analysts are lowering their forecasts for BP’s 2014 earnings, which are slated to be released Feb. 3.

The steep price decline “reduces BP’s flexibility to cope with any further claims or shocks,” analysts at Fitch Ratings wrote Friday. The drop “will severely dent earnings in 2015, and will likely stretch BP’s credit profile beyond what is acceptable for an ‘A’ rating, in the short run at least.”

While the collapse in oil prices will crimp BP’s cash flow, the company’s lawyers aim to use it to their advantage. They plan to argue that the price drop has weakened BP Exploration & Production Inc., the subsidiary that is charged with the spill violations, and the court should weigh this in imposing a penalty.

“We look forward to presenting our case at trial,” said J. Andrew Langan, a lawyer representing BP’s subsidiary. The company “should be subject to a Clean Water Act penalty at the lower end of the statutory range.”

BP had $30.7 billion in cash by the end of September. But the company argues that it has no obligation to lend money to its subsidiary and that the court should disregard the broader BP group’s financial resources in imposing a fine.

ENLARGE
BP faces up to $13.7 billion in fines stemming from the 2010 Deepwater Horizon oil rig disaster in the Gulf of Mexico. European Pressphoto Agency

BP also argues it should get credit for leading the “largest environmental response operation in the nation’s history,” according to court pleadings. The company has incurred $43 billion of spill-related costs, including criminal and civil settlements and $14 billion for the Gulf cleanup.

Lawyers for the government acknowledge that BP spent money that it wasn’t required to, citing $846.2 million that BP paid for research into the spill, tourism promotion, and seafood testing, among other expenses, that could be deducted from the penalty.

But they plan to present evidence that BP’s subsidiary is controlled by the parent and can weather the impact of a fine. Because the subsidiary “can readily access equity, capital, or borrowing from BP, it can pay the maximum penalty,” lawyers for the U.S. Justice Department wrote on Dec. 19, 2014.

High oil prices buoyed BP as it unloaded properties to pay for spill-related costs. The company has raised more than $40 billion from selling assets since 2010, including refineries in California and Texas, and fields in the Gulf, Alaska, Colombia and the North Sea.

“BP sold a hell of a lot of assets when the price of oil was a hell of a lot higher than it is now,” said Richard Champion, chief investment officer at Sanlam Private Investments, which held BP shares as of December. As a result, BP made more money from the sales than it could at current prices, he added.

The Deepwater Horizon disaster spurred a tangle of litigation, including class-action lawsuits filed on behalf of people, businesses and governments that contend that they were hurt by the oil spill.

But the case that could be the most costly is the battle with the U.S. government over violations of the Clean Water Act. Judge Carl Barbier, a federal-district court judge in New Orleans handling the case, divided it into three parts.

In the first step, to determine liability, Judge Barbier ruled in September that in an effort to cuts costs, BP acted recklessly before the drilling rig exploded. On Thursday, the judge ruled on the second major phase of the litigation, finding that BP didn’t act irresponsibly in the wake of the accident.

Judge Barbier concluded that the well leaked 4 million barrels, less than prosecutors had claimed. After subtracting the oil that was captured without spilling into the Gulf, the judge determined BP is liable for a fine on 3.19 million barrels.

Now the question is how much the company must pay in pollution penalties for each of those barrels. The government is seeking a $4,300 fine for each one; BP contends that fines should be capped at $3,000 per barrel.

The penalty sought by the government would be the largest by far for violating the Clean Water Act; BP calls it “a gross outlier compared to penalties in any other case or settlement.” The highest penalty imposed under the act to date is the $1 billion that Transocean Ltd. paid in a 2013 settlement over the same spill.

Tom Claps, a legal analyst at Susquehanna Financial Group, estimates that BP’s penalty will likely total about $6 billion to $7 billion. In addition to BP’s steps to clean up the spill, he says, Judge Barbier found BP bears only two-thirds of the blame for the accident, with contractors Transocean and Halliburton Co. at fault for 30% and 3%, respectively.

Write to Daniel Gilbert at daniel.gilbert@wsj.com and Justin Scheck at justin.scheck@wsj.com

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