September 20th, 2011 by Michael Ricciardi
In what is being called “even more damning” than an earlier, presidential report*, the government released a new assessment of the Macondo accident and British Petroleum’s role in it, last Wednesday. The report largely places the blame for the accident — the worst oil spill in history — on BP’s cost-cutting policies.
Pressure is mounting on both BP and the Obama administration to settle the total liability claims as soon as possible. For BP, the pressure comes from a combination of continued bad public relations and investor demands. For the Obama admin, the pressure comes from wanting to resolve this issues as far ahead of the November 2012 election as possible, as an on-going case may make the government look too “anti-business”.
With economic and punitive damages coming in at around $30 billion, and possibly as high as $40 billion, there was some concern that BP might choose to drag out the case over many years, in the same fashion as ExxonMobil did following the Valdez oil spill in 1989. In the latter case, Exxon legally challenged various penalties for 20 years, ultimately paying significantly less than the original award amount. Twenty years on, however, hundreds of pockets of oil remain along the affected coastline.
Large corporations often employ this strategy as payments made in the future have less value than those made now (assuming constant rate of dollar depreciation).
But BP’s case is not so easily panned-off onto an inebriated and/or incompetent ship captain. Previous investigations have placed the blame for the Macondo explosion and spill on BP’s “management structure and decisions.”
The DOJ had previously indicated that it would be pursuing the steepest penalties associated with gross negligence. A guilty finding on this count alone could cost the corporation $21 billion (note: this is in addition to the $3.5 billion in fines related to Clean Water Act). Thus it is possible that if BP pursues anything other than a quick settlement strategy, it could end up paying even more. According to some financial estimates (taking into consideration the decline in BP share price), the total pay out will be closer to $60 billion (which includes the $25 billion already paid out.
Further, legal observers note that because the report finds various cost-cutting and negligent decisions, claimants (such as fishermen and hotel owners) could receive many times the amount of any compensatory award.
BP’s own estimate of the total cost of the oil spill — including clean-up, compensation, legal claims and fines — is $42 billion. Observers say that BP may be inclined to put $40 billion on the table to settle all claims once and for all, and quickly.
But no penalty is guaranteed in this world where Big Business meets Big Government.
Political insiders cite pressure on the DOJ from the Administration — combined with industry lobbying pressure in Congress — to settle sooner, rather than later. This means that the DOJ, as well as some lawyers representing larger claimants, will have less time to make their cases on each claim. Thus, the DOJ may be pressured to accept a “discount” to the maximum fine, as will the other litigators in the case.
Most observers agree that a fine of at least $10 billion, plus $5 billion in punitive damages (allowed in the case of maritime-related claims) is likely. But other lawyers for some of the larger claimants (such as tourism and shrimping) believe the total economic damages awarded will be much higher than that — at least $20 billion more — since, so far, the government has been settling only the smaller cases.
Author’s comment: It is a precarious game that BP must play here; all parties are under pressure to settle, every one knows this. BP could possibly get its penalty reduced by several billions if it can convince the DOJ that it is serious about challenging some of the claims. But it must do so in a way that doesn’t anger the shareholders (who are already counting huge losses for the company). The gambit can only work if BP’s challenges to the claims can stand up in court. But it could backfire and give the plaintiffs more time to press their claims. And every claim found in favor of a plaintiff decreases BP’s chances. If the court system finds against it, anyway, BP could pay even more. So, there is a clear limit as to how long BP can play this game. My guess is a blanket settlement of $40 billion.
The largest oil spill in the history of the petroleum industry began on April 20, 2010, following a massive explosion on the Deepwater horizon drilling platform, killing 11 workers; the resulting blow out of a valve on the Macondo well released an estimated 53,000 barrels per day (8,400 m³/d) before it was capped on July 15, totaling approximately 4.5 million barrels.
Meanwhile, almost unnoticed in by the mainstream media, another giant oil slick has appeared in the Gulf of Mexico in the same area as the original BP/TransOcean spill.
* The January 2011 White house commission report stated: “The root causes are systemic and, absent significant reform in both industry practices and government policies, might well recur.”
Some source material for this post came from this Reuter’s News article: ‘Analysis: BP oil spill report may prompt $30 billion pay-out’
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