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Vol. 17, No. 48 Week of November 25, 2012
Providing coverage of Alaska and northern Canada's oil and gas industry

Just the start for BP?

After striking criminal deal on Deepwater Horizon, firm braces for huge civil hit

Wesley Loy

For Petroleum News

Now that BP has reached a federal criminal settlement for the Deepwater Horizon disaster, agreeing to pay a record $4 billion in fines and other penalties, the company turns to defending against potentially much larger civil liabilities.

BP’s top leadership vows that defense will be vigorous.

“We are open to settlements, but only on reasonable terms,” said Bob Dudley, chief executive.

The criminal settlement came down Nov. 15, packing heavy consequences not only for the London-based company but for individual employees, including two “company men” federal prosecutors accused of negligent conduct aboard Transocean’s semisubmersible rig, the Deepwater Horizon.

The rig was drilling the Macondo exploration well for BP about 41 miles offshore Louisiana when it experienced a blowout and fire on April 20, 2010. The disaster killed 11 workers and unleashed a long-running oil spill in what prosecutors called the nation’s largest environmental disaster.

Attorney General Eric Holder said the $4 billion in fines and penalties is “the single largest criminal resolution” in U.S. history.

Lanny A. Breuer, an assistant attorney general helping lead the Deepwater Horizon investigation, said the rig explosion “resulted from BP’s culture of privileging profit over prudence.”

Pleading guilty

Under the settlement, BP has agreed to plead guilty to 11 counts of felony manslaughter, one count of felony obstruction of Congress, one misdemeanor violation of the Clean Water Act, and one misdemeanor violation of the Migratory Bird Treaty Act.

The settlement is subject to approval of the U.S. District Court in New Orleans, where the charges against BP were filed.

Grand jury indictments also were announced Nov. 15 against three individuals.

Robert M. Kaluza, 62, of Henderson, Nev., and Donald J. Vidrine, 65, of Lafayette, La., were charged with 11 counts of involuntary manslaughter, 11 counts of seaman’s manslaughter and one violation of the Clean Water Act.

Kaluza and Vidrine were the highest ranking BP supervisors aboard the Deepwater Horizon. On the evening of April 20, 2010, they “observed clear indications that the Macondo well was not secure and that oil and gas were flowing into the well,” the Department of Justice said in a press release. “Despite this, BP’s well site leaders chose not to take obvious and appropriate steps to prevent the blowout. As a result of their conduct, control of the Macondo well was lost, resulting in catastrophe.”

If convicted, the company men face a maximum of eight to 10 years in prison on each manslaughter count.

David I. Rainey, 58, of Houston, was charged with obstruction of Congress and making false statements to law enforcement officials. Prosecutors said Rainey is a former BP executive who served as a deputy incident commander and BP’s second-highest ranking representative at the unified command during the spill response.

The Justice Department said BP has admitted that, through Rainey, it withheld documents and provided misleading information in response to a U.S. House of Representatives inquiry on the volume of oil going into the Gulf of Mexico after the blowout.

“Among other things, BP admitted that Rainey manipulated internal estimates to understate the amount of oil flowing from the well and withheld data that contradicted BP’s public estimate of 5,000 barrels of oil per day,” the Justice Department said.

A technical group of government and independent scientists later concluded that more than 60,000 barrels per day were leaking into the Gulf, prosecutors said.

Securities fraud settlement

Thirteen of the 14 criminal counts against BP are “based on the negligent misinterpretation of the negative pressure test conducted on board the Deepwater Horizon,” the company said.

“BP acknowledged this misinterpretation more than two years ago when it released its internal investigation report,” BP said.

The remaining criminal count, the company said, “pertains to two BP communications made to a member of Congress during the spill response about flow rate estimates.”

Under the settlement, BP may pay the $4 billion in installments over a five-year period. Of the total, about $1.26 billion is criminal fines. Almost $2.4 billion will go toward marine and coastal restoration and conservation in the Gulf region, and $350 million will go to the National Academy of Sciences to improve oil spill prevention and response.

BP also will serve a five-year term of probation, if the court approves.

Further, BP must engage a process safety and risk management monitor for its deepwater Gulf of Mexico drilling, and an ethics monitor to improve BP’s “code of conduct.” Each monitor will have a four-year term, BP said.

