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Vol. 14, No. 29 Week of July 19, 2009
Providing coverage of Alaska and northern Canada's oil and gas industry

State defends BP suit

Company trying to ‘delay, complicate’ Prudhoe spill case, state lawyers say

Wesley Loy

For Petroleum News

Lawyers for the state are opposing BP’s efforts to toss out part of a lawsuit seeking potentially huge damages stemming from Prudhoe Bay oil spills in 2006.

They argue attorneys for BP Exploration (Alaska) Inc. are trying to belittle the magnitude of the events of three years ago, and to “delay and complicate this lawsuit” by asking a judge to kick part of the case to the Alaska Oil and Gas Conservation Commission.

“BPXA tries to characterize this lawsuit as one involving only two relatively minor oil spills (despite the fact that the March 2006 spill was the largest ever on the North Slope), which it cleaned up right away (ignoring the fact that it had a clear legal obligation to do so),” the state’s lawyers wrote in a July 10 filing in Anchorage Superior Court. “Moreover, the March 2006 spill prompted immediate pipeline integrity inspection orders and investigations by state and federal agencies, and ultimately led to BPXA’s conviction for criminal negligence under the Clean Water Act.”

The remarks are contained in a 49-page argument opposing BP’s May 26 motion to dismiss much of the state’s lawsuit against BP.

The state sued the oil company, which operates the Prudhoe Bay field, on March 31. The civil suit seeks fines and punitive damages plus back taxes to compensate the state for a production shortfall of at least 35 million barrels of oil caused by two spills in 2006 and the ensuing work to repair or replace leaky, corroded pipelines.

BP’s lawyers, in their May 26 motion, argue the state is “overreaching” with an improper lawsuit.

But state lawyers contend BP’s arguments lack merit and “all of the state’s claims must be allowed to go forward.”

High stakes

The conflict between the state and BP has potential as a long and costly war.

Certainly the stakes are high. Steve Mulder, a chief assistant attorney general in the Alaska Department of Law’s environmental section, has said the state is seeking back taxes and other collections that could tally as much as $1 billion.

BP already has felt considerable sting from the 2006 spills and the pipeline corrosion scandal, drawing criticism not only from regulators but from members of Congress for lax maintenance of key pipelines in Prudhoe, the nation’s largest oil field. After pleading guilty in late 2007 to the federal pollution misdemeanor, a judge put the company’s Alaska subsidiary on probation for three years and ordered more than $20 million in penalties.

The state wants a jury trial. To help with the case, it has hired an outside law firm, K&L Gates. The firm’s Louisiana Cutler is working with Mulder.

Lawyers on both sides agree the case is highly complex. To help manage it, Superior Court Judge Peter Michalski of Anchorage has appointed a “discovery master” to referee trial preparations. Dan Hensley will make $300 an hour for the job.

Just when the case will come to trial is unclear.

A written summary of a recent conference before Judge Michalski says lawyers agree the trial “probably won’t be ready in a year.” The summary indicates the two sides have “attempted some form of settlement already.”

Legal arguments

For now, the issue is whether BP will succeed in getting of the state’s key claims thrown out.

BP’s lawyers argue the state is improperly pursuing “tort claims” when it has powers to discourage oil spills and punish offenders under oil and gas leases and unit agreements — what amount to contracts. A tort generally is defined as a wrongful act, not including a breach of contract, that causes injury.

BP also argues the state shouldn’t be allowed to collect punitive damages.

And it asks the judge to shift certain state claims — those concerning how much oil “waste” resulted from the spills and production shut-ins — to the AOGCC.

“Waste of oil is a highly technical subject, better suited for initial resolution by the AOGCC than by a lay jury,” BP’s lawyers wrote in their May 26 motion.

State attorneys urge the judge to reject BP’s arguments.

“BPXA argues unpersuasively … that the oil and gas leases and unit agreements, which are contracts between it and the state, preclude the state from asserting tort claims against BPXA when the tort claims and breach of contract claims are based upon the same conduct,” the state lawyers write. “Alaska law is clear that the state may bring both contract and tort claims in this lawsuit and BPXA’s attempt to eliminate its tort liability must be rejected.”

As for punitive damages, the state’s lawyers write:

“BPXA essentially asks the court to take the radical step of making the state a second class citizen compared to any other plaintiff who sues for this kind of injury, and impose a limit on the state’s potentially recoverable damages that would be inapplicable to any other party.”

The state’s lawyers concede, however, that the Alaska Supreme Court “has not had occasion to expressly address” the question of whether the state has the same right as a private plaintiff to obtain punitive damages.

The AOGCC angle

State lawyers urge the judge not to grant “BPXA’s attempt to sideline this case while AOGCC considers a fraction of it.”

A big part of the agency’s job is ensuring companies don’t waste or strand oil and gas as they produce the state’s resources.

But sending part of the state’s lawsuit against BP to the AOGCC to investigate whether waste occurred — an “enormous task” — would only succeed in wasting a lot of time in concluding the case, the state’s lawyers argue.

Even if the agency concludes waste occurred, the court still will have to deal with the overlapping and equally technical question of how the production shortfall affected state revenue, the state’s lawyers argue.

Anyway, if the three AOGCC commissioners had wanted to investigate the highly publicized 2006 spills, they surely could have, the lawyers add.

“Significantly, in the three years since the spills occurred and BPXA’s inadequate corrosion control practices were revealed, the AOGCC has had plenty of time to exercise its discretion to initiate an investigation into whether waste has occurred and has not done so,” the lawyers write.

The federal case

The same day the state sued BP, lawyers for the federal government filed a separate civil lawsuit against the company in U.S. District Court in Anchorage.

The federal suit is quite different from the state’s in that it doesn’t seek such collections as back taxes or punitive damages.

Rather, the federal case seeks fines for violation of water and air pollution laws with respect to the 2006 oil spills — the largest of which was 212,252 gallons covering two acres of tundra and the edge of a frozen lake — and the improper stripping of asbestos-containing material off insulated pipelines during inspection and repair operations.

The federal suit also seeks civil penalties against BP for violating pipeline safety laws by failing to comply with a corrective action order from the U.S. Pipeline and Hazardous Materials Safety Administration.

The potential financial liability to BP of the federal suit most likely is far less than that of the state lawsuit.

So far, the federal case hasn’t progressed at all, with BP yet to file an answer to the government’s complaint.

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