Long Term Impact

Jim Brown
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BP may have announced the well was officially dead but the impact of the spill on BP's fortunes could last for decades.

BP pronounced the Macondo well dead over the weekend but the repercussions of the disaster are alive and well and thriving. BP reported the custodian of the $20 billion fund for damages was paying claims at a record breaking rate. The fund has paid out 19,000 claims totaling over $240 million. Claims were paid to fishermen, hotels and retailers whose business was hit by the spill. BP claims the total cost so far has been $9.5 billion.

The fund began paying claims on August 23rd at the rate of about $3.5 million per day. Since September 3rd that has risen to an average of $12.5 million per day. This is actually good news for BP since anyone accepting payment from the fund has to agree not to sue BP.

BP still has plenty of suits. There are more than 400 "major" lawsuits already on the books and there will be thousands of minor suits once they make their way through the claims process and are turned down by the claims fund.

Those are not only civil suits. A probe by several different agencies could lead to multiple criminal charges and actual prosecution of the company or employees. The outcome could be a suspension of well operating licenses and/or a cancellation of contracts under U.S. pollution laws.

BP can be prevented from bidding on new leases and applying for permits to drill on existing leases. Since BP gets 10% of its production from the Gulf this would be a serious blow. BP had six major projects scheduled for funding in the Gulf in 2011 and those are now on hold. BP will claim it requires the ongoing support and access to the Gulf in order to pay the damage claims, fines and penalties. It is unlikely they will be banned but stranger things have happened when politicians try to garner votes.

They still have the penalty phase ahead of them. The government estimates there were 4.1 million barrels of oil released into the Gulf. If they are found simply "negligent" the fine will be in the range of $4.5 billion. If they are found "grossly negligent" that fine can increase to $17.6 billion under the Clean Water Act rules.

This is why BP produced such a detailed internal report and blamed Transocean and Halliburton for the disaster. They don't want to be the lone guilty party. If they can claim it was a joint mistake they can spread the blame and the cost and have a better chance of escaping the negligent label.

The House passed a bill in July that included an amendment disqualifying from new offshore leases any company with safety violations greater than five times the industry average in the past seven years or that have had more than 10 fatalities at exploration and production facilities in the same period. BP is the only company that qualifies under those rules to be banned from new leases.

I suspect calmer heads will prevail now that the well is sealed and the publicity is dying down. Politicians will still want to use BP as a punching bag until the November elections simply because it distracts from the real problems in Washington and gives them a paper tiger to shred.

BP can expect the legal claims to drag on for years although the dispute with Transocean and Halliburton will be handled by binding arbitration as specified in their contracts. That will be a shorter and cheaper route that could lead to a quick settlement for a token amount paid to BP so that Transocean and Halliburton can go about their business without the cloud over their heads. BP does not have that luxury. They will have this cloud for the rest of the decade.

Jim Brown

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