BP unit says big spill fines could cut deep

HOUSTON – BP’s U.S. oil unit says high penalties for the Deepwater Horizon disaster would drain its available funds next year and dramatically weaken its finances amid plunging crude prices.

In court papers Monday, the Houston-based oil producer argued federal prosecutors are relying on an outmoded financial value for the BP subsidiary, based on higher oil prices in August, to justify seeking up to $18 billion in pollution fines.

BP Exploration & Production Inc., the unit legally tied to the Gulf of Mexico oil spill, said its penalties should be set at the lower end of the possible range for the fines because its $42 billion in spill liabilities and the falling U.S. benchmark oil price, which this year has folded nearly in half to $55.26 on Monday, have already cut into its value significantly.

The U.S. unit “has operated at a loss since the spill, and even then, only with assistance from a corporate parent that is not legally obligated to assist,” it said.

The same day, credit ratings agency Standard & Poor’s Rating Service reset its debt-grade outlook for BP, Royal Dutch Shell, Total and other European oil companies to negative, slicing its international oil-price assumptions for the next two years to $70 to $75 a barrel.

The British oil giant’s share price has dropped by more than a quarter since June as investors worry about the company’s investment in Rosneft in Russia, which could face an oil-driven recession next year, as well as the company’s remaining oil spill liabilities and the impact of falling crude prices.

BP, which employs 10,000 in Houston and has said it will pare down its global workforce as part of $1 billion in restructuring costs next year, is facing two fronts in the civil court battle over how much it owes for the 2010 oil spill.

Plaintiff attorneys are planning to ask an appeals court to stack punitive damages on top of other claims BP is paying to thousands of Gulf Coast business and residents.

And federal prosecutors are gearing up to head back to court for weeks of testimony starting in January, in which they will argue that a federal judge in New Orleans should set BP’s pollution fines at $16 billion to $18 billion.

In September, U.S. District Judge Carl Barbier found BP was grossly negligent in the lead up to the oil spill. The ruling means BP could face the maximum $4,300-per-barrel fine for the spill.

Plaintiff attorneys will appeal one section of the 153-page ruling that barred punitive damages against BP because of a legal precedent set by the 5th U.S. Circuit Court of Appeals, said Steve Herman, co-lead counsel for a committee of lawyers representing oil spill claimants, in an emailed statement.

The conduct of BP personnel at the time of the spill “is egregious enough to merit a punitive damage award, and the fifth circuit should review the matter because of a conflict in the circuits,” Herman said.

Barbier had said in September the facts of the case, including the behavior of BP employees, merit punitive damage awards, but said his hands are tied because the circuit court’s precedent prevents such damages based solely on operational recklessness of a company’s employees.

If the attorneys’ appeal fails, Herman said, they could seek a review from the Supreme Court, pointing to a split on the matter in the 11th, 5th and other circuit courts. The attorney noted that Barbier’s findings only apply to the first phase of BP’s civil trial.

The second phase of the trial, which took place in late 2013, centered on questions surrounding how many millions of barrels of oil spilled in the Gulf, and BP’s response.

“Phase two was about why the spill lasted so long,” including BP’s alleged failure to prepare for such a disaster, Herman said. “That’s conduct on the corporate level. The judge could hold BP liable for punitive damages in phase two” under fifth circuit rules.

BP spokesman Geoff Morrel said in an emailed statement the law in the fifth circuit is clear: “Punitive damages are not available in this case.”

Meanwhile, federal prosecutors have argued for $18 billion in penalties for the spill, the largest amount possible in this case.

“Given the enormity of this spill and its toll on individuals, society, and the environment, and given BP’s egregious behavior, the court should only reduce the penalty if BPXP presents valid reasons to do so,” the prosecutors said.

BP’s U.S. unit said the high fines would “result in a funding shortfall” as it would likely bear the brunt of the penalties for the worst U.S. offshore disaster in history.

BP argued that the environmental damage from the spill wasn’t nearly as bad as initially feared, as government and academic data show no long-term effects to fish and shellfish populations and that seafood safety testing has shown exposure to the spill wasn’t too great.

It said three quarters of the Gulf shoreline weren’t fouled by oil and that 99 percent of birds observed during the spill had no visible signs of exposure to the oil.

In a pre-trial brief last week, prosecutors argued they will show evidence at trial there was significant environmental damage done because of the spill. They said BP has a history of major environmental violations, including those at Endicott Island in Alaska, where BP was fined in the late 1990s for illegally dumping hazardous waste; at its Grangemouth oil refinery in Scotland, where a fire in 1987 killed a worker and burned others; in Texas City, where a 2005 explosion and fire at its oil refinery killed 15 workers and injured hundreds of others; at and Prudhoe Bay in Alaska, the site of a 2006 oil spill that was the biggest in the region at that time.

The penalty phase of BP’s civil trial “focuses on fixing a penalty that punishes the wrongdoer and deters future misconduct,” prosecutors said, arguing the facts of four prior violations is relevant in considering the Deepwater Horizon.