Providing coverage of Alaska and northern Canada's oil and gas industry
December 2009

Vol. 14, No. 52 Week of December 27, 2009

Lawyers debate BP motion

Company fights Alaska’s billion-dollar suit over ’06 Prudhoe Bay pipeline leaks

Wesley Loy

For Petroleum News

A lawyer for BP on Dec. 21 urged a judge to dismiss much of the State of Alaska’s lawsuit against the company seeking $1 billion or more in damages for the 2006 pipeline spills in the Prudhoe Bay oil field.

Jeff Feldman, a private Anchorage attorney representing BP, argued in a hearing before Alaska Superior Court Judge Peter Michalski that the state is improperly pushing tort claims for damages. He also said some of the case should be deferred for now to the Alaska Oil and Gas Conservation Commission, which has expertise on the subject of waste in production of the state’s oil reserves.

A private lawyer for the state, however, argued the state’s claims are proper, and that BP is simply trying to find a way to avoid facing a jury for its negligence in maintaining key Prudhoe Bay pipelines.

The state’s lawyer, Louisiana Cutler of Anchorage, told the judge the state is seeking at least $1 billion in lost revenue to the state treasury and the Alaska Permanent Fund as a result of the 2006 leaks and the production shut-ins that followed as BP replaced or repaired pipes.

The arguments were centered around BP’s motion to dismiss parts of the state’s suit against the company, which operates the nation’s largest oil field on behalf of itself and other owners ConocoPhillips, ExxonMobil and Chevron. If granted, the motion would effectively gut the state’s case.

The judge made no immediate ruling after the hearing, which attracted more than a dozen lawyers to a downtown Anchorage courtroom.

Origins of lawsuit

The state sued BP’s local operator, 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 oil pipeline.

The suit cites a total production shortfall of at least 35 million barrels of oil and natural gas liquids from the Prudhoe Bay and Milne Point fields from 2006 through 2008.

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.

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 BP Alaska pleaded guilty to a federal environmental misdemeanor.

Legal arguments

BP’s attorney argued in court on Dec. 21 that the state is improperly pursuing tort claims beyond merely claims under the relevant contracts, chiefly the oil field leases. A tort is a wrongful act committed against a person or property for which the injured party is entitled to compensation.

Feldman also questioned the state’s demand for punitive damages. He likened it to the state suing a store owner who pays less taxes as a result of his furnace failing, his pipes freezing and his business making less money.

The state has never followed through on a punitive damages claim in court, he said.

Barring dismissal of the state’s claim that oil waste occurred as a consequence of the spill and ensuing shut-ins, that aspect of the case at least should be referred to the AOGCC for a determination if waste really did occur, Feldman added, noting: “Oil didn’t disappear. It’s still in the reservoir.”

Cutler, in her argument, reminded the judge that one of the 2006 leaks was the largest oil spill in the history of North Slope oil production — 212,252 gallons, released slowly through an almond-sized hole onto the frozen tundra. The leak came from one of Prudhoe’s oil transit lines, which Cutler said BP nicknamed the “money lines.”

She acknowledged the state seldom seeks punitive damages, but said it’s doing so right now in a pending lawsuit against Mercer, a giant human resources consulting firm accused of making sloppy actuarial estimates of state pension plan liabilities.

As for the tort claims, the state is entirely within legal precedent to seek such claims alongside contract claims, Cutler said. Further, she said the state leases contain no exculpatory clause limiting tort claims. An exculpatory clause relieves one party of liability as a result of actions, or inactions, while executing the terms of a contract.

“There’s no limiting language whatsoever in the leases,” Cutler told the judge.

She also argued the AOGCC need not be involved with the case, as it lacks pipeline expertise.

Feldman, in a rebuttal, called the point about the exculpatory clause “a complete red herring.”

Judge asks questions

Cutler argued the state’s case isn’t about recouping revenue. It’s about BP violating its duty to operate properly and without negligence, which damaged the state.

Michalski at one point interrupted Cutler’s argument to ask her some questions.

Judge: What is the duty of BP other than the contract?

Cutler: The duty is to operate the pipeline as a reasonable operator should.

Judge: And could someone other than the state sue for negligent operation of a pipeline?

Cutler: Yes, a field partner could or a landowner who suffered some form of damage.

Later, Cutler said BP’s motion to dismiss should be denied, as the company is only looking to avoid trial “regardless of how substandard” its pipeline corrosion control might be.

But Feldman noted the state — as a state — has “multiple means” of fining or otherwise punishing BP without pressing improper tort and punitive damages claims.

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