Will BP Offer “the Mother of All Settlements” to Gulf Spill Victims?

The state of BP’s legal liability just went from bad to disastrous. The federal government’s second major investigation into last year’s Gulf oil spill presents incriminating new evidence that exposes BP to a whole new level of liability and greatly increases the likelihood that criminal charges will be brought. The report pulls no punches, citing egregious safety lapses, a sloppy cement job, a rush to meet a completion deadline and reckless cost-cutting efforts by BP and its contractors as key causes of the worst environmental disaster in U.S. history – and the deaths of 11 workers.

The 212-page report – generated from a sweeping 18-month investigation by the U.S. Coast Guard and the Bureau of Ocean Energy Management, Regulation and Enforcement – is even more critical than the findings from the presidential oil spill commission. And that’s saying something. The latest federal report on what went wrong aboard the Deepwater Horizon and why is devastating to BP’s legal exposure – and the oil giant is scrambling to keep a cap on the damage. From a Sept. 16 Reuters report:

Findings of the second major investigation by the U.S. government into the 2010 Gulf of Mexico oil spill, may press BP into putting over $30 billion on the table to quickly settle its outstanding legal headaches.

With the release of the report last week, BP finds itself staring down the barrel of a range of mistakes and failures that took place on the Deepwater Horizon rig (which BP leased from Transocean) leading up to the tragic explosion on April 20, 2010. The highly critical federal report focuses on four major findings:

The failure of the cement seal around the well was found to be a primary cause of the explosion on the Deepwater Horizon rig.

Crew members failed to take appropriate safety precautions after a kickback of natural gas occurred aboard the rig weeks before the deadly April 20 explosion.

Personnel shuffling and personality conflicts on the rig caused confusion and tension over who was responsible for critical decisions at the time of crisis.

Leading up to the deadly explosion, BP rushed to meet a completion deadline and engaged in reckless cost-cutting efforts to head off nearly $60 million in budget overages.

I am among those close to the legal proceedings who believe these new findings will push BP to offer a large settlement to spill victims, like commercial fishermen and charter boat captains. The company wants to put this nightmare in its rearview mirror as quickly as possible – both from a PR and business perspective. From Reuters:

“We would like everything settled as soon as we can, otherwise you have lingering reputation issues and investor uncertainty,” one insider said after the latest report.

It’s now a matter of how much BP will offer. More from Reuters:

The man hearing the civil damages claims against BP, Judge Carl Barbier, has set a February trial date. BP is likely to make a “significant” offer soon afterwards, the insider said.

“I expect that early next year you will see the mother of all settlements,” another source close to the company said.

The alternative is for BP to move forward with a protracted, hugely expensive trial that is sure to include significant punitive-damage awards. From the Sept. 16 Reuters report:

While recent awards have generally seen punitive damages awarded at levels equal to or less than actual economic damages, Zygmunt Plater, Professor at the Boston College Law school, said claimants could receive a multiple of any compensatory award because the latest government report linked the accident to BP’s cost-cutting efforts.

Even at a 1:1 punitive-to-economic damage ratio, BP may have to offer an additional $5 billion to cover punitive awards.

There’s an old plaintiff’s attorney saying about punitive damages. They can be awarded for really stupid behavior (gross negligence), such as we witnessed in the drunkenness of Captain Joe Hazelwood when the Exxon Valdez ran aground in Alaska’s Prince William Sound. Punitives can also be awarded for really mean-spirited and reckless behavior. BP’s actions constitute the latter. The constitutional limits on punitive damages are much higher for mean-spirited and reckless conduct.

In addition to hefty punitive awards, the new report makes “gross negligence” charges tied to pollution fines pretty much a foregone conclusion. The Oil Pollution Act of 1990, assesses fines of $1,000 per barrel or, in the case of “gross negligence,” $3,000 per barrel.

BP’s provision…includes $3.5 billion related to Clean Water Act fines. But if BP is found to have been grossly negligent, which it denies, it could be fined over $21 billion.

Even before the conclusion of the highly critical official investigations, the government indicated it would press for the higher level of fines associated with gross negligence.

In addition to gross negligence fines and punitive awards (should the trial move forward), the new report makes it much more likely that the Department of Justice ultimately will bring criminal charges both against BP, the company, and employees in charge aboard the Deepwater Horizon rig leading up to the deadly explosion. From Reuters:

Combined, it appears BP may have to put over $30 billion on the table to cover the DoJ and civil claimant cases against it – some $20 billion above what it has budgeted for.

[Professor] Plater, however, said the risk of a court awarding much more meant that if BP could put all criminal and civil cases against it to rest for $40 billion, it should jump at the chance.

In light of this latest federal report, I think it may take more than $30 billion to cover all the cases. One thing’s for sure, BP is feeling the heat. We’ll see early next year just how much the company will put on the table to try to make all this liability disappear, like so many gallons of crude.

Read the full Reuters report here: http://ca.reuters.com/article/businessNews/idCATRE78F1AP20110916

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