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Vol. 15, No. 25 Week of June 20, 2010
Providing coverage of Alaska and northern Canada's oil and gas industry

Split ruling in BP case

Judge tosses one state claim, OKs others in billion-dollar suit over Prudhoe spills

Wesley Loy

For Petroleum News

An Alaska judge has thrown out a piece of the state’s lawsuit against BP stemming from the Prudhoe Bay oil pipeline leaks of 2006.

The June 11 ruling, however, seemed to fall short of the huge hole BP had hoped to blast in the case now pending in state Superior Court in Anchorage.

The company’s lawyers had sought dismissal of three claims the state asserted in its nine-count civil suit. BP also wanted the court to ship part of the case to the Alaska Oil and Gas Conservation Commission.

In a potentially significant victory for BP, Judge Peter Michalski did partially dismiss one of the claims. But he let the other two stand, including one for punitive damages. And Michalski declined to defer to the AOGCC.

With the ruling, the table now appears set for the two sides to prepare for a high-stakes trial scheduled for late 2011.

State, feds sue

The state and federal governments each sued BP Exploration (Alaska) Inc. on the same day, March 31, 2009.

The suits came after authorities wrapped up criminal prosecution of the company, which in November 2007 pleaded guilty to a misdemeanor violation of the Clean Water Act. It was sentenced to three years on probation and ordered to pay $20 million in penalties.

BP came under intense scrutiny from pollution and pipeline regulators, as well as Congress, after Prudhoe Bay oil transit lines carrying sales-grade crude sprang leaks due to corrosion eating through the steel pipes.

One of the leaks slowly released 212,252 gallons of oil onto the snow-covered tundra before a BP field worker discovered the spill on March 2, 2006. It stands as the largest oil spill on the North Slope in more than 30 years of production there.

The federal suit, now pending in U.S. District Court in Anchorage, seeks millions of dollars in fines and accuses BP of an array of 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.

Justice Department and BP lawyers involved in the federal suit recently disclosed they’ve had “extensive settlement discussions.”

The state lawsuit appears to pose a potentially greater liability for BP, though one that’s likely dwarfed in comparison with the company’s mounting troubles in the Gulf of Mexico.

Arguing BP Alaska was negligent and engaged in “destructive cost cutting,” the state is seeking not only fines but back taxes and royalties it argues were “lost” as a result of field shut-ins forced by the leaks and subsequent pipeline replacements.

The lawsuit says the total production shortfall from Prudhoe Bay and the neighboring Milne Point unit totaled at least 35 million barrels of crude oil and natural gas liquids from 2006 through 2008.

A state lawyer has said the state is seeking perhaps in excess of $1 billion in damages.

A BP victory

In a motion filed on May 26, 2009, BP asked the judge to toss out three of the nine claims, or counts, in the state’s lawsuit.

Lawyers for the two sides presented oral arguments on the BP motion four days before Christmas, and Michalski’s seven-page ruling is the result.

One key claim the state lodged against BP concerned “negligence with respect to corrosion monitoring and control practices.”

This negligence caused oil to discharge illegally onto state land, and caused the state to suffer “substantial economic and property damages” including lost revenues from production interruptions, the suit said.

In his ruling, Michalski held that the state could not assert both a tort claim and, in a separate count, a claim for breach of contract — the contract being the oil and gas leases and unit agreements between the company and the state.

And so, in a win for BP, Michalski dismissed the negligence count but only with respect to “special damages,” the lost revenue the state alleges.

The contract covers the lost revenues, the judge wrote.

“Without the contract there is no duty to produce the revenue,” he said. “Thus, in the context of this case, the failure to do so may not be litigated as a tort.”

Michalski declined to dismiss the negligence claim with respect to any damages to the land.

Whether the judge’s ruling hurts the state’s effort to collect back taxes and royalties remains to be seen. Presumably, BP saw an advantage in narrowing the case to a breach of contract claim.

Two claims stand; no AOGCC review

BP also sought dismissal of two other claims, one for treble damages under a state statute pertaining to “waste,” and the other for punitive damages for BP’s “outrageous” and “reckless” conduct.

BP’s lawyers, in court filings and in oral arguments on Dec. 21, argued forcefully against the state’s claim of punitive damages.

One of their arguments was that the state, unlike a private plaintiff, has lots of ways — such as civil fines and criminal penalties — to punish a company for an oil spill and to deter future misconduct.

Judge Michalski denied BP’s motion to toss out the state’s “waste” claim, and he also allowed the claim for punitive damages to stand.

He noted the Alaska Legislature had not declared the state “impotent to obtain civil punitive damages of its own.”

BP’s lawyers also had urged the judge to steer part of the case to the AOGCC for a determination of whether waste of oil and gas had occurred.

“Waste of oil is a highly technical subject, better suited for initial resolution by the AOGCC than by a lay jury,” BP argued in a court filing.

The state’s lawyers opposed any deferral to the AOGCC, arguing it would serve only to delay the case. Besides, they said, the agency is much more of an expert on physical waste than on “economic” waste.

Without elaborating, Michalski declined to “cede jurisdiction on the issue of waste” to the AOGCC.

Trial of the complex case is scheduled to start in September 2011 and last about 12 weeks.

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