By Daniel Gilbert And Justin Scheck
After its oil-well explosion in the Gulf of Mexico in 2010, BP
PLC caught one lucky break: Oil prices surged and boosted its cash
flow, helping it to cover billions of dollars in legal and
oil-spill cleanup costs.
Now BP is facing up to $13.7 billion in federal fines--about $10
billion more than it has set aside--in much less comfortable
economic circumstances now that oil prices have plunged. The
company is set to go to trial Jan. 20 in federal court in New
Orleans over how much it must pay the U.S. government for each
barrel of crude that spilled into the Gulf, in the final phase of
litigation stemming from violations of the Clean Water Act.
A global oil glut has sent prices tumbling since the summer.
Crude now sells for about 40% less than it did in April 2010, when
the explosion of the Deepwater Horizon rig killed 11 people and
touched off the largest offshore oil spill in U.S. history.
The court's decision on the fines comes at a vulnerable moment
for BP. Once the pride of England--BP stands for British
Petroleum--the company already has had to sell off a lot of assets
to cover spill costs. One of its biggest bets is in suddenly
hostile territory: Russia.
The company is carrying $53.6 billion in debt, $21 billion more
than at the time of the spill. Some analysts have been speculating
that a slimmed-down BP could become a takeover target once the
Deepwater Horizon litigation concludes.
BP is already feeling the effects of lower oil prices. On
Thursday it said it would lay off about 300 workers in Scotland,
and analysts are lowering their forecasts for BP's 2014 earnings,
which are slated to be released Feb. 3.
The steep price decline "reduces BP's flexibility to cope with
any further claims or shocks," analysts at Fitch Ratings wrote
Friday. The drop "will severely dent earnings in 2015, and will
likely stretch BP's credit profile beyond what is acceptable for an
'A' rating, in the short run at least."
While the collapse in oil prices will crimp BP's cash flow, the
company's lawyers aim to use it to their advantage. They plan to
argue that the price drop has weakened BP Exploration &
Production Inc., the subsidiary that is charged with the spill
violations, and the court should weigh this in imposing a
penalty.
"We look forward to presenting our case at trial," said J.
Andrew Langan, a lawyer representing BP's subsidiary. The company
"should be subject to a Clean Water Act penalty at the lower end of
the statutory range."
BP had $30.7 billion in cash by the end of September. But the
company argues that it has no obligation to lend money to its
subsidiary and that the court should disregard the broader BP
group's financial resources in imposing a fine.
BP also argues it should get credit for leading the "largest
environmental response operation in the nation's history,"
according to court pleadings. The company has incurred $43 billion
of spill-related costs, including criminal and civil settlements
and $14 billion for the Gulf cleanup.
Lawyers for the government acknowledge that BP spent money that
it wasn't required to, citing $846.2 million that BP paid for
research into the spill, tourism promotion, and seafood testing,
among other expenses, that could be deducted from the penalty.
But they plan to present evidence that BP's subsidiary is
controlled by the parent and can weather the impact of a fine.
Because the subsidiary "can readily access equity, capital, or
borrowing from BP, it can pay the maximum penalty," lawyers for the
U.S. Justice Department wrote on Dec. 19, 2014.
High oil prices buoyed BP as it unloaded properties to pay for
spill-related costs. The company has raised more than $40 billion
from selling assets since 2010, including refineries in California
and Texas, and fields in the Gulf, Alaska, Colombia and the North
Sea.
"BP sold a hell of a lot of assets when the price of oil was a
hell of a lot higher than it is now," said Richard Champion, chief
investment officer at Sanlam Private Investments, which held BP
shares as of December. As a result, BP made more money from the
sales than it could at current prices, he added.
The Deepwater Horizon disaster spurred a tangle of litigation,
including class-action lawsuits filed on behalf of people,
businesses and governments that contend that they were hurt by the
oil spill.
But the case that could be the most costly is the battle with
the U.S. government over violations of the Clean Water Act. Judge
Carl Barbier, a federal-district court judge in New Orleans
handling the case, divided it into three parts.
In the first step, to determine liability, Judge Barbier ruled
in September that in an effort to cuts costs, BP acted recklessly
before the drilling rig exploded. On Thursday, the judge ruled on
the second major phase of the litigation, finding that BP didn't
act irresponsibly in the wake of the accident.
Judge Barbier concluded that the well leaked 4 million barrels,
less than prosecutors had claimed. After subtracting the oil that
was captured without spilling into the Gulf, the judge determined
BP is liable for a fine on 3.19 million barrels.
Now the question is how much the company must pay in pollution
penalties for each of those barrels. The government is seeking a
$4,300 fine for each one; BP contends that fines should be capped
at $3,000 per barrel.
The penalty sought by the government would be the largest by far
for violating the Clean Water Act; BP calls it "a gross outlier
compared to penalties in any other case or settlement." The highest
penalty imposed under the act to date is the $1 billion that
Transocean Ltd. paid in a 2013 settlement over the same spill.
Tom Claps, a legal analyst at Susquehanna Financial Group,
estimates that BP's penalty will likely total about $6 billion to
$7 billion. In addition to BP's steps to clean up the spill, he
notes, Judge Barbier found BP bears only two-thirds of the blame
for the accident, with contractors Transocean and Halliburton Co.
at fault for 30% and 3%, respectively.
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