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Vol. 16, No. 19 Week of May 08, 2011
Providing coverage of Alaska and northern Canada's oil and gas industry

BP, feds settle

$25 million penalty, pipeline integrity program to resolve Prudhoe spills case

Wesley Loy

For Petroleum News

Wiring the government a $25 million civil penalty looks to be the easy part for BP in settling a federal lawsuit over the 2006 Prudhoe Bay pipeline leaks.

Much tougher, and more expensive, will be fulfilling the myriad requirements contained in the proposed “consent decree” announced May 3 between BP Exploration (Alaska) Inc. and federal regulators.

The 60-page document, with several appendices, is essentially a long and tedious to-do list for BP. The word shall, as in BP shall do this or that, appears 298 times.

All the requirements are meant to compel BP to do a better job of maintaining its pipelines in the vast Prudhoe Bay oil field, and to prevent a recurrence of the corrosion-related spills seen in 2006, federal officials said.

They called the $25 million civil penalty “the largest per-barrel penalty to date for an oil spill.”

“This penalty should serve as a wake-up call to all pipeline operators that they will be held accountable for the safety of their operations and their compliance with the Clean Water Act, the Clean Air Act and the pipeline safety laws,” said Ignacia Moreno, assistant attorney general for the Environment and Natural Resources Division of the U.S. Department of Justice. “Companies like BP Alaska must understand that they can no longer afford to ignore, neglect or postpone the proper monitoring and maintenance of their pipelines. This agreement will help prevent future environmental disasters and protect the fragile ecosystem of Alaska’s North Slope.”

BP, in a press release, said it “did not admit any liability,” and noted that no per-barrel penalty was assessed in the agreement, even though federal authorities used that characterization.

Steve Rinehart, BP’s Anchorage spokesman, added: “We believe the terms of the agreement are fair.”

Record North Slope spill

BP operates Prudhoe Bay, the nation’s largest oil field, on behalf of itself and partners ExxonMobil, ConocoPhillips and Chevron.

On March 2, 2006, a BP worker discovered what later would be calculated as a 212,252-gallon (5,054-barrel) crude spill that had leaked from an oil transit line near Gathering Center 2 on the western side of the field. The spill, which affected the tundra and the edge of a frozen lake, was the largest oil release ever to occur on the North Slope.

A second, much smaller leak occurred on another transit line the following August, this time on the eastern side of the field. The spill triggered a partial shutdown of Prudhoe, which briefly rattled world oil markets.

BP would draw pointed congressional and regulatory criticism for poor maintenance on the transit lines, which are major pipes that carry sales-grade crude from the field to Pump Station 1 of the trans-Alaska oil pipeline.

In late 2007, BP Alaska was sentenced to three years on probation and ordered to pay $20 million in penalties after pleading guilty to a federal environmental misdemeanor. The plea deal wrapped up criminal prosecution of BP for both the federal and state governments, although federal authorities recently accused the company of violating its probation.

On March 31, 2009, the federal and state governments each filed a civil suit against BP Alaska.

The state case poses a bigger financial threat to the company than the federal case, as the state is seeking not only the statutory penalty for the spilled oil but also compensatory and punitive damages plus back taxes and royalties. State lawyers contend that BP’s negligence led to emergency field shut-ins and pipeline replacements, depriving the state of revenue on an estimated production shortfall of 35 million barrels of oil and natural gas liquids.

The state’s damages could exceed $1 billion, a state lawyer has said.

Unlike with the federal suit, which never really advanced as the two sides worked toward a settlement, the state case is hotly contested and appears headed for trial.

Elements of suit, settlement

The federal lawsuit, brought on behalf of the Environmental Protection Agency and the Pipeline and Hazardous Materials Safety Administration, featured three elements.

First, it alleged violations of the Clean Water Act for two unauthorized discharges of oil into waters of the United States.

Second, the suit alleged a violation of the Clean Air Act stemming from unsafe stripping of asbestos-containing material off insulated pipelines during inspection and repair operations.

Lastly, the suit accused BP of failure to comply with PHMSA’s corrective action order.

The consent decree also has three main elements.

First, BP agrees to pay the $25 million civil penalty, about $20 million of which will go into the Oil Spill Liability Trust Fund with the rest to the U.S. Treasury. The government said the penalty reflects “gross negligence.”

Second, BP must implement an “integrity management program” for its 1,600-mile North Slope pipeline network, a requirement that will cost $60 million over three years and is in addition to the $200 million the company already has spent to replace miles of transit lines, the government said in a press release.

The consent decree requires BP to inventory every pipeline; prescribes when and how to use pigs, coupons and other tools to detect corrosion and metal loss in pipelines; and sets out a schedule for inspecting pipelines by air, vehicle and foot patrol. It also includes timeframes for fixing problems, and requires the company to stage emergency repair equipment such as sections of pipe on the Slope. Further, BP must research improved leak detection systems.

The third element of the consent decree requires BP to hire an “independent monitoring contractor,” someone who hasn’t worked for the company, to report to the government on BP’s compliance. The contractor must have access to “all data, information, records, employees, contractors, and facilities” within BP’s pipeline system, the consent decree says.

Subject to court approval

“With this settlement, BP admits it cut corners and failed to do what was required to adequately maintain its pipelines in Alaska,” Karen Loeffler, U.S. attorney for Alaska, said at a May 3 press conference. “The penalty here reflects the seriousness of the conduct.”

The consent decree is subject to a 30-day public comment period and final approval by a federal judge.

The settlement, if approved, would square away at least one of the legal problems confronting BP, which faces huge challenges stemming from the Deepwater Horizon disaster in the Gulf of Mexico.

Justice, EPA and PHMSA officials at the press conference declined to discuss the BP Alaska case in the context of Deepwater Horizon.

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