The government filed the first of several lawsuits against BP and its partners in the Horizon disaster and this will be the first chapter in a decade long saga of legal wrangling.
The Justice Dept filed a civil lawsuit against BP and its partners and insurers using the Clean Water Act and the Oil Pollution Act as the basis for the suit. No specific damages were mentioned but the Clean Water Act specifies a fine of up to $1,100 per barrel spilled. With an estimates five million barrels released into the Gulf that adds up to a significant chunk of change.
The other companies include Transocean (RIG), their insurer Lloyds of London, Anadarko (APC), MOEX Offshore, Triton Asset Leasing and Mitsui.
This suit is not their worst worry. The Justice Dept only filed the suit because Wednesday was the last day suits could be filed. This was a placeholder suit so they can add other details later.
The Justice Dept is also planning on filling criminal charges as a result of the current investigation. The statute of limitations on criminal charges is five years. If the government can prove gross negligence or criminal negligence the fines under the Oil Pollution Act can be as much as $4,300 per barrel or something in the range of $20 billion. But it can get worse, a lot worse.
Under the Oil Pollution Act the government can impose additional fines for anything they want. For instance they could add a fine for every dolphin, turtle, fish and seabird that washed up on the beaches covered in oil. Those fines can be in the thousands of dollars per animal.
The Dept of Justice will likely wait until the end of the five year statute of limitations before filing the criminal case. The reasoning is something called the Alternative Fines Act. Under the act a felony that resulted in a loss to another person or entity can be fined twice as much as the loss.
For instance a fishing boat operator that lost $100,000 in profits from the oil spill could cost the BP group $200,000 under the Alternative Fines Act. BP has already established a $20 billion fund to compensate victims and pay cleanup costs but there are thousands of people and firms suing BP for things not covered by the fund. These suits could run into the billions in additional compensation.
If BP pays out $30 billion in compensation under the Alternative Fines Act they could be liable for another $60 billion or twice the original claims.
The government uses the AFA as a hammer to force companies to settle and agree to terms and conditions they would never agree to out of court. Hypothetically once all the cases are closed the government could file a case under the AFA with some monster fine attached. Then they turn to BP with a list of demands. Either agree to our demands and pay a smaller fine or we will proceed with the AFA case and bury you.
They used the AFA against BP for the refinery explosion in Houston. There were fatalities and BP racked up a monster pile of damages and fines. When the smoke cleared the government used the AFA to force BP to pay a $50 million fine and plead guilty to a felony and agree to a long list of promises about future refinery operations. If they break one of the promises an even larger fine can be levied. This puts the government in control of BP for a very long time.
Now that BP has again come under fire for a fatal accident there is the potential for the government to really come down hard on them as a repeat offender.
Regardless of how each case plays out this is going to lead to a lost decade for BP. Their profits will always be under a cloud of litigation and they will not be able to sell or dispose of any assets without the approval of the Justice Dept. They are going to be inflicted with the torture of 1000 cuts and while each will not be fatal they will combine to slow the BP machine and distract them from their normal business. They would be better off to show up on the steps of the Justice Dept with a $50 billion check and plead for mercy and considering the tens of billions in future court costs and attorney's fees it would probably even be cheaper.
This newsletter is only one of the newsletters produced by OilSlick each day. The investment newsletter is also produced daily and contains the current play recommendations in the energy sector. Stocks, options and futures are featured. If you are not receiving the "Play Newsletter" please visit the subscribe link below to register.
Subscribe to Energy Picks Newsletter
See a list of our closed plays from 2010 here: Closed Positions