BP could be in for another crude awakening

LONDON -- ereguly@globeandmail.com

There must be a Big Business law that guarantees that three industries always win, no matter what calamity befalls them, no matter what sins they commit or stupidities are thrust upon them by greedy or incompetent management. The three are banks, defence contractors and oil companies.

Taxpayers everywhere were looted to keep the banks going during the financial crisis. War or peace, defence contractors never fail to find buyers for products whose bloated prices bear no relation to the initial estimate. Oil companies are given considerable environmental and political leeway because we are utterly addicted to oil.

Among oil companies, it looks like BP will prove the exception. Now that the British company is close to sealing permanently the Macondo well in the Gulf of Mexico, the company no longer seems in danger of a Titanic run to the bottom of the ocean. But it sure is going to get punished and might never regain its former size and glory.

BP will suffer because it still has no idea of the size of its legal liabilities, other than that they will be enormous, to the point they will make Exxon's liabilities from the 1989 Exxon Valdez tanker spill look like pocket change. Investors who were buying shares at Wednesday's price of about $39 (U.S.),well above their low of $26.75 set on June 28, may be in for a disappointment.

By now we know Macondo was a record breaker. American scientists estimate the well belched out 4.9 million barrels of oil - about 20 times more than the Exxon Valdez - making it the largest accidental maritime leak. That's the key figure in determining BP's liabilities.

Under the U.S. Clean Water Act, BP would be on the hook for fines of $1,100 for each barrel spilled. That would come to $5.4-billion, hardly a fatal number for a company of BP's size. But the fine would rise to $4,300 a barrel if BP is proven guilty of gross negligence. In that case, the fine would rise to $21-billion, though BP would argue that the 800,000 or so barrels it captured should be deducted from the 4.9 billion. The U.S. government is bound to argue that it's irrelevant whether the crude was scooped after it escaped from the well - a leak is a leak.

There is a big difference between negligence and gross negligence. The former implies mere sloppiness or bone-headedness. The latter implies a conscious disregard for safety, or "reasonable care," to use the legal term. Gross negligence can lead to punitive damages or criminal charges or both, in which case BP is in for a supertanker load of trouble.

Anadarko Petroleum, the oil company that owns 25 per cent of the Macondo well, which was operated by BP, has said repeatedly that the accident "was preventable and likely the result of the operator's gross negligence and/or willful misconduct." The word among oil industry executives is that gross negligence charges are possible, even likely. The U.S. Department of Justice has opened a criminal investigation into the leak.

The investigators will want to know, among other things, whether the blow-out preventer, which failed, was adequately tested before it was installed on the well and properly maintained, and whether corners were cut in the well-cementing job. In congressional hearings, Henry Waxman, chairman of the U.S. House energy and commerce committee, noted "the failure to circulate potentially gas-bearing drilling muds out of the well" before the cementing.

If gross negligence is the case, Anadarko and the other Macondo partners are off the liability hook, pushing up BP's own liability exposure. If that weren't bad enough, the new U.S. oil-drilling regulator, Michael Bromwich, director of the Bureau of Ocean Energy Management, wants to increase the penalties on violators, taking past transgressions into account. "I do think what a regulator such as I can do is take a company's safety record into account in imposing sanctions," he told reporters earlier this week. "That's something that can be done and frankly should be done."

BP has a grim safety record in the United States, though it's not clear whether an ocean-drilling regulator would take non-ocean accidents into account. The 2005 explosion at BP's Texas City oil refinery killed 15 workers and nailed the company with safety and environmental violations.

Gross negligence charges would trigger a chain reaction of other claims. Remember that the explosion of the Deepwater Horizon rig drilling BP's Macondo well killed 11 workers. Add in the clean-up costs, the payments for lost employment in the Gulf states and other tidbits, and the price keeps rising. The company would also face fines under the Migratory Bird Treaty Act, Endangered Species Act and the Refuse Act.

For BP and its investors, the nightmare may be just beginning and it's not clear whether the share price fully discounts the possibility of gross negligence charges. What is clear is that the Obama administration and the regulators will not tread lightly on a company responsible for the world's worst oil disaster, and a fatal one at that.

BP boss Tony Hayward did the right thing by not fighting his ouster. He is to step down in October, to be replaced by Bob Dudley, an American. The liability barrage will make the new boy's life miserable while Mr. Hayward is sailing.

BP (BP)

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