Despite BP PLC's effort in its internal report to blame contractors for mistakes leading to the Macondo well blowout in the Gulf of Mexico, the amount the British major might recover may not be "worth the additional financial and reputational risk" of a protracted legal battle, said analysts at FBR Capital Markets & Co., Arlington, Va.
BP's recent report on the causes of the blowout and oil spill was critical of drilling contractor Transocean Ltd. and Halliburton Co. that did the original cement work for sealing the well. However, FBR Capital Markets analysts reported, "We found it particularly interesting that BP's report…did not seem to try to make any implication that Transocean or any other party was grossly negligent. In fact, we were struck by the language in the report, which seemed to indicate that Transocean's rig crew was 'unaware' that a well control problem was ongoing. While the report seems to do a very good job of spreading blame around, it also seems to play down any implication of negligence, much less gross negligence."
They said, "With the report indicating that many wellsite decisions were jointly made between BP and Transocean, one might reasonably infer that for Transocean to be grossly negligent, so would BP. Thus, based on multiple conversations with legal experts, we expect BP will settle with Transocean, Anadarko Petroleum Corp. [a partner in the well for which BP was operator], and other named defendants well before any public resolution of the myriad claims." Failure to reach a settlement with their partners "could provide additional ammunition to various plaintiffs," said the analysts, who stressed they are not attorneys and their report does not constitute legal advice.
Proof of negligence
Proof of negligence could greatly increase BP's total cost for the oil spill. Under the Clean Water Act alone, the minimum fine for an oil spill is $1,100/bbl, which for Macondo could total $4.1-4.9 billion vs. a fine of $4,300/bbl for gross negligence that could balloon to $21 billion. "With Transocean having a book value of $21 billion and a market capitalization of $18 billion, it could hand over the keys to BP and it would not offset the financial risk to BP that it might be found to be grossly negligent under the CWA," FBR analysts surmised.
"The primary conclusions from our recent series of meetings with legal experts on the Gulf Coast are that Transocean's legal liability is likely to be far lower than the $6 billion to $7 billion presently discounted in the stock," said FBR analysts. Regardless of legal wrangling, the personal injury and death cases resulting from the blowout are covered by Transocean's insurance policy "and should not cost the company more than the sum of its deductibles," they said.
However, FBR analysts acknowledged, "The issues are incredibly complex. Transocean seems to be protected both by the law and by its contract with BP from bearing substantial liability for the spill." Under the Oil Pollution Act of 1990 (OPA), Transocean is not responsible for pollution emanating from the well. However, the analysts said, "Experts with whom we have spoken indicate that there are several court cases that have disallowed indemnification for gross negligence under maritime law as being against public policy, and indicated that BP could attempt to pierce Transocean's indemnity." They reiterated BP hasn't "enough financial incentive" to do that if it opens the UK-based producer to additional fines.
"Given our understanding of the relevant laws and competing pressures," said FBR analysts, "it seems reasonable to assume that Transocean might settle with BP for between $1-2 billion and that Anadarko may settle in the $2 billion to $4 billion neighborhood. While both companies have strong cases that they bear little or no liability, both companies have the incentive to settle with BP to put the matter behind them. Likewise, BP has an incentive to settle to lock in some contribution and end divisive legal haggling from partners."
OPA coverage
The "vast majority" of civil liability for the blowout and spill likely will be adjudicated under OPA, "a clear piece of legislation with regards to what damages are recoverable," FBR analysts said. "While it is not exclusive and can be supplemented by other state or federal law, one expert called it 'a tort law out of central casting,' as it is so encompassing that there is very little if anything it does not cover." On the other hand, general maritime law—under which claims were made against Exxon following the Valdez oil spill—limits financial recoveries to parties that have ownership interest in the damaged property.
Congress passed OPA to fix many of the shortcomings discovered in general maritime law during the Exxon Valdez litigation. It broadened recovery to include claims for pure economic damages and created the Oil Spill Liability Trust Fund, which provides up to $1 billion to pay for expeditious oil removal and uncompensated damages. OPA also broadened the scope of damages for which polluters are liable; amended the Clean Water Act; and addressed preventing, responding to, and paying for oil pollution incidents in navigable waters. However, FBR analysts pointed out, "OPA does not provide for punitive damages, which creates a quandary for fishermen and property owners as to whether to make a claim under OPA or general maritime law, but it does not preempt state law claims resulting from an oil spill."
The $20 billion oil spill fund administered by Kenneth R. Feinberg, a founder and managing partner of Feinberg Rozen LLP, potentially could reduce and manage BP's exposure as those who receive a lump-sum payment waive their right to sue BP for punitive damages. Feinberg is considering whether those who accept final payments must also waive their rights to sue related companies like Transocean. Claimants have 3 years to file for a lump-sum, final-damages payment. Feinberg has said that he intends to be more generous than any state or federal court would be, which would seem to encourage claimants to seek repayment from the fund.
"While some have estimated the ultimate liability at up to $100 billion, we believe the ultimate cost is more likely to end up in the $30 billion to $60 billion range, depending on how distant the courts (and Feinberg) consider causation," said FBR analysts.
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