BP Liability Could Exceed $21 billion Under Clean Water Act

Published on August 3, 2010

According to The Wall Street Journal, scientists have estimated that 62,000 barrels of oil per day, or approximately 4.9 million barrels in total, leaked into the Gulf of Mexico due to the blowout of BP’s Macondo well.  Estimates have varied widely over the course of the disaster and it is not possible to come up with a precise figure for the leak.  BP is currently preparing to permanently kill the well through a combination of a “top kill” maneuver and the completion of two relief wells.

Under the Clean Water Act, BP will be fined at least $1,100 per barrel, but the figure could rise to $4,300 per barrel if the company is found to be “grossly negligent”.  Therefore, the worst case scenario would result in a fine exceeding $21 billion.  This would be in addition to the costs BP has already paid for the cleanup as well as the $20 billion the company agreed to deposit into an escrow account over the next four years to compensate victims of the disaster.

We have previously written about the allegations made by a Congressional committee regarding flaws in BP’s well design.  In addition, other oil exploration companies have broken with BP regarding well design and safety procedures.  BP was conspicuously absent from a consortium of four oil majors that have proactively taken steps to design a rapid response system to address future spills in the Gulf of Mexico.  While it is by no means “obvious” that BP will be charged with gross negligence, it is also clear that investors cannot discount the possibility of a massive fine being levied in addition to the already heavy costs of the disaster.

In addition to all of these negative developments, BP is the target of legislation designed to bar the company from future activity in the Gulf of Mexico.  According to the Financial Times, such efforts are expected to fail in the short run, but there can be no assurance that a finding of gross negligence will not increase political pressure to take further punitive action against the company.

Many well respected value investors including Whitney Tilson have argued in recent weeks that BP is unjustifiably cheap, and the stock price has rallied sharply since late June.  BP could very well represent a home run for value investors but political and financial risks remain very high.  The company may be able to absorb a $21 billion fine, but value would be substantially diminished in a worst case scenario involving an exit from the Gulf of Mexico due to political pressure.

Disclosure:  No position.

BP Liability Could Exceed $21 billion Under Clean Water Act
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