Crying over Spilled Oil; BP Deepwater Horizon

After the Deepwater Horizon oil rig exploded in 2010, killing 11 workers and spewing a lake of oil into the Gulf of Mexico, BP knew it would be punished severely. So far, the British oil firm has set aside $42 billion to pay fines, compensate victims and clean up the mess. Of this, some $36 billion has already been paid out or earmarked. America has also temporarily barred the company from bidding for federal contracts.

In all, BP has shelled out $14 billion to stop the spill and restore the coast to the way it was. It has paid out or earmarked $17.5 billion to compensate individuals and small businesses, plus another $4 billion to settle criminal charges with the Department of Justice. It has also set aside $3.5 billion to pay penalties for oil leaks under America’s Clean Water Act.  These have yet to be determined. A civil trial, set to begin on February 25th in New Orleans, will apportion blame for the accident, determine how much oil gushed out and apply financial penalties. The federal government is demanding $21 billion in compensation for spilt oil. To get that much, it must prove BP was “grossly negligent”. It must also persuade the court to accept its estimate of the size of the leak, rather than

As if that were not enough, BP’s annual results, released on February 5th, harboured another nasty surprise. Tucked away on page 42 were details of hefty new claims against the oil giant. Alabama, Mississippi, Florida and Louisiana are demanding $34 billion for economic losses and property damage. These mainly relate to tax revenues allegedly lost as a result of disruptions to businesses, says BP.  The oil giant knew that a bill was in the post: a three-year statute of limitations will soon expire. However, it was not expecting the bill to be so big. BP disputes the way the sum has been calculated and is ready to fight the claims in court. It reckons that the states will have a tough job substantiating their calculations of forgone taxes.

Both claims seem likely to be settled out of court…BP would far rather end the matter quickly and get on with its business. The uncertainty over the final bill is weighing down its share price. And its sheer size is daunting. If all the claims against it are upheld, BP’s total bill will amount to $90 billion or so. By way of comparison, Saddam Hussein’s Iraq was ordered to pay reparations of $52 billion ($88 billion in today’s money) for invading Kuwait.

One reason why a settlement has proved elusive is that the case is so complex. It involves three pieces of legislation and several layers of federal, state and local government with precious little co-ordination between them. For example, BP notes that 11 tiny Louisiana parishes have made a separate claim for damage to local wildlife. BP’s woes are not over.

The Deepwater Horizon disaster: Spills and bills, Economist, Feb. 9, 2013, at 66

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