BP’s ‘Gross Negligence’ Raises Risk of Billions in New Payouts

This content was published on September 4, 2014 - 15:36

Sept. 4 (Bloomberg) -- BP Plc faces billions more in potential penalties after a judge found it acted with gross negligence in the 2010 Gulf of Mexico oil spill, dealing a blow to the company’s efforts to expand its drilling program as costs rise and production slips.

In a turning point after four years of legal wrangling over responsibility, U.S. District Judge Carl Barbier’s ruling laid the bulk of the blame on BP for the explosion, which killed 11 men and caused the largest offshore oil spill in U.S. history. BP, which has spent more than $28 billion on the accident so far, is exposed to as much as $18 billion in additional government fines and penalties.

The judge found co-defendants Transocean Ltd. and Halliburton Co. less responsible for the spill.

“BP’s conduct was reckless,” Barbier wrote in a decision today in New Orleans federal court. “Transocean’s conduct was negligent. Halliburton’s conduct was negligent.”

The ruling leaves BP further weakened at a time when the search for crude resources grows riskier and more expensive. BP has been forced to sell assets to help pay for the disaster, which halted deep-water drilling for months and forced explorers to foot the bill for additional safety measures to access oil miles beneath the ocean’s surface.

Survival Strategy

“BP’s done an amazing job at surviving, so I wouldn’t count them out,” Amy Myers Jaffe, executive director of energy and sustainability at the University of California at Davis, said in an interview before the ruling was announced. “If something were to dramatically change and their prospects for the future didn’t look good, people would be waiting for a fire sale for a lot of their assets.”

Today’s ruling doesn’t include a specific fine amount, which will be determined after a trial scheduled to begin in January 2015 in New Orleans. Plus, legal appeals may prolong the outcome for more than a decade -- Exxon Mobil Corp. paid the final punitive damages from the 1989 Valdez spill off Alaska 20 years after the incident.

Barbier laid 67 percent of responsibility for the deadly disaster squarely on BP’s doorstep. The judge also found co- defendant Transocean 30 percent responsible and Halliburton just 3 percent to blame. Earlier this week, Halliburton said it had agreed to settle most of the lawsuits stemming from its role in the spill for $1.1 billion.

Spill Amount

The judge did not rule today on how much oil was spilled, a key factor in determining the scope of additional fines. The millions barrels of crude dumped into the Gulf harmed wildlife and fouled hundreds of miles of beaches and coastal wetlands.

BP fell 5.5 percent to 457.25 pence at 4:07 p.m. in London. The stock had lost more than $3 billion in market value this year as the value of its stake in Russian producer OAO Rosneft has plunged on concerns that conflict between Russia and Ukraine could break out into full-scale war.

“The federal government has extracted more than a pound of flesh in many cases, such as in the aftermath of the financial crisis, but the extraordinary amounts of those fines haven’t reversed the damage that was done,” said Robert Mittelstaedt, dean emeritus of Arizona State University’s W.P. Carey School of Business. “It’s only made them weaker institutions.”

Equipment failures and questions about lapses in oversight led to an overhaul of federal regulation governing offshore safety. The agencies controlling deep-water drilling were reorganized, with new rules put in place to strengthen requirements for equipment, inspections and accident response. New drilling in the deepest waters of the Gulf of Mexico was shut down for almost a year and permitting of new projects slowed under more stringent federal reviews.

Asset Sales

Before today, BP’s stock had fallen 26 percent since the spill, compared with a 44 percent rise over the same period for Exxon and 34 percent climb for Royal Dutch Shell Plc. Former Chief Executive Officer Tony Hayward was ousted and the company’s dividend was halted after the spill.

Incoming CEO Robert Dudley embarked on a wide-ranging asset sale campaign to raise money and streamline the company. Sales included oil fields in Alaska, natural gas developments in Vietnam and refineries in Texas and California.

The company has set aside $43 billion to pay for cleanup costs and fines. It has about $28 billion in cash hoarded to pay potential costs, enough to ward off questions about its viability in the short term, said Fadel Gheit, an analyst with Oppenheimer & Co. in New York.

Moving On

“Not only does the company want to get this albatross off their shoulder, they also want to make up for this disaster to shareholders by buying back stock and reducing debt,” said Gheit, who rates the shares the equivalent of a buy.

Since deep-water drilling in the U.S. resumed, BP and its peers have returned to the Gulf of Mexico, where the company is seeking to drill deeper and at higher pressures than before. Gulf oil output rose to 1.3 million barrels a day in May, the highest level since 2011, according to the U.S. Energy Information Administration.

--With assistance from Harry R. Weber in Houston.

To contact the reporters on this story: Bradley Olson in Houston at; Margaret Cronin Fisk in Detroit at To contact the editors responsible for this story: Susan Warren at; Michael Hytha at Tina Davis

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