BP says paying a fraction of oil spill bill could put its U.S. unit in trouble

HOUSTON – BP says fines above $2.3 billion for the Deepwater Horizon disaster would drain its U.S. oil business of available cash this year — even if U.S. crude returned to $100 a barrel — threatening its solvency and spending in the Gulf of Mexico. 

That’s less than a fifth of the environmental penalties U.S. prosecutors want BP to pay for the oil spill that fouled the Gulf five years ago.

BP’s assessment of the U.S. unit’s financial state emerged in court papers Friday as the British oil giant, the U.S. government and Anadarko Petroleum Corp. expanded on arguments they made in January and early February during the third and final phase of the New Orleans civil trial over the spill.

Eleven workers were killed in an explosion on BP’s leased Deepwater Horizon rig on April 20, 2010, and BP’s blown-out Macondo well off the coast of Louisiana spewed more than 3 million barrels of oil into the ocean over 87 days.

U.S. District Judge Carl Barbier in New Orleans could level fines as high as $13.7 billion against BP and possibly more than $1 billion against Anadarko, a minority owner in the Macondo well, after the parties file final reply briefs in late April. The Justice Department has appealed a ruling that cut BP’s potential fines down from $18 billion.

Solvency issues

In the court papers Friday, BP argued for much lower fines, reiterating that its multibillion-dollar response to stem the environmental impact of the spill and “herculean” efforts by its workers merit a smaller penalty. Prosecutors said that response work just shows how big the spill was from April to July 2010.

But the London oil company again turned to the debate over whether it has the financial muscle to pay the maximum fines. It said the equity value of its Houston-based U.S. oil business, the unit legally tied to the spill and that manages its Gulf of Mexico operations, fell to $5 billion in December amid low oil prices.

A high penalty could force the unit, BP Exploration & Production or BPXP, to cut from its 2,300 jobs, $5 billion in annual spending and future oil production in the Gulf region. It said it would damage the business if the unit resorted to selling off more than $1 billion to $3 billion in assets to pay off spill liabilities.

The whole argument hangs on BP’s claim that the London parent company isn’t legally obligated to pay for the debts of its subsidiaries. Such a requirement would “pierce the corporate veil,” — a situation prosecutors have said they wish to avoid.

“The United States incorrectly suggest that BPXP’s past borrowing from affiliates allows one to assume future funding to pay” the fines, BP said. It said “circumstances were materially different” when other corporate entities in the BP chain backed the unit’s efforts to respond to the spill, when $14 billion in costs were “incurred at a blistering pace at a critical time.”

U.S. rebuttal

In rebuttal, the U.S. government said one of its experts showed at trial that BPXP could pay the highest potential fines by borrowing money from its internal credit line or from external sources, by using future cash flows tied to oil reserves or by selling assets.

The government says the unit had $25 billion in assets in March 2014, with hundreds of leases and reserves that could be worth $18 billion in new production after 2015. The prosecutors noted the firm has already set aside $3.5 billion to pay for Clean Water Act fines.

But if Barbier set the fines out of the unit’s reach, would the BP parent corporation actually turn away? Prosecutors said they didn’t believe so: BPXP had no trouble securing a combined $33.1 billion in financing from the BP Group from 2009 to 2014 and, after all, BP’s Gulf business makes up 22 percent of its global production.

“Simply put, the BP Group hinges on BPXP just as BPXP depends operationally and financially on the Group,” prosecutors said.

BP could pay the fines over time, the Justice Department suggested, at Barbier’s discretion. Several federal judges have imposed fines that are paid in installments — including Barbier, the prosecutors said.