Coverage: The cost of gross negligence

BP was found to be grossly negligent in the 2010 Gulf of Mexico oil spill by a federal judge on Thursday. It’s not a totally unexpected decision, but it is one that will be costly for the oil giant.

Clifford Krauss and Campbell Robertson had this story in The New York Times:

A federal judge ruled on Thursday that BP was grossly negligent in the 2010 Gulf of Mexico oil well blowout that killed 11 workers, spilled millions of barrels of oil into the Gulf of Mexico and soiled hundreds of miles of beaches.

“BP’s conduct was reckless,” United States District Court Judge Carl J. Barbier wrote in his sternly worded decision. Judge Barbier also ruled that Transocean, the owner of the rig, and Halliburton, the service company that cemented the well, were negligent in the accident.

But the judge put most of the blame on BP, opening the way to fines of up to $18 billion under the Clean Water Act.

In a 153-page, densely technical decision, Judge Barbier described how BP repeatedly ignored mounting warning signs that the well was unstable, making decisions that he says were “primarily driven by a desire to save time and money, rather than ensuring that the well was secure.”

The Wall Street Journal’s Daniel Gilbert and Justin Scheck reported the company could pay as much as $18 billion, a huge difference from its $3.5 billion estimate:

The decision by U.S. District Judge Carl Barbier in New Orleans could leave BP on the hook for up to $18 billion under the U.S. Clean Water Act. The company had estimated potential penalties under the act at $3.5 billion, based on the assumption it wouldn’t be found grossly negligent.

The finding of gross negligence—conduct that is more reckless than ordinary negligence—means BP faces a payment of as much as $4,300 per barrel of crude spilled into the Gulf of Mexico. That is nearly quadruple the maximum civil penalty had BP been found simply negligent.

BP’s penalties will also depend on Judge Barbier’s pending ruling of how much oil spilled into the Gulf of Mexico, and what the company did to mitigate the damage from the biggest offshore spill in U.S. history.

The U.S. government claims that 4.2 million barrels spilled; BP puts that number at 3.2 million barrels, and argues that it is only liable for 2.45 million barrels under the Clean Water Act because some of the crude was skimmed from the sea.

Bloomberg reported in a story by Bradley Olson and Margaret Cronin Fisk that BP planned to appeal the ruling:

“This opens the window for a worst-case scenario to play out, although this will likely drag out for years,” said Brian Youngberg, an analyst with Edward Jones & Co. in St. Louis. “The legal uncertainty and unrest in Russia are overshadowing the company’s operations in a significant way.”

Barbier found BP’s co-defendants Transocean Ltd. and Halliburton Co. less responsible for the accident. The judge did not rule today on how much oil was spilled, a key factor in determining the scope of additional fines. The millions of barrels of crude dumped into the Gulf of Mexico harmed wildlife and fouled hundreds of miles of beaches and coastal wetlands.

BP said it “strongly disagrees” with the ruling, made against the company’s unit, BP Exploration and Production Inc., and would appeal immediately.

 “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 a statement.

The Washington Post story by Steven Mufson pointed out that this was only the beginning of the court battle against the company:

The question of negligence is the first part of a three-part court case about the fines the government can impose on the London-based oil giant. This part assigns blame. The second part will determine the size of the spill. (BP’s estimates are sharply lower than the government’s.) And the third part will determine the final amount of the Clean Water Act and punitive fines.

BP has spent about $27 billion so far to clean up the oil spill and compensate people and businesses harmed by the spill. The company has taken $43 billion of charges against earnings so far, it said in its most recent earnings release.

At the same time, the company has increased its drilling activity in the Gulf of Mexico. At the end of 2013, the company was operating 10 deepwater rigs there. It has brought several new wells online.

All three parts of the ongoing court case are separate from BP’s settlement with private plaintiffs claiming economic damages. That settlement, which BP expects will cost about $9.2 billion, is also before Barbier.

There’s a lot left to settle and BP has years to go before it puts this all behind it. Thursday’s ruling does give the government the room to capture as much money as possible, which is something that the damaged Gulf states need. It’s hard to put a number on the loss of wages, the environmental toll and other repercussions from the disaster. But forcing BP to pay as much as possible is a good start, if it holds up in appeal.