Posted on 05 Mar 2012
The $7.8 billion oil spill settlement between BP PLC and thousands of residents and businesses along the Gulf of Mexico clears the way for what may become a far more expensive battle between the oil giant and the U.S. government.
Legal experts said the size of the settlement, announced Friday night, suggests that if the government pursues criminal environmental penalties against BP the potential penalties could reach $17 billion to $40 billion, though a settlement likely would reduce any fine to far less.
Potential civil penalties, which are based on the amount of oil spilled but increased by any finding of negligence, could top an additional $20 billion. That amount also would be subject to reduction through a settlement.
The indefinite delay of a civil trial that was to begin today is expected to lead to the resumption of settlement talks among the remaining parties, including the Department of Justice.
Attorney General Eric Holder told Congress last week his department was prepared to go to trial over the case, but a spokesman said over the weekend the government will "remain open to a fair and just settlement."
The government could try to force Transocean Ltd., which owned the doomed Deepwater Horizon drilling rig, and Halliburton Co., which was involved in preparing the well, to shoulder some of the government fines and penalties. But both companies said Friday they will continue to fight against accepting any liability in the massive 2010 oil spill in the Gulf.
BP has recorded a $37.2 billion charge for what the British company estimates will be its maximum spill-related costs. It said the settlement Friday doesn't change the figure.
So far, the company said it has spent about $22.1 billion on the disaster, including about $8.1 billion paid to individuals, businesses and governments and about $14 billion to stop the leak and clean up the spill. The figure excludes Friday's settlement but it includes $6.5 billion in damage claims BP agreed to pay through an out-of-court settlement system.
The out-of-court system, overseen by Kenneth Feinberg, a lawyer who headed the Sept. 11 victims' fund, will be replaced by a similar system overseen by the courts as part of the new settlement. It is unclear whether people who accepted payments from the out-of-court fund received a larger percentage of their claims than those in Friday's settlement will see. The exact terms of Friday's settlement have yet to be worked out.
The settlement, which must be approved by U.S. District Judge Carl Barbier in New Orleans, covers economic losses and medical claims. While it doesn't put a cap on the total payments BP will make, the company estimates it will cost about $7.8 billion, including about $2.3 billion to help resolve economic-loss claims related to the Gulf seafood industry.
The settlement doesn't cover civil penalties the government appears likely to ask the court to impose. Those payments may range from $1,100 to $4,300 per barrel of oil spilled under the Clean Water Act, with the higher amount applied if a court finds the company was "grossly negligent," an argument government lawyers said they planned to make in court against BP and Transocean, according to sealed filings reviewed by The Wall Street Journal.
Based on government estimates of 4.9 million barrels of oil spilled—figures which BP is likely to dispute—those civil fines could range from $5.4 billion to $21 billion.
If the government alleges criminal violations of the Clean Water Act, BP could be subject to fines equal to twice the economic damage of the spill. That could equal up to $28 billion in criminal fines, said Tom Claps, a former mass torts lawyer who does litigation analysis for Susquehanna Financial Group. He said the U.S. could argue for a doubling of both the $7.8 billion settlement and the $6.5 billion in damage claims BP agreed to pay through the out-of-court settlements.
David Uhlmann, a University of Michigan law professor who headed the Justice Department's Environmental Crimes Section for many years, thinks the potential range of criminal penalties could be much higher—nearly $40 billion—if they include what some have estimated are up to $5 billion in damage to wetlands and beaches.
Mr. Uhlmann noted there never has been a U.S. corporate criminal penalty of even $2 billion, but that he could see BP paying one close to $10 billion.
BP declined to comment on the projections from Messrs. Claps and Uhlmann.
BP currently is required to indemnify both Transocean and Halliburton against compensatory damages like those negotiated in the settlement Friday unless the court determines those two companies were grossly negligent.
The government named Transocean in its claim for penalties under the Clean Water Act, but a Feb. 22 ruling by Judge Barbier said Transocean isn't liable unless it is found to be an operator of the doomed well.
Last week, Transocean said it took a $1 billion loss for spill-related legal activities and that a larger loss was possible, a move analysts saw as an indicator the company expected it would be making settlement payments.