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Oil Well Is Almost Dead, but Legal Wrangling Just Beginning for BP

BY Lea Winerman  August 17, 2010 at 11:48 AM EDT

BP’s blown-out Gulf of Mexico oil well has been capped for weeks and the company is close to killing it for good. But while the technical challenges are winding down, the long slog through the courts is likely just beginning.

In the coming years, BP will face a web of sometimes interrelated penalties, lawsuits and claims — and the past week’s developments hint at the complexity yet to come in the wrangling over how much BP will pay, and to whom.

•On Aug. 10, a judicial panel decided that a federal judge in New Orleans wouldpreside over a parcel of hundreds of civil lawsuits filed against BP and other companies involved in the spill — lawsuits by shrimpers, fisherman, hotel owners and others who have suffered economic harm, as well as wrongful injury and death suits by victims of the oil rig explosion.

•On Aug. 11, the federal government finished negotiating the shape of the $20 billion compensation fund BP had agreed to establish, and the company deposited the first $3 billion into an escrow account. The 40-page agreement spells out that the fund’s existence doesn’t take away anyone’s right to sue BP, and that the company can’t use the money to pay penalties.

•And speaking of penalties — last week Rep. Ed Markey, D-Mass., sent a letter to BP asking the company to publicly accept the government’s latest estimate of the amount of oil spilled — 4.9 million barrels — as the basis for fines that have yet to be assessed.

•On Aug. 12, Alabama Attorney General Troy King filed a lawsuit against BP — against the wishes of his governor — seeking an unspecified amount of money for economic damages to the state.

When all is said and done, the amount BP pays in fines, claims, legal settlements and cleanup costs will run into the tens of billions of dollars, though it’s impossible to estimate the precise amount. Environmental lawyer Noah Hall, of Wayne State University Law School in Detroit, guesses that it might top $50 billion; BP chairman Carl-Henric Svanberg himself estimated the potential cost at least $32 billion last month.

First, the penalties: The Justice Department is conducting an investigation of the spill, and attorney General Eric Holder said in June that the department is reviewing the many statutes under which BP could face civil and criminal penalties, including the Clean Water Act, the Oil Pollution Act of 1990, the Migratory Bird Treat Act, the Endangered Species Act, and others.

The number that’s received the most attention lately is $21 billion. That’s the amount that BP could be fined under the Clean Water Act, if the court accepts the government’s current estimate that 4.9 million barrels of oil leaked out over the three months that the well was open. The Clean Water Act sets a fine limit of $1,100 per barrel of oil spilled, but that limit goes up to $4,300 per barrel if the company is found to have committed “gross negligence” — a possibility for BP. Multiply it out — 4.9 million x $4,300 — and you get about $21 billion.

But BP is unlikely to pay that much in the end, many legal experts say.

“The statutes are designed to generate the maximum penalty. But it’s pretty routine that parties settle for less than that,” says Tracy Hester, a professor of law at the University of Houston Law Center. Courts can take mitigating factors into account, such as the fact that BP recovered about 800,000 barrels of the oil that spilled and the fact that it is already spending billions of dollars to clean up the oil and compensate victims.

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But BP could still end up paying the largest Clean Water Act penalties ever enforced, says Hall. “They don’t need to go after maximum to make sure BP pays more in fines than any company ever has before.”

Next, the damage claims: BP negotiated with the government a $20 billion fund to pay compensation claims, and deposited the first $3 billion last week. The company will add another $2 billion next quarter and $1.25 billion every quarter after that for three years. The fund will be administered by independent trustees. BP can’t use the money to pay penalties, but it can use it to pay a broad swath of claims, including natural resource damage costs, claims approved by the Gulf Coast Claims Facility, and state and local response costs.

As of Tuesday, BP said that it had already paid out $368 million in claims.

The $20 billion fund can also use the fund to pay court judgments and settlements reached with people who decide to sue the company, either because they don’t want to file a claim with the Gulf Coast Claims Facility or because they’re turned down by it — the compensation fund doesn’t inure BP against lawsuits.

“It’s a bit of a gumbo,” Hester says. “People may not get compensation from the fund because, for example, the trustees decide they’re too remote — say a travel agency in New Jersey who says they’ve lost bookings. The escrow fund may not pay that amount, but that doesn’t mean they can’t and won’t go to court.”

That process has already begun, with the group of more than 200 lawsuits recently sent to New Orleans Judge Carl Barbier. The Financial Times explained the significance of Barbier’s role in a recent story:

“The judge will be responsible for running the pre-trial proceedings in 77 lawsuits related to the explosion on the Deepwater Horizon rig, plus a likely 200 “tag-along” cases and the prospect of more to come. He will almost certainly have to make decisions on what documents the companies must reveal and on whether claims for types of economic damage can be bought, potentially setting precedents for liabilities faced by BP and energy multinationals involved in future disasters. [...] The decision to group the cases and send them to New Orleans has highlighted the size of the stakes facing BP, the other companies and those who have launched claims against them. The result could be a piece of “super-litigation” of the kind seen in the Exxon Valdez oil spill, which led to a $5bn (€3.9bn, £3.2bn) punitive damages award against Exxon, later cut by almost 90 per cent on appeal.”

In the end, the comparison with Exxon Valdez suggests how long the litigation could conceivably last. The final supreme court decision in that case — the one that cut the original punitive damages award against Exxon — came in 2008, 19 years after the spill.