RPT-SPECIAL REPORT-How BP’s oil spill costs could double

PUNITIVE DAMAGES

Whatever BP ends up paying in fines and cleanup costs, there
could be another big charge: punitive damages. Such a charge
would be helped by a finding of gross negligence, though
claimants could pursue punitive damages even if gross negligence
wasn’t proven. Exxon Mobil paid punitive damages of $1 per $1 of
economic damage following the 1989 Exxon Valdez spill in Alaska
when the captain of the tanker, who had been drinking, hit a
reef.

Jamison Colburn, Professor of Law at Penn State University,
says it is not entirely clear whether the current law covering
oil spills at sea will allow punitive damages for BP, though if
such damages are allowed, a one-to-one ratio would be in line
with precedents like the Valdez. “Punitive damages are a wild
card,” he said. “It’s still an open question.”

In the Texas City case, BP settled all claims out of court,
so a judge did not rule on punitive damages. However, lawyers
say the amount paid out in settlements is consistent with an
expectation there was a good chance significant punitive damages
would have been awarded.

If BP were to face punitive damages, given the prevailing
estimates of economic damages at around $20 billion for the Gulf
spill, a fine at the same ratio could add another $20 billion to
its bill.

But trial lawyer Coon says he believes punitive damages
could be levied at a higher multiple, because the accusations
against BP are greater than those Exxon faced. “In that
accident, a drunk captain inadvertently ran his ship onto a
reef. The drunk captain wasn’t doing something at the request of
the company,” Coon said, referring to the arguments which would
underpin a gross negligence claim.

LONG-TERM VIEW

What’s clearly not included in BP’s spill estimate is a
figure related to the damage the disaster has done to its U.S.
business over the long term. BP said it lost 30,000 barrels per
day of production in the Gulf — one of its most profitable
bases — in the third quarter, and expected further impacts in
the fourth quarter and into 2011.

But the added regulatory scrutiny the oil firm is likely to
undergo in the United States will surely add to its operating
costs. Analysts at Bernstein say BP’s upstream production costs
could rise by 10 percent, or $280 million a year. Using the
company’s own internal discount rate of 9-13 percent implies the
present value of a 10 percent rise in these costs would be $2.5
billion. If other areas of BP’s U.S. business faced similar
increases, the hit could be twice this.

In addition, some lawmakers have called for BP, currently
the Gulf’s largest operator, to be banned from future licence
rounds. “BP may find that when its application for a licence
goes in, it is put in the ‘pending’ file while Shell (RDSa.L: ) or
someone else gets the licence,” said Iain Armstrong, analyst at
Brewin Dolphin.

“REAL MONEY”

Tally up fines commensurate with gross negligence, punitive
damages at a ratio of just once economic damages, lower
production, a 10 percent rise in U.S. operating costs, and
difficulties in securing new reserves in the United States, and
you quickly reach a figure around $50 billion. That may not be
as dramatic as it sounds: some costs could still be shared with
partners and contractors, many would be tax deductible, and they
would in any case probably be payable over many years. The
company can likely afford even the most pessimistic estimates.

But things might not be as easy today as they were in 2005.
BP’s under-clubbing of the costs of Texas City was made up for
by a more than doubling of the oil price between 2005 and 2008.
The outlook for crude now is less bullish [ID:nLDE6AT13H], which
may mean the oil giant has fewer places to hide.

“A very slight miscalculation now about what we think is
going to happen is magnified by the huge numbers of stake
holders (who could make claims),” said Logan of Roger Williams
University. “A billion here, a billion there and pretty soon
you’re talking about real money.”
Despite BP’s official statements, some industry analysts say
the company may be expecting to have to pay more. “The way that
they are selling assets and
strengthening their balance, is what you would expect them to do if they were
preparing for a worse scenario such as a finding of gross negligence,” said one
analyst who asked not to be named because he did not want to be seen questioning
BP’s public comments.

Currently, analysts predict BP will reinstate its dividend in early 2011, at
half the pre-spill level. If it hasn’t done its sums right, a return to steady
dividend growth from the company could take quite a while longer.
(Editing by Sara Ledwith and Simon Robinson)

RPT-SPECIAL REPORT-How BP’s oil spill costs could double