After its oil-well explosion in the Gulf of Mexico in 2010, BP caught one lucky break: Oil prices surged and boosted its cash flow, helping it to cover billions of dollars in legal and oil-spill cleanup costs.
As The Wall Street Journal reports, BP is now facing up to $13.7 billion in federal fines—about $10 billion more than it has set aside—in much less comfortable economic circumstances now that oil prices have plunged. The company is set to go to trial on Tuesday in federal court in New Orleans over how much it must pay the U.S. government for each barrel of crude that spilled into the Gulf, in the final phase of litigation stemming from violations of the Clean Water Act.
A global oil glut has sent prices tumbling since the summer. Crude now sells for about 40% less than it did in April 2010, when the explosion of the Deepwater Horizon rig killed 11 people and touched off the largest offshore oil spill in U.S. history.
The court’s decision on the fines comes at a vulnerable moment for BP. The company is carrying $53.6 billion in debt, $21 billion more than at the time of the spill. Some analysts have been speculating that a slimmed-down BP could become a takeover target once the Deepwater Horizon litigation concludes.
While the collapse in oil prices will crimp BP’s cash flow, the company’s lawyers aim to use it to their advantage. They plan to argue that the price drop has weakened BP Exploration & Production Inc., the subsidiary that is charged with the spill violations, and the court should weigh this in imposing a penalty.
BP also argues it should get credit for leading the “largest environmental response operation in the nation’s history,” according to court pleadings. The company has incurred $43 billion of spill-related costs, including criminal and civil settlements and $14 billion for the Gulf cleanup.
Lawyers for the government acknowledge that BP spent money that it wasn’t required to, citing $846.2 million that BP paid for research into the spill, tourism promotion and seafood testing, among other expenses, that could be deducted from the penalty.
But they plan to present evidence that BP’s subsidiary is controlled by the parent and can weather the impact of a fine. Because the subsidiary “can readily access equity, capital, or borrowing from BP, it can pay the maximum penalty,” lawyers for the U.S. Justice Department wrote on Dec. 19, 2014.
Read the full story (subscription may be required).
