Search

'Worst Case' BP Ruling on Gulf Spill Means Billions More in Penalties

By Margaret Cronin Fisk, Laurel Brubaker Calkins and Jef Feeley
September 04, 2014 8:18 PM EDT 220 Comments
The off shore oil rig Deepwater Horizon burns in the Gulf of Mexico on April 21, 2010.
Photographer: Jon T. Fritz/MCT via Getty Images
The off shore oil rig Deepwater Horizon burns in the Gulf of Mexico on April 21, 2010.

BP Plc acted with gross negligence in setting off the biggest offshore oil spill in U.S. history, a federal judge ruled, handing down a long-awaited decision that may force the energy company to pay billions of dollars more for the 2010 Gulf of Mexico disaster.

U.S. District Judge Carl Barbier held a trial without a jury over who was at fault for the catastrophe, which killed 11 people and spewed oil for almost three months into waters that touch the shores of five states.

“BP has long maintained that it was merely negligent,” said David Uhlmann, former head of the Justice Department’s environmental crimes division. He said Barbier “soundly rejected” BP’s arguments that others were equally responsible, holding “that its employees took risks that led to the largest environmental disaster in U.S. history.”

Related: BP Negligence Ruling to Force Billions More in Payouts

The case also included Transocean Ltd. and Halliburton Co., though the judge didn’t find them as responsible for the spill as BP. Barbier wrote in his decision today in New Orleans federal court that BP was “reckless,” while Transocean and Halliburton were negligent. He apportioned fault at 67 percent for BP, 30 percent for Transocean and 3 percent for Halliburton.

U.K.-based BP, which may face fines of as much as $18 billion, closed down 5.9% to 455 pence in London trading.

“The court’s findings will ensure that the company is held fully accountable for its recklessness,” U.S. Attorney General Eric Holder said. “This decision will serve as a strong deterrent to anyone tempted to sacrifice safety and the environment in the pursuit of profit.”

Turning Point

The ruling marks a turning point in the legal morass surrounding the causes and impact of the disaster. Four years of debate and legal testimony have centered on who was at fault and how much blame each company should carry.

BP Exploration & Production Inc. is “subject to enhanced penalties under the Clean Water Act” because the discharge of oil was the result of its gross negligence and willful misconduct, Barbier held. BP said it “strongly disagrees” with the decision and will challenge it before the U.S. Court of Appeals in New Orleans.

“BP believes that the finding that it was grossly negligent with respect to the accident and that its activities at the Macondo well amounted to willful misconduct is not supported by the evidence at trial,” the company said in an e-mailed statement. “The law is clear that proving gross negligence is a very high bar that was not met in this case.”

Coalition

The coalition of plaintiffs lined up against BP included the federal government, five Gulf of Mexico states, banks, restaurants, fishermen and a host of others who have pursued redress for their losses. While today’s ruling provides a partial answer, appeals may mean it will be years before final penalties are tallied.

BP has set aside $3.5 billion to cover pollution fines. The company had taken a $43 billion charge to cover all the costs related to the spill, according to a July 29 earnings statement. The ultimate cost is “subject to significant uncertainty,” BP said.

“BP said it was above the law; Judge Barbier said the law applies to everyone, even multinational giants,” David Yarnold, Audubon Society president, said in a statement. Barbier has yet to rule on how much oil was spilled, a key factor in determining the extent of BP’s fines.

The decision nevertheless may expose BP to unspecified punitive damages for claimants who weren’t part of the $9.2 billion settlement it reached with most non-government plaintiffs in 2012.

The judge left that unclear in his ruling.

Unclear

“Although BP’s conduct warrants the imposition of punitive damages under general maritime law, BP cannot be held liable for such damages under Fifth Circuit precedent,” he wrote, referring to the appellate jurisdiction that includes Louisiana.

In a footnote, however, Barbier said BP might be liable for punitive damages for other claims.

With only a ruling of negligence, Transocean escapes any such liability. Barbier had already determined Transocean was shielded from compensatory damages through the drilling contract. Halliburton, which also won an earlier indemnity ruling, removed the threat of punitive damages by agreeing to a $1.1 billion settlement with most plaintiffs Sept. 2.

Penalty Merited

“During the penalty proceedings, BP will seek to show that its conduct merits a penalty that is less than the applicable maximum,” BP said in its statement. Halliburton said “the lack of a gross negligence finding against Halliburton should resolve all remaining punitive damages claims against the company.”

