BP suspended from new federal contracts

By Jennifer A. Dlouhy and Harry R. Weber

The Obama administration’s decision Wednesday to bar BP from entering new federal government contracts for its role in the 2010 Gulf oil spill potentially costs the company millions while threatening the British oil giant’s stance as a major offshore energy producer and one of the military’s biggest jet fuel suppliers.

But the rare temporary suspension ordered by the Environmental Protection Agency will have no effect on BP’s existing government contracts or its current oil and gas activities in the Gulf of Mexico. And there were signs Wednesday that the suspension could be relatively brief, with both the EPA and BP noting that it could end as soon as the company convinces the government its operations have improved.

Some of that work may already be under way as part of the terms of BP’s proposed criminal settlement with the Justice Department, which includes requirements for new safety and ethics monitors, as well as stepped-up environmental audits for its offshore operations.

The EPA’s move to suspend BP from new contracts based on a “lack of business integrity” sets up a formal process for the company and agency to negotiate an administrative agreement for proving its “present responsibility” to conduct business with the U.S. government.

BP said in a statement that it is already working to convince the agency of its present responsibility and that EPA is already developing a proposed administrative agreement laying out the parameters for lifting the suspension.

“There seems to be a relatively clear pathway (out of the suspension) that is not horrifically disruptive to BP or to other entities in the Gulf,” said Benjamin Salisbury, an analyst with FBR Capital Markets.

The move comes roughly two weeks after BP agreed to pay $4.5 billion to settle manslaughter, obstruction and other criminal and Securities and Exchange Commission charges connected with the April 20, 2010 blowout of its Macondo well in the Gulf of Mexico, which triggered an explosion killing 11 workers and the nation’s worst oil spill. A judge still must approve the deal.

Although the government issued 928 suspensions in fiscal year 2011 — and the EPA alone issued 114 in fiscal year 2012 — they are relatively rare when it comes to large companies, noted expert Charles Tiefer, a law professor at the University of Baltimore who spent three years on a wartime contracting commission focusing on these issues.

Tiefer noted that other large firms with big military contracts and multiple felony pleas evaded suspension and debarment even though they entered into administrative agreements with agencies laying out plans for improving operations.

“The government is being much tougher on BP than it has been on other big companies, and that is apparently because the scale of the environmental damage is beyond the harm that any other government contractor has ever done,” Tiefer said. “This is a permanent black mark on BP’s record — that it was suspended — even if the suspension doesn’t last long. They are in a class with very few members.”

While the EPA’s decision could be viewed as a prod for the company to settle potentially civil claims tied to the 2010 disaster _ including Clean Water Act fines ranging from $5.4 billion to $21 billion _ some cast it as a major assertion of government power.

Scott Amey, the general counsel of the Project on Government Oversight said the move “sends a message to all government contractors _ even large companies _ that they will be held accountable if their business practices place taxpayers at risk.”

While the suspension is in place, the government will not award the company any new offshore drilling leases, although it will be able to continue drilling and production at existing operations. For instance, federal regulators will continue processing BP’s applications for permits to drill and do other work offshore _ minimizing the effect on contractors who supply those operations.

Although BP did not submit bids in an auction Wednesday of western Gulf of Mexico leases, the suspension could prevent the firm from submitting offers in a more attractive central Gulf lease auction next year.

It was not clear exactly how much money was at stake for BP, but some analysts said the hit could be significant if the suspension stretches for months or longer. Historically, suspensions last between three and 18 months, though they can stretch as long as three years.

BP holds $1.4 billion in fuel supply deals with the Defense Logistics Agency, contracts that represent 10.35 percent of the Pentagon purchaser’s energy purchases in fiscal 2011. Even with the suspension, the Pentagon has some latitude to enter new fuel contracts with BP by citing national security needs.

BP noted Wednesday that it has invested more than $52 billion in the United States _ higher than any other oil and gas company, and more than it invests in any other country where it operates.

“Without question, the Gulf of Mexico is an area that BP considers a cornerstone of its oil and gas portfolio,” said Morningstar analyst Stephen Simko. “Though the company does have plenty of existing Gulf leases in its possession where it can search for new oil (and) gas in the next couple of years, these won’t last forever, and ultimately the Gulf remains one of the most attractive areas for the oil majors. I’d say the impact only becomes concerning if this ban lasts for two plus years.”

The EPA’s action seemed to catch some other agencies in Washington by surprise and came despite reassurances by offshore drilling regulators that the company has taken major steps to boost the safety of its offshore operations.

“Our experience with BP following the spill is that BP has gone through significant internal reforms,” said Tommy Beaudreau, director of the Bureau of Ocean Energy Management that oversees offshore leases. “I believe BP is genuine and sincere about reforming the way it does business offshore and making real changes not only to its practices, but to its culture.”

Current law dictates that the debarment process is meant not to punish, but rather as a way to protect taxpayers from doing business with entities seen as hurting society.

“It’s meant to be protective of the taxpayer, the same way that you incarcerate a violent criminal (in part) to protect the public,” Tiefer said. “But it is a powerful tool the government can use.”

Tiefer stressed that it was significant that EPA was made the lead government agency in deciding whether BP’s contracting powers would be checked after the 2010 oil spill, given the environmental community’s outrage at the Nov. 15 plea agreement.

“EPA is … who would have to go back to the environmental committees in Congress and the environmental groups that have millions of strongly believing members and, in effect, to those who speak for the powerful environmental conscience of the country,” Tiefer said.

Rep. Ed Markey, D-Mass., an outspoken critic of the company, likened the EPA’s move to taking the driver’s license and keys away from someone who “recklessly crashes a car.”

“The wreckage of BP’s recklessness is still sitting at the bottom of the ocean and this kind of time out is an appropriate element of the suite of criminal, civil and economic punishments that BP should pay for their disaster,” Markey said.