State and feds sue BP over oil spills

The pair of civil complaints could lead to hundreds of millions in fines and compensation related to two oil spills in 2006

Eric Lidji

Petroleum News

The state and federal governments are seeking multimillion-dollar fines from BP Exploration (Alaska) related to a pair of North Slope oil spills at the Prudhoe Bay field in 2006.

The civil complaints filed March 31 claim the subsidiary of the London oil giant violated environmental laws with the spills, one of which was the largest ever on the North Slope.

Under the maximum penalties requested by the suits, BP could end up paying hundreds of millions in fines and compensation to the state and federal governments.

The 23-page federal complaint claims BPXA violated environmental laws by allowing more than 200,000 gallons of oil to spill from pipelines in March and August 2006.

The federal government is seeking some $5.6 million in fines, an amount that would nearly quadruple if “gross negligence or willful misconduct” caused the spills.

The suit says BPXA violated the Clean Water Act by failing “to prepare and implement spill prevention, countermeasure and control plans in accordance with good engineering practices,” and failing “to implement certain required spill prevention measures.”

The complaint also says BPXA violated the Clean Air Act by “improperly” removing material containing asbestos from its pipelines, and “failed to comply in a timely manner” with “testing, inspection, maintenance and repair activities” required by the government.

The civil complaint follows a criminal complaint in late 2007 where BPXA plead guilty to one count of criminal negligence and agreed to pay $20 million in fines.

After a 212,252-gallon spill in March 2006 and a smaller 900-gallon spill in August, BPXA scaled back production at Prudhoe Bay and ultimately took on a multimillion-dollar replacement of transit lines and other facilities at the largest oil field in North America.

The company finished that project around the end of last year.

The 49-page state complaint claims those spills “significantly reduced” oil production on the North Slope for more than two years, leading to millions in lost revenue to the state.

The state is estimating the volume of oil production lost as a result of the spills and shutdown at 35 million barrels between 2006 and 2008, a period of time when world oil prices steadily increased to record levels and the state also increased production taxes.

The taxes and royalties on that lost production could be several hundred million dollars.

The state claims BPXA owes nearly $1.7 million in environmental fines for spilling oil on North Slope lakes and tundra, or $8 for each gallon spilled. The state wants the fine to jump four-fold if a trial ultimately proves “gross negligence” on the part of BPXA led to the corrosion that caused the spills, or that BPXA didn’t follow its spill contingency plan.

The state is also claiming other damages for violations of environmental law.

BP Alaska declined to comment on the legal issues, but spokesman Steve Rinehart said, “We have taken significant steps to ensure that our operations are safe and reliable, and protect the environment. Those include building a new $500 million system of oil transit lines at Prudhoe Bay.”

State eyes issue of neglect

Around that time, then-BP Alaska President Doug Suttles called the lawsuit “another example” of what BP saw as an increasingly hostile business environment in Alaska.

“We’re ... one of the biggest taxpayers in the state of Alaska and have been for many years, and the attacks we come under are quite extraordinary,” Suttles said.

The state is basing its civil complaint, in part, on BPXA’s guilty plea in the criminal case, saying the company admitted that corrosion on the pipeline could be traced to neglect.

The state says BP’s negligence includes inadequate maintenance, primarily a lack of monitoring and cleaning oil transit lines on the eastern and western half of Prudhoe Bay, and a failure to prevent sediment buildup in portions of the lines, leading to corrosion.

The state set aside $4.7 million last year for the suit. The Palin administration requested an additional $3.5 million in the budget cycle currently under review by lawmakers.

In a March budget amendment, the Palin administration requested additional funds for the lawsuit, saying the Department of Law “believes that it is unlikely that an agreement could be reached to resolve the claims and anticipates filing a court case later this year.”

Steve Mulder, with the Department of Law, wouldn’t say if the state and BP tried to reach a settlement, only that the state had been “in communication with the company.”

On-going impact of spills

The shutdown cut daily production by 400,000 barrels per day, nearly in half, and caused widespread concern about the state budget in the wake of the sudden loss of revenue.

The partial shutdown came just days before the Republican primaries for the 2006 gubernatorial race, where now-Gov. Sarah Palin faced incumbent Frank Murkowski.

Following news of the shutdown, Palin told the Anchorage Daily News that the state, as a regulator of the oil industry on the North Slope, was partially responsible for accidents, but that the state also needed to hold companies accountable for taking care of pipelines.

The spills and shutdown prompted a Congressional investigation, uncovering documents and e-mails suggesting cost-cutting measures by BP led to corrosion on the pipelines.

In a May 2007 hearing, BP America Chairman and President Robert Malone said “risk assessment processes” ultimately had more to do with the spills than budget pressures.

The hearings came as Palin created the Petroleum Systems Integrity Office to revise and replace a broader program from the Murkowski administration, and requested funding for a comprehensive assessment of the risk of failure at production facilities, storage systems, wells, marine terminals and pipelines from the North Slope to Valdez to Cook Inlet.

The team hired for the project recently released its risk assessment methodology for public and legislative review and hopes to complete the assessment by summer 2010.

Following the spills, BP created a “technical directorate,” an independent agency charged with overseeing pipeline integrity that reports directly to the president of BP Alaska.