Transocean said in a statement that while the decision is subject to appeal, it effectively eliminates the company’s financial risk arising from the below-surface discharge of oil at Macondo. Transocean’s remaining financial risk is for above-surface discharge of pollutants, if any, occurring during the initial two days of the spill, according to the statement.

“Transocean believes any such pollution either caused no significant harm or is covered by BP’s indemnity,” the company said.

James P. Roy and Stephen J. Herman, lead lawyers for the plaintiffs, said in a statement that “the court has now laid bare the full extent of the level of BP’s misconduct.”

The blowout and explosion aboard the Deepwater Horizon drilling rig on April 20, 2010, caused the deaths of 11 workers and spilled millions of barrels of crude oil into the Gulf, harming wildlife and fouling hundreds of miles of beaches and coastal wetlands.

Equipment Failures

Equipment failures and questions about lapses in oversight led to an overhaul of federal regulations governing offshore safety in the following years. The agencies overseeing deep-water drilling were reorganized, with new rules put in place to strengthen requirements for equipment, inspections and accident response.

The disaster sparked thousands of lawsuits against BP; Vernier, Switzerland-based Transocean, the owner of the drilling rig; and Houston-based Halliburton, which provided cement for the well.

The spill’s fallout entered the courts on two tracks -- criminal and civil. In 2012, BP pleaded guilty to 14 federal counts, including manslaughter for the 11 deaths in the explosion of the Deepwater Horizon rig, and obstructing Congress as it probed the size of the spill.

U.S. Senator Edward Markey of Massachusetts, who helped direct that Congressional inquiry, hailed today’s ruling.

‘Compromised Safety’

“In the course of my investigation of BP, it was clear that the company compromised safety for speed, and today’s ruling once again confirms that assessment,” Markey said in a statement. “BP should be fully held to account, and should not be allowed to lowball the size of its spill or take other actions that could reduce their financial liabilities for this disaster. The people of the Gulf of Mexico deserve justice, delivered in full.”

The London-based energy company previously agreed to pay $4 billion to end the criminal case. Transocean last year pleaded guilty to a U.S. charge tied to the Clean Water Act, and agreed to pay $1.4 billion. A Halliburton unit last year pleaded guilty to one count of destroying evidence for failing to preserve computer models examining its cement job on the well after the explosion. Halliburton paid a $200,000 fine.

BP also agreed to pay $525 million to settle U.S. Securities and Exchange Commission claims that it misrepresented the size of the spill, misleading shareholders as to its potential liability.

Primary Litigation

But the primary litigation remaining is the pending court action by the U.S. government, Gulf states and thousands of individuals and businesses claiming economic and environmental losses. While Halliburton wasn’t sued by the U.S., the states and other plaintiffs included the company in their claims.

BP settled the claims brought by most business owners and Gulf residents hurt by the spill in March 2012, just before trial was to begin. The deal postponed the start of its first phase to February 2013.

That phase, which lasted two months, addressed who was at fault and whether gross negligence played a role in the 2010 explosion. The term is defined as intentionally failing to perform a clear duty, in reckless disregard of the consequences to lives and property.

The second phase, completed in October, focused on the size of the spill, and efforts to contain it. A third phase is set for January to determine how much some of the defendants should pay in pollution fines.

One Man

Since shortly after the spill, the resolution of litigation over the disaster has largely been in the hands of one man, who has spent much of his life on the Gulf coast.

Barbier, 70, was appointed to the federal court in New Orleans in 1998 by President Bill Clinton, a Democrat. A former maritime lawyer who began his career representing sailors in personal-injury cases, the judge has been overseeing BP spill litigation since August 2010.

Barbier grew up in the West Bank, a cluster of suburbs, small cities and unincorporated towns straddling the border of the Orleans and Jefferson parishes, across the Mississippi River from the city of New Orleans. He went to high school in Harvey, a residential neighborhood of single-family homes that sprung up around the oilfield services industry and the Harvey Industrial Canal. Barbier eventually won a football scholarship to Southeastern Louisiana University, where he played on both offensive and defensive lines.

After earning a business degree in 1966, Barbier worked as a high school teacher and accountant, including stints at Boeing Co. and Shell Oil Co., while attending law school, according to testimony at his confirmation hearings in 1998.

Blowout Causes

Lawyers for the U.S. government and oil-spill victims told Barbier during the first phase that BP was over-budget and behind schedule, prompting it to cut corners and ignore safety tests showing the Macondo well was unstable.

BP was $60 million in the red and 54 days late on the well by April 9, 2010, just 11 days before the blowout, the plaintiffs’ lawyers said in court papers last year.

