BP's Gulf Headache Gets Worse

Morningstar's latest analysis of the Department of Justice accusations made against BP and Transocean

Stephen Simko, CFA 5 September, 2012 | 5:01PM
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The US Department of Justice issued a scathing memo against BP (BP.) on Wednesday, which once again included the accusation that the firm was grossly negligent in its well operations in the Gulf of Mexico and fostered "a culture of corporate recklessness." Court pleadings in February also indicated that the US government intended to pursue gross negligence claims against BP and Transocean (RIG).

The timing of the latest memo indicates that the US government may be growing frustrated about its inability to reach a settlement with the parties and may be gearing up for a trial, which is now set for January 2013.

Shares in BP reacted to the news by falling 3% on Wednesday.

Proving Gross Negligence is No Easy Task

While we are not lawyers, we think it will be difficult for the US government to prove gross negligence against BP and Transocean. The Macondo well blowout involved multiple contractors with overlapping responsibilities and included oversight and approvals by federal regulators. Thus, attempting to prove gross negligence against BP may also raise uncomfortable questions about the role that federal regulators played in the blowout, and whether BP simply misled them or if the regulators also failed to meet their duties.

While we are not lawyers, we think it will be difficult for the US government to prove gross negligence against BP and Transocean

 

We also believe it will be difficult for the US government to prove any single action--such as the well design, the cementing job, the design and interpretation of the negative pressure test, not running a full bottom-up circulation of the well, and poor communication between all of the parties involved--rose to the level of gross negligence; instead, the government may need to try and argue that either the environment was conducive to gross negligence, or that all of these actions together constitute gross negligence.

Prior case law might not be much help, as gross negligence was easier to prove in the Exxon Valdez case because the captain was drunk and asleep when the tanker struck the reef. The complexity of the Macondo litigation and incident, in our view, indicates that the US government will face a challenge proving its claims.

The gross negligence claim is a central consideration to how large the remaining fines and lawsuits against BP and its partners will be, since under the Clean Water Act, fines can be as high as $4,300 per barrel if gross negligence is proven. Conversely, fines max out at $1,100 per barrel if this is not the case. Given that 4.1 million net barrels of oil were spilled (after subtracting oil that was removed from the water by human activity), the maximum CWA fines if gross negligence is found appear to be $17.6 billion. Otherwise they could only reach $4.5 billion. We at Morningstar conservatively assume that CWA fines will be $3,000 per barrel, or $12.3 billion, and that BP will be responsible for 75% of that amount.

BP Facing More Litigation & Lawsuits 

It should be noted that BP still faces other lawsuits and obligations beyond the CWA, the most important of which is the lawsuit being brought by US coastal states. We expect that non-CWA litigation and settlements themselves will be an additional few billion dollars of cash outflows during the next few years (although timing is impossible to accurately predict). BP's Macondo headache still has a ways to go before it is fully played out.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
BP PLC466.25 GBX-0.01Rating
Transocean Ltd4.83 USD1.68

About Author

Stephen Simko, CFA  is a senior stock analyst at Morningstar.

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