Blog Post

BP Settles - But the Story is Far from Over

Nov 15, 2012 | Nathan Richardson

Reports of a $4.5b settlement between BP and the federal government over criminal charges related to the 2010 Deepwater Horizon oil spill have emerged today. If the reports are correct, the settlement will be the largest criminal settlement in U.S. history. The criminal settlement in the Exxon Valdez disaster was only $150m, of which $125m was immediately forgiven. At the time, the Exxon Valdez settlement was the largest in history for any environmental crime. This settlement is larger chiefly because it's only indirectly environmental. According to reports, under the terms of the settlement BP will plead guilty to federal felony charges related to each of the 11 deaths in the rig explosion, and to a charge of obstruction of Congress (due to inaccurate testimony about flow rates during the spill). Whatever Exxon's failures, it didn't lie to Congress, and it's wrongdoing didn't lead to human deaths. These are serious charges with serious penalties.

However, even a $4.5bn settlement pales in comparison to total damages from the spill. Damage assessments are still ongoing, and will be for some time. A final, accurate total damages number may never be known. But it is almost certainly in the tens of billions.

But remember that this criminal settlement is only a small part of BP's liability.

Earlier this year, BP reached a preliminary $7.8b class settlement with a large number of private plaintiffs (fishermen, property owners, etc.) harmed by the spill. That agreement is currently under review by a federal district court judge. This is in addition to $8b in payments made to private parties who agreed not to litigate (from BP's oil spill "fund"). Future payments to private parties are likely as claims on the fund are resolved or as those who were not part of the class settlement pursue separate claims. BP also claims to have paid out $14b in cleanup costs.

But that's not all. BP still must face civil suit from the federal government (and states) over natural resources damages. Under federal law (the Oil Pollution Act of 1990), these and other damages would be limited to $75m. But the limits no longer apply in cases of "gross negligence" or "willful misconduct" - which the Department of Justice alleges are valid characterizations of BP's conduct. Pleading guilty to criminal charges related to the spill would appear to increase the likelihood of BP being found grossly negligent. If so, that increases not only the likely value of a natural resources damage settlement, but the likelihood that the private plaintiffs (or the court) will tear up the $7.8bn settlement agreement as too low.

BP also faces civil penalties under the Clean Water Act, which would quadruple from $5.5b to $21b if gross negligence is found.

In other words, BP will pay out the largest criminal settlement in U.S. history and it will be only a small share of its total liability.

n.b.: BP is suing its Deepwater Horizon partners, Transocean and Halliburton. If BP wins or a settlement is reached, they will have to make some contribution to these damages payments and accept a share of responsibility.