Monday, February 25, 2013

BP Will Go to Trial to Set the Civil Penalties for Oil Spill

Last week, BP announced their intent to go to trial for the civil penalties to be assessed under the Clean Water Act. BP says it will vigorously defend itself against the “gross negligence” allegations. The US District Court in Louisiana will ultimately determine the legal and factual issues at the heart of the case, including whether BP or any other party was grossly negligent. “Gross negligence is a very high bar that BP believes can not be met in this case,” said Rupert Bondy, Group General Council for BP in their press release. “This was a tragic accident, resulting from multiple causes and involving multiple parties. We firmly believe we were not grossly negligent.”

BP also contends that US Government inflated their flow rate estimates. The determination of the total oil released will be subject of phase two of the trial set for September 2013. Oil flow rate and quantification of barrels of oil spilled are very important issues for determining total liability. BP has said, although there is inherent uncertainty, they believe that the U.S. government’s public estimate of 4.9 million barrels of oil released is at least 20 % overstated. In addition, whatever the final number of barrels released from the reservoir is proven to be in trial, BP does not believe that the 810,000 barrels of oil that the company successfully captured from the Macondo reservoir without it entering the Gulf of Mexico waters should be considered in the Court’s future determination of Clean Water Act penalties. Under the Clean Water Act, civil penalties are assessed only on oil that has actually entered the environment and potentially caused harm. If BP can reasonably prove their flow estimate of 20% below the government estimate and deduct a further 810,000 barrels for the captured oil, then the spill would be 3.1 million barrels of oil spilled that would be used in calculating a Clean Water Act penalty.

The Court has broad discretion to assess a per-barrel Clean Water Act penalty between zero and the statutory maximum which is $4,300 per barrel. According to BP, in deciding on the per-barrel fine, the Court must consider not only the level of culpability, but also seven other statutory penalty factors. The intent behind the statute was to enable courts to account for the violating company’s conduct following the violation. In practice, courts have historically awarded only a fraction of the statutory maximum penalty.

Mr. Bondy summarized the company position, “In determining the penalty, we believe the Court should consider, among other things, the fact that BP immediately stepped up and acknowledged our role in the accident. We waived the statutory cap on liability, and to date, we’ve spent more than $23 billion in response, clean-up, and payments on claims by individuals, businesses, and governments...”

Back on November 15, 2012, BP agreed to plead guilty to 11 counts of felony manslaughter, one count of felony obstruction of Congress, and violations of the Clean Water and Migratory Bird Treaty Acts., all arising from the 2010 Macondo Well/ Deepwater Horizon blowout that killed 11 people and caused the largest oil spill and what EPA called in their press release the largest environmental disaster in U.S. history. BP agreed to pay $4.5 billion, including $1.26 billion criminal fine, to end all criminal charges and resolve securities claims against them.

In addition, on November 28th 2012 EPA announced that it had temporarily suspended BP Exploration and Production, Inc., BP PLC and affiliated companies (BP) from new contracts with the federal government. This includes oil development leases in a Gulf as well as contracts with the Department of Defense. The suspension does not affect existing agreements and contracts BP has with the government. Since the Deepwater Horizon accident, the US has granted BP more than 50 new leases in the Gulf of Mexico, where the company has been drilling since the government lifted the drilling moratorium. In addition, in 2011 BP was the largest fuel supplier to the U.S. Department of Defense and is likely to be the largest supplier in 2012, and 2013. 

BP has also reached an agreement to settle claims from fishermen and others affected by the oil spill for $7.8 billion that was approved by a federal judge on December 21, 2012. According to a press release by BP, this raises to $41.95 billion the charge taken against income in the third quarter financial statements. BP’s financial statements as of  December 31, 2012 reflect this additional charge that reflects the criminal settlements, the $18 billion spent on cleanup costs and the $15 billion  paid into the trust fund to compensate victims.  This settlement only addresses economic and property damage and does not address claims made by cleanup workers and other who say exposure to oil or oil dispersant has made them sick.

In addition, as agreed in a negotiated settlement with the US government on Thursday, February 14th 2013 Transocean Deepwater Inc. pleaded guilty to a criminal violation of the Clean Water Act (CWA) and was sentenced to pay $400 million in criminal fines and penalties. In total, the amount of fines and other criminal penalties imposed on Transocean are the second-largest environmental crime recovery in U.S. history – following the historic $4 billion criminal sentence imposed on BP Exploration and Production Inc. in connection with the same disaster.

Separate from the corporate charges and settlements, a federal grand jury has indicted two BP supervisors, Robert Kaluza and Donald Vidrine who were on board the Deepwater Horizon with seaman manslaughter and involuntary manslaughter for each of the 11 men killed in the blast, as well as a criminal violation of the clean water act. Robert Kaluza and Donald Vidrine were the on-site supervisors representing BP on the Deepwater Horizon drill rig. They were the Well Site Leaders known colloquially as the “company men.” Their job was to ensure that BP had “well control” by supervising the implementation of BP’s drilling plan and ensuring the safety of the operation.

According to charges filed by the United States against Mr. Kaluza and Mr. Vidrine on April 20th 2010 a negative pressure test was performed on the well to ensure that the temporary cement seal just installed would hold when the drilling mud was removed when the well displacement took place. During the test the pressure quickly built up above acceptable values. Each time the pressure was bled off it built up again along with abnormal fluid flow.

The two men were presented with what the U.S. Government characterizes as a nonsensical explanation that this was due to a "bladder effect” and directed the testing of the “kill line.” The government charges that rather than consult with BP engineers on shore about the continued high pressure in the drill pipe and ask for advice, Mr. Kaluza and Mr. Vidrine passed the negative pressure test. The government characterizes this as gross negligence.

The well was not secure. The abnormal readings during the negative pressure test were the indication that the well was not secure and Mr. Kaluza and Mr. Vidrine failed to adequately account for the abnormal readings during the testing. The government charges that these two men by deeming the negative pressure test a success allowed the displacement of the well to proceed and resulted in the blowout that killed 11 men aboard the rig that same evening. Mr. Kaluza and Mr. Vidrine are charged with involuntary manslaughter, seaman manslaughter and criminal violation of the Clean Water Act. Both men have pleaded not guilty in a New Orleans court. They face up to 10 years in prison on each of 11 counts of seaman's manslaughter and eight years in prison on each of 11 counts of involuntary manslaughter. The trial has been delayed until 2014 to allow the defense to adequately prepare. It is unknown how the corporations pleading guilty to the criminal charges will impact their cases.

Finally, former senior BP executive David Rainey pleaded not guilty to obstruction of justice charges for lying about how much oil was gushing out of the runaway well. He faces five years in prison if convicted.

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