BP’s Gulf spill toll could run up to $68.2 billion

The runaway well that emptied millions of barrels crude into the Gulf of Mexico could ultimately cost BP about $60.2 billion to $68.2 billion, a high bill for a firm wading through an industry downturn, analysts say.

The cost estimate means the remaining legal aftermath of the Deepwater Horizon oil spill, which includes impending environmental fines and settlement payments, could run up another $16 billion to $24 billion as the tangle of litigation around the spill unfolds for the next few years.

That’s as much as a fifth of BP’s current market value of $126 billion. BP has already booked $43.8 billion for oil spill costs.

Given how far oil prices have fallen in recent months, the London oil major may have to sell off more assets, increase its debt load, strip more from its budget or, as a last resort, slash its dividend to deal with its liabilities, Bloomberg Intelligence energy analyst William Hares said in an online presentation to investors Tuesday.

“For BP, these ongoing and upcoming litigation liabilities are also occurring at one of the most challenging periods for the company and the industry in recent memory,” Hares said. “Barring a worst-case scenario, BP will continue to exist, though the impact from the litigation will be felt by investors. Something has to give as it faces tens of billions of dollars in incremental penalties.”

In April, 2010, the 87 day oil spill began after a subsea well blowout caused an explosion on the Deepwater Horizon rig. The blast killed 11 workers and the rig burned for two days until it sank into the ocean.

A mile under the ocean, a torrent of crude began spewing and spread through the Gulf, wreaking havoc on coastal economies and businesses that are now locked in courtroom battles with BP over compensation. The litigation will take years.

BP is currently waiting for a federal judge in New Orleans to rule on how much it owes for in federal environmental fines for the spill, under the Clean Water Act. Those penalties could climb as high as $13.7 billion. Any penalty over $1 billion would be a record for the Clean Water Act.

Bloomberg Intelligence energy litigation analyst Brandon Barnes says he believes U.S. District Judge Carl Barbier will trim those fines down to $5 billion to $8 billion, giving BP credit for its rapid, multibillion-dollar response to clean up the spill.

Barnes noted that the judge has ruled BP wasn’t grossly negligent in how it operated the clean-up of the spill. “The court is very aware of how much liability BP faces, it has acknowledged that in terms of financial risk,” Barnes said.

Barbier could rule on the Clean Water Act fines at any time. But outside of that, BP still litigation on several fronts.

Five Gulf Coast states have sued BP for damages under the Oil Pollution Act, seeking a combined $35 billion in damages. But Alabama, the plaintiff in the first test case in that series of cases, probably won’t go to court until the second or third quarter of 2016.

And it’s highly unlikely, Barnes said, that the states will be awarded an amount close to $35 billion. The analyst believes the states could see $650 million to $1.5 billion in damages at most, and it is unlikely BP will settle with the states.

The British oil giant is also paying out billions to Gulf Coast residents and businesses as part of a 2012 settlement. BP’s payments for business economic loss claims have averaged $160,000 in the last few years.

Ultimately, those business claims could add up to $12.4 billion to $13.5 billion in costs for the firm, and other claims could amount to $9.7 billion, Barnes estimated.

In Houston, courtroom battles with shareholders are unfolding, as well. The investors are suing BP for making allegedly misleading statements about the size of the spill. Those cases could amount to another $3.5 billion to $5.5 billion for BP.

So far, the five Gulf states have agreed to hold off on filing Natural Resource Damage claims – the claims that are the most difficult to predict, Barnes said.

“Natural resource damages actually tries to monetize the value of trees, different aquatic organisms, so it’s very uncertain,” he said. Those cases are years away, and BP has already committed up to $1 billion for projects that could be

“I suspect if the states don’t get what they want out of the state OPA cases, they’ll probably hammer down on the NRD cases,” he said, though he estimated the Natural Resource Damage cases will amount to another $1 billion to $2 billion.

Hares said the most important factor for BP’s balance sheet is the price of oil. The company’s sources of cash flow have fallen from $10 billion in the first quarter of 2014 to $4 billion in the first quarter of this year, despite a 7 percent boost in oil and gas production.

“Barring a worst-case scenario, BP will continue to exist, though the impact from the litigation will be felt by investors,” Hares said. “Something has to give as it faces tens of billions of dollars in incremental penalties.”

The analyst said BP will probably use every option available to it before it cuts its shareholder dividend, including further spending cuts, which would sacrifice future growth. An oil price recovery, he said, would allow BP to cover pending liabilities and keep growing at a steady clip.

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