The plaintiffs also alleged that Halliburton’s cement job was defective, and that Transocean employees made a series of missteps on the rig, including failing to properly maintain it, disabling safety systems and not providing adequate training for its crew.

Blame Game

The companies, meanwhile, blamed each other. BP said at trial that Transocean failed to maintain the drilling rig and Halliburton provided faulty cementing services. Transocean and Halliburton pointed their fingers back at BP.

BP denied it was grossly negligent while accepting blame for errors that caused the spill.

The Deepwater Horizon “blowout resulted from a series of independent acts and omissions by independent individuals that, when combined, had the effect of overcoming state-of-the-art safety systems,” BP told the judge last year.

In the second phase of the trial, the U.S. contended BP’s well spewed 4.2 million barrels of oil into the Gulf of Mexico before it was capped, almost three months later. BP estimated the flow at 2.45 million barrels. Both agreed their numbers would have been higher if 810,000 barrels hadn’t been captured by a siphoning device placed at the wellhead.

Second Phase

Lawyers for Transocean, Halliburton and plaintiffs claimed in the second phase that BP delayed the capping of the well by misrepresenting the size of the spill, as well as prospects for containing it. The spill victims also alleged that BP wasn’t prepared for a deep-water blowout.

BP initially valued its economic-loss settlement at $7.8 billion. It now puts the cost at $9.2 billion, with the final price “likely to be significantly higher,” according to the July 29 regulatory filing.

Halliburton reached a separate $1.1 billion settlement with most spill plaintiffs earlier this week. The company has taken a $1.3 billion reserve for costs related to the spill.

BP has reserved $3.5 billion for civil penalties under the Clean Water Act, using its own estimates on oil spilled and based on its “conclusion, among other things, that it did not act with gross negligence or engage in willful misconduct,” the company said in its 2013 annual report.

BP hasn’t increased the reserve, the company said in its most recent quarterly filing.

Oil Spilled

“The amount and timing of the amount to be paid ultimately is subject to significant uncertainty since it will depend on what is determined” by the court on multiple issues, including gross negligence and the amount of oil spilled, BP said in the filing.

The amount will also depend on how Barbier applies penalty factors set in the Clean Water Act, BP said.

The company had set aside $43 billion to cover all the costs of the spill, and so far has paid out more than $28 billion for response, cleanup and claims.

Once he decides on the size of the spill, Barbier will consider eight criteria in setting the fine, including the seriousness of the violation, the degree of culpability, any history of prior violations, any other penalties for the same incident, and what BP has done to minimize or mitigate the effects of the spill.

Under the law, Barbier also has to consider the possible economic impact of any penalty on the company.

Earlier Accord

BP’s earlier accord resolved economic-loss claims for fishing boat owners and multiple classes of businesses and property owners in Louisiana, Alabama and Mississippi and in parts of Texas and Florida.

It excluded claims of financial institutions, casinos, some private plaintiffs in Florida and Texas, and residents and businesses claiming harm from the Obama Administration’s resulting moratorium on deep-water drilling.

It also didn’t cover claims by governments.

Barbier gave final approval to the settlement in December 2012. An appeal by objectors to the settlement was rejected by the U.S. Court of Appeals in New Orleans.

BP lost a separate appeal on its claim that the administrator of the settlement was paying for unjustified claims. The company asked the U.S. Supreme Court on Aug. 1 to review the decisions.

BP Exploration & Production Inc. and BP American Production Co. are direct or indirect wholly-owned subsidiaries of BP Plc, Barbier wrote in his ruling.

In BP’s annual report, BP Exploration & Production is described as “the BP group company that conducts exploration and production operations in the Gulf of Mexico.” The report states that “BP Plc is the parent company of the BP group of companies.”

BP said in court papers filed in March that the exploration unit is “an indirect subsidiary with five intermediate parent companies.”

Louisiana Attorney General James Caldwell, whose state suffered the brunt of the explosion’s fallout, praised the decision “finding BP reckless for their outrageous conduct in destroying our precious coastal resources.”

“I will continue fighting for the recoveries Louisiana is entitled to for the damages we have sustained,” he said in a statement.

The case is In re Oil Spill by the Oil Rig Deepwater Horizon in the Gulf of Mexico on April 20, 2010, MDL-2179, U.S. District Court, Eastern District of Louisiana (New Orleans).

To contact the reporters on this story: Margaret Cronin Fisk in Detroit at mcfisk@bloomberg.net; Jef Feeley in Wilmington, Delaware at jfeeley@bloomberg.net

To contact the editors responsible for this story: David E. Rovella at drovella@bloomberg.net Peter Blumberg

More related content »