How Much Will BP Really Pay to Gulf Oil Spill Victims?

Last Updated May 5, 2010 9:34 AM EDT

An ongoing charm offensive by BP chief executive Tony Hayward belies a known truth: federal law could limit the British energy giant's liability exposure to victims of the Deepwater Horizon oil spill in the Gulf of Mexico.

The April 20 explosion and fire occurred on an ultra-deepwater rig working approximately 41 miles offshore from Louisiana on Mississippi Canyon Block 252 (referred to as the Macondo prospect). The rig sank in waters approximately 5,000 feet deep in the U.S. Gulf of Mexico, coming to rest on the sea floor approximately 1,500 feet northwest of the well center and away from any subsea pipelines, according to the rig's operator Transocean (RIG). However, remotely operated, submersible vehicles monitoring the site have identified three leaks, spewing about 5,000 barrels (or 210,000 gallons) of oil a day from the uncapped well.

The spill is disastrous to the locals in coastal towns. The fishing industry in Louisiana could be impacted to the tune of $2.5 billion, and Florida's tourism losses are expected to total around $3 billion, according to Sierra Club executive director Michael Brune. Although BP accepts its role as "responsible party" for clean-up, two weeks into the spill the energy giant could be backing off from its initial commitment to "pay legitimate and objectively verifiable claims" resultant from the spill. BP executives note that the disaster, in which 11 workers died, wasn't directly BP's fault, as drilling contractor Transocean was operating the rig on its behalf. Additionally, Houston-based Anadarko (APC) holds a 25 percent working interest in the Macondo prospect.

Nice try. Under US law, BP is ultimately responsible for most of the costs, as it owns the drilling license -- unless BP proves Transocean to be the "responsible party."

Despite BP's politically correct PR posturing -- company executives expressing sympathy and promising full restitution before Congress and at town hall meetings -- management is fully cogent that their financial exposure for putative damages is limited. Under a key provision of the Oil Pollution Act of 1990, resultant from the infamous Exxon Valdez, BP's liability for damages is capped at "$75 million per spill, plus removal costs."

Sure, affected shrimp fishermen and environmentalists wiping the tar from the local marine life could sue, but good luck -- after almost 20 years of appeals the Supreme Court (Exxon Shipping Co. v. Baker) struck down an initial jury award of $5 billion in putative damages to victims of the Exxon Valdez spill (fishermen, landowners and native Alaskans) for being "excessive," and slashed payment to just $500 million. Civil settlements totaled about $1 billion.

Work has begun on a relief well to intercept and isolate the oil leak, but drilling 13,000 feet into the seabed will take at least three months, said CEO Hayward in a press statement yesterday. Additionally, BP is moving forward on an underwater oil recovery plan that involves placing large enclosures, or containment chambers, atop the leaks and redirecting flow to the surface through a pipe or hose. The system is scheduled to be complete in about one week.

BP's forecasted recovery costs and timeline could prove too optimistic. Clean-up costs, now estimated at more than $6 million per day are expected to approach $10 million as the oil slick(s) spread to shore, according to Merrill Lynch analysts. Notwithstanding the difficulties in anchoring protective barriers offshore or injecting dispersants directly into the oil flow (uncertainties in predicting direction currents and weather conditions), the response effort will be hampered, too, by the oft-ignored fact that BP operations in the affected area already push the learning-curve of current deepwater drilling technology. For example, the containment chambers that BP plans on using to funnel the oil to the surface have never been deployed at these depths, according to the National Oceanic and Atmospheric Administration (NOAA).

Defeats "are sent to teach us wisdom and prudence, to call forth greater energies, and to prevent our falling into greater disasters," said Confederate general Robert E. Lee.

U.S. Senator Robert Menendez (D-NJ) along with Senators Frank Lautenberg (D-NJ) and Bill Nelson (D-FL) introduced legislation yesterday to raise the ceiling on oil company liability for spill damages from $75 million to $10 billion. Making the bill retroactive could prove difficult. Given our continued dependence on fossil fuels, even $10 billion is unlikely to prevent us from falling into greater disasters.

Image Sources:

  • Burning oil rig photo courtesy of Flickr and US Coast Guard
  • Oil slick flow photo courtesy of NOAA
  • David Phillips

    David Phillips has more than 25 years' experience on Wall Street, first as a financial consultant and then as an equity analyst for several investment banking firms. He sifts through SEC filings for his blog The 10Q Detective, looking for financial statement soft spots, such as depreciation policies, warranty reserves and restructuring charges. He has been widely quoted in outlets such as BusinessWeek, The International Herald Tribune, Investor's Business Daily, Kiplinger's Personal Finance, and The Wall Street Journal.