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BP's Oil Spill Bill Just Got a Lot Bigger

BP argued for weeks that measuring the size of the Gulf oil spill was an unnecessary distraction to the critical task of stopping the gushing Macondo well. Now we know why: The official estimate released Monday puts the spill at 4.9 million barrels, or nearly 206 million gallons, which means BP faces more than $21 billion in fines. And that's just for the Clean Water Act violations.

A clause added to to the U.S. Clean Water Act after the Exxon Valdez spill allows the government to pursue civil penalties for every drop of oil spilled in U.S. federal waters. The clause is special because it's not limited by a finite cap, unlike the Oil Pollution Act of 1990, which caps economic damages at $75 million.

It's up to the EPA to decide how aggressively it wants to pursue BP. The fines begin at $1,100 per barrel. But it can jump to $4,300 per barrel if the EPA decides -- and a federal court agrees -- that the spill was caused by gross negligence. If BP were fined for every barrel that leaked from the well, it would mean $21.1 billion. The amount could be reduced to $17.6 billion if the EPA only counts the 4.1 million barrels of oil that weren't captured by skimmers.

A quick back-of-the-envelope calculation:

  • $20 billion escrow fund to cover economic damages;
  • $21 billion in Clean Water Act violations (based on gross negligence;
  • $100 million charitable fund for unemployed workers;
  • $2.9 billion costs, to date, for the oil spill response
All that puts BP's liability at $41 billion... and counting.

BP has to avoid the gross negligence charge if it hopes to survive this. For one, BP would face $5 billion in fines, not $21 billion. But more importantly, if a federal court rules BP was grossly negligent, the company's total liability would skyrocket.

At this point, the only good news for BP is that it has more than $250 billion in total assets to help pay for its spill bill. BP has already upped its planned asset sale twice, most recently tripling it the amount to $30 billion. If the gross negligence charge sticks, expect BP to push that number even higher and delay its dividend through 2011.

Photo from Flickr user Brooks Elliott, CC 2.0
For complete coverage, see All Things BNET on BP's Gulf of Mexico Spill