9th Circuit revives BP shareholder suit

Case stems from pipeline leaks in 2006 at Prudhoe Bay; investors allege misleading company statements, seek to recover losses

Wesley Loy

For Petroleum News

A federal appeals court has revived a BP shareholder lawsuit stemming from high-profile pipeline leaks in 2006 in the Prudhoe Bay oil field.

In a 42-page opinion issued Feb. 13, the 9th U.S. Circuit Court of Appeals in San Francisco reversed a lower court’s dismissal of the case.

The case began in 2008, when BP shareholders filed a class action alleging the company made false and misleading statements about the condition of its pipelines and BP’s maintenance and leak detection practices.

The plaintiffs want relief for investment losses incurred after the second of two leaks forced a partial shutdown of Prudhoe Bay and allegedly caused a 4 percent drop in BP’s share price, the 9th Circuit opinion says.

Two spills, big trouble

The first spill was discovered in March 2006 in the field’s western operating area. At 212,252 gallons, it was the largest oil spill ever on the North Slope.

A second, much smaller spill occurred later in 2006 on Prudhoe’s eastern side. This second spill forced a partial field shutdown, briefly rattling world oil markets and unleashing intense regulatory and congressional scrutiny for BP.

The cause of the spills was corrosion in oil transit lines, major pipes that carry sales-grade crude oil to the trans-Alaska pipeline.

BP Alaska’s maintenance and corrosion monitoring practices on these pipelines were shown to be seriously lacking, and the company ultimately pled guilty to a federal pollution misdemeanor.

The federal and state governments each brought civil suits against BP. The company agreed to pay a $25 million to settle the federal suit. The state, in its case, won more than $255 million.

‘Simply not plausible’

The court considered not only whether these statements were misleading, but rose to the level of scienter, defined as “a mental state embracing intent to deceive, manipulate or defraud.”

As an example, the court examines a statement attributed to Johnson in an Associated Press article on March 15, 2006, about two weeks after the first spill. Johnson was quoted as saying corrosion seen in the oil transit line in a 2005 inspection appeared to be occurring at a “low manageable corrosion rate.”

The appeals court said it agreed with the lower court that this statement was misleading, based on inspection data that showed high corrosion rates.

The “key question” was whether the plaintiffs had adequately pled the element of scienter, the appeals court said. The lower court doubted it; the appellate judges disagreed.

The appeals court added it was “simply not plausible” to think Johnson either misunderstood the data or did not have access to it. The court noted her doctorate degree in chemical engineering, and her key position as Prudhoe Bay unit leader and “gatekeeper of information on the Prudhoe Bay pipelines.”

The opinion examines other statements from BP and company executives, and ultimately reverses the lower court dismissal of the shareholder lawsuit.

“In the end, we conclude that after six years of preliminary litigation, the allegations should now be tested on the merits,” the appeals court concluded. “We return the matter to the district court for that purpose.”

Dawn Patience, the Anchorage spokeswoman for BP Alaska, provided a statement to Petroleum News that said in part:

“Since 2006, BP has made measurable improvements to safety and reliability on the North Slope. We have significantly increased spending on corrosion monitoring and prevention, such as in-line smart pig inspections. Annually, BP does more than 100,000 pipeline inspections for corrosion under insulation on the North Slope.”

A smart pig is a tool that runs through a pipeline, looking for problems such as corrosion.