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vol. 14, No. 34 Week of August 23, 2009
Providing coverage of Alaska and northern Canada's oil and gas industry

BP pushes for AOGCC probe

Wants ‘waste’ claim reviewed, punitive damages barred in Prudhoe spill case

By Wesley Loy

For Petroleum News

Lawyers for BP continue to press for partially diverting a state lawsuit over the 2006 Prudhoe Bay pipeline spills from the courts to the Alaska Oil and Gas Conservation Commission.

BP’s lawyers also are pushing for the judge in the case to bar the state’s attempt to collect punitive damages for the spills, one of which was the largest oil spill in the industry’s history on the North Slope.

Should BP succeed in sidetracking the case partly to AOGCC, and in blocking the punitive damages claim, it could largely gut the state’s lawsuit in Alaska Superior Court in Anchorage.

At press time, lawyers for the two sides were trying to work out a date for oral argument on BP’s motion.

Billion-dollar suit

The state sued BP’s local subsidiary, BP Exploration (Alaska) Inc., on March 31 seeking to collect compensatory and punitive damages as well as “lost” taxes and royalties for production shut-ins related to the 2006 pipeline spills.

The spills were from corrosion-damaged transit lines that carry sales-grade crude oil out of the Prudhoe Bay field and feed it into the trans-Alaska pipeline.

The lawsuit cites a total production shortfall of at least 35 million barrels of crude oil and natural gas liquids from the BP-operated Prudhoe Bay and Milne Point fields from 2006 through 2008 due to the spills and subsequent pipeline replacements.

The state’s lawyers accuse BP of knowingly neglecting corroded pipelines in the interest of cutting costs, and the suit seeks punitive damages for “outrageous” or “reckless” conduct.

Should the state win the case, it potentially could reap some $1 billion in back taxes and other collections from BP, a state lawyer has said.

Apart from the state suit, BP also is defending a federal lawsuit the Environmental Protection Agency and pipeline regulators filed against the company on the same day the state sued. The federal suit seeks millions of dollars in fines for alleged water and air pollution violations, as well as failure to meet deadlines in a corrective action order from U.S. Department of Transportation pipeline regulators.

The state and federal suits are civil actions. Criminal prosecution of BP for the 2006 spills wrapped up for both governments in November 2007, when BPXA pleaded guilty to a federal environmental misdemeanor.

Kick case to AOGCC?

Lawyers for BP are asking Superior Judge Peter Michalski to toss out three key counts in the state’s nine-count lawsuit.

One count accuses BP of “negligent” corrosion monitoring and control practices in pipelines, resulting in leaks onto state land and major production shut-ins at Prudhoe Bay and Milne Point. One leak left a North Slope record 212,252-gallon (5,054-barrel) oil spill on the tundra.

The second count holds BP liable for “waste” of oil, and the third count involves the state’s pursuit of punitive damages.

In an Aug. 7 court filing, lawyers for BP urge the judge to allow AOGCC to investigate the question of oil waste, saying that’s the agency with the right expertise.

The lawyers chide the state for not asking AOGCC to investigate in the first place.

State attorneys are resisting the idea, calling it BP’s “attempt to delay and complicate this lawsuit.”

“Delay is not inevitable or even likely,” BP’s lawyers counter. “More important, the State bears responsibility for any delay caused by referral to the appropriate agency after litigation has started, since the State unquestionably could – and should – have gone to the AOGCC during the three years since the oil was discharged, if it believed waste had occurred.”

The BP lawyers also question the range of waste-related damages the state is seeking.

“The State suggests, without any authority, that it is entitled to pursue as part of its waste claim something admittedly non-traditional, which it terms ‘economic waste,’” BP’s Aug. 7 filing says. “While the State’s definition of ‘economic’ waste is not entirely clear, it appears that what the State refers to is not waste at all but traditional economic damages for deferred revenue. If this is, or if it will become, a recognized form of waste, that should be decided in the first instance by the AOGCC, which can make clear rules and set standards to be applied equally to all waste determinations in Alaska. A jury examining just one case cannot do this.”

BP fights punitive damages

If the judge goes along with BP’s motion to dismiss the state’s negligence claim, “then there is no basis for any award of punitive damages,” BP lawyers argue.

Because Alaska is a state, it has authority to enforce civil and criminal statutes and pursue “enormous” penalties, the BP lawyers say.

By going beyond these powers to seek punitive damages, the state is “overreaching and seeking damages to which it has no entitlement,” the lawyers argue, noting no precedent for it in Alaska Supreme Court rulings.

State lawyers, however, have argued the state is within bounds to seek punitive damages.

“If punitive damages are justified in this case on the facts, but are disallowed simply because the plaintiff is the State, then the appropriate punishment and deterrence will not be accomplished, regardless of the State’s incentive and ability to obtain other civil and criminal sanctions,” the state’s lawyers wrote in a July 10 filing.

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