BP noted that under U.S. law, companies convicted of certain criminal acts can be “debarred” from contracting with the federal government. Such contracting could include oil and gas leases.

“BP has not been advised of the intention of any federal agency to suspend or debar the company in connection with this plea agreement,” the company said. “BP will continue to work cooperatively with the debarment authority.”

Simultaneous to the criminal settlement, the U.S. Securities and Exchange Commission resolved civil securities fraud claims with BP in a $525 million settlement, payable in three installments over three years.

“The SEC’s claims are premised on oil flow rate estimates contained in three reports provided by BP to the SEC during a one-week period (on April 29 and 30 and May 4, 2010), within the first 14 days after the accident,” BP said.

“The oil spill was catastrophic for the environment, but by hiding its severity BP also harmed another constituency — its own shareholders and the investing public who are entitled to transparency, accuracy and completeness of company information, particularly in times of crisis,” said Robert Khuzami, director of the SEC’s Division of Enforcement.

‘Vigorous’ civil claims defense

The $4 billion criminal settlement dwarfs the settlement approved in 1991 for the Exxon Valdez oil spill in Alaska. Exxon was fined $150 million, then the largest fine ever imposed for an environmental crime. The court, however, forgave $125 million in recognition of Exxon’s cooperation in the cleanup and its payment of certain private claims. Exxon also agreed to pay $100 million in criminal restitution, plus a $900 million civil settlement.

Aside from the Gulf of Mexico, BP has a major presence in Alaska as operator of Prudhoe Bay, the nation’s largest oil field.

U.S. Sen. Lisa Murkowski, R-Alaska, the top-ranking Republican on the Senate Energy and Natural Resources Committee, said in a Nov. 15 press release: “I’m pleased that BP, the Justice Department and the SEC have reached a settlement. While no amount of money will compensate for the lives lost in or the environmental damage done by the explosion, I hope that this will provide a measure of closure for all involved.”

Settling was in the best interest of BP and its shareholders, said Carl-Henric Svanberg, BP’s chairman.

“It removes two significant legal risks and allows us to vigorously defend the company against the remaining civil claims,” he said.

BP said it would “vigorously defend itself” against all remaining civil claims, and contest allegations of “gross negligence.” The company contends it was not grossly negligent, saying: “All the pleas related to the accident itself are based on no more than negligent conduct.”

This is an important legal distinction, as proof of gross negligence could greatly increase BP’s fines under federal law, particularly the Clean Water Act. Such fines are based on the number of barrels of oil spilled, and could top $20 billion.

Aside from federal civil claims, BP said it faces federal and state natural resource damages claims; private civil and securities claims now pending in the courts; and state economic loss claims.

The Justice Department said a trial on federal civil claims is scheduled to begin in February in New Orleans.

Divestiture campaign

BP said it has spent more than $14 billion to date in Deepwater Horizon operational response and cleanup costs, and has paid more than $9 billion to individuals, businesses and government entities.

“From the outset, we made a commitment to clean up the spill and pay legitimate claims — and we’ve been fulfilling that commitment ever since,” CEO Dudley said.

The company further noted that over the past five years, BP has invested more than $52 billion in the United States, more than any other oil and gas company. And the company employs 23,000 Americans.

BP also said it has taken “significant steps to further enhance safety and risk management throughout its global operations.” It has moved to implement all 26 recommendations from its internal investigation, made key leadership changes, and reorganized its upstream business.

To deal with the corporate impact of Deepwater Horizon, BP has been selling off assets to raise money. The company in October said it was approaching its goal of $38 billion in divestitures. Since then, it announced a preliminary deal to sell its 50 percent stake in major Russian oil producer TNK-BP for $17.1 billion in cash plus shares in the buyer, Rosneft.

BP isn’t entirely alone in facing the Deepwater Horizon liabilities.

“BP has previously secured contributions toward response and compensation costs from the co-owners of the Macondo well, Anadarko ($4 billion) and MOEX ($1 billion), and from contractors who worked there, including Cameron ($250 million) and Weatherford ($75 million),” BP said in its Nov. 15 press release.

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