BP Waiver of $75 Million Spill Damage Cap May Recognize Liability Reality

BP Plc’s pledge to waive a $75 million limit on environmental damages for its Gulf of Mexico oil spill may prove an empty gesture if safety violations played a role in the disaster.

The U.S. Oil Pollution Act of 1990 requires parties responsible for a spill to pay cleanup costs, while it limits payouts for private economic and public natural-resource claims to $75 million. Exceptions include gross negligence, willful misconduct and the violation of safety rules.

BP has said the cap is “irrelevant” and that it will pay “legitimate” claims. The offer, experts and lawyers suing BP said, is hollow in light of violations they claim led to the Gulf disaster -- violations that remove the $75 million ceiling.

“They know perfectly well there will be some violation of federal safety regulations, so there will be no cap,” said Jeffrey Rachlinski, an environmental law professor at Cornell University in Ithaca, New York.

The Deepwater Horizon rig, leased to BP, blew up off the coast of Louisiana on April 20, killing 11 workers and releasing more than 5,000 barrels of crude a day. The federal government and four Gulf states are assessing damage to coastlines and wetlands, and more than 130 private lawsuits have been filed by fishermen, property owners and tourist businesses.

Exxon Valdez

Exxon Mobil Corp. and its predecessor eventually spent $2 billion to clean up the smaller 1989 spill by the Exxon Valdez oil tanker, and $2.3 billion more for damaging natural resources and for private parties’ claims. With the scale of the Gulf spill still unknown, federal and state governments have yet to file claims against BP for reimbursement.

The 1990 statute, which imposed liability as well as a cap, was passed because of the Exxon Valdez spill. It requires responsible parties to restore the land or “provide some equivalent resource to offset the loss,” said Brad Marten, a Seattle-based attorney who represented Alaska in litigation over the Valdez spill.

Trustees for natural resources can collect “the cost of restoring, rehabilitating, replacing or acquiring the equivalent of the damaged natural resources,” according to the 1990 law. Such resources include land, fish, wildlife, wetlands, groundwater and drinking water.

“It doesn’t have to be a lethal injury -- it can be an injury to a breeding ground or to the ability to reproduce,” Marten said. If a resource can’t be rehabilitated, the defendant has to provide something of equal value, for instance by creating a new wetland, he said.

Will Pay Claims

Scott Dean, a spokesman for BP, declined to discuss alleged safety violations or potential liability under the 1990 law.

“That is for the investigation to determine,” Dean said in an e-mail. BP believes claims will exceed $75 million and the company will “pay those claims described by Congress” in the Oil Pollution Act, he said.

BP has been attempting to cap the leak, saying this week that it has decreased the rate of spillage. Some scientists, including Steve Wereley, an associate professor of mechanical engineering at Purdue University in West Lafayette, Indiana, claim the original estimates of 5,000 barrels a day are too low and the spill may be more than 10 times bigger.

Heavy oil, meanwhile, has reached the wetlands in the Pass a Loutre area of Plaquemines Parish, Louisiana, Governor Bobby Jindal said at a press conference this week. “These are not tar balls,” Jindal said. “This is heavy oil.”

A thin layer of oil already has reached the Loop Current, water that flows from the Gulf around Florida to the Atlantic Ocean, U.S. officials said.

Claims of Violations

Lawyers representing Gulf fishermen and BP shareholders have accused the companies involved in the drilling operation of a range of safety violations. These include using an improper cementing technique to seal the well, failing to adequately test and maintain blowout prevention equipment and drilling deeper than BP’s federal permit allowed.

At a May 12 congressional hearing, U.S. Representative Henry Waxman of California cited BP reports that the well had failed a pressure test hours before the Deepwater Horizon exploded.

BP Americas Chairman Lamar McKay, who told Congress that the company will pay “legitimate claims” and that the cap is “irrelevant,” testified that engineers trying to close the blowout preventer using robot submarines were hampered by drawings that didn’t reflect modifications to the equipment.

With McKay’s testimony and evidence cited by plaintiffs’ lawyers, breaching the damage cap “would be a cakewalk in this case,” New Orleans attorney Joe Bruno said in an interview. “There were safety violations; they were wanton about disregarding warnings.”

‘A Huge Risk’

Bruno, who represents New Orleans residents suing the Army Corps of Engineers over the levee break following Hurricane Katrina in 2005, hasn’t filed any lawsuits over the BP spill.

Federal and state environmental claims over damage to wetlands, waterways and wildlife are a “a huge risk” to BP and the other companies, and may cost more than lawsuits by private parties, said Tom McGarity, a law professor at the University of Texas in Austin.

“Fishermen are directly affected by the loss of a particular species,” McGarity said. “The natural resource damages claims don’t get into the worth of a species to fishermen, but to mankind.”

U.S. President Barack Obama proposed raising the limit to $10 billion while lawmakers suggested eliminating it.

Legal experts point to several examples in which companies were forced to pay millions of dollars to remediate serious environmental damage on property worth a fraction of that being damaged by the Gulf spill.

Louisiana Pollution Case

In a Louisiana pollution case, Exxon was told to pay $56.1 million to restore a contaminated oilfield pipe-cleaning facility near New Orleans worth only $145,000, according to court records. In 2005, an appeals court cut punitive damages awarded by jurors to $112 million from $1 billion.

In the Gulf spill, many companies are vulnerable to litigation. In private lawsuits filed from Texas to Florida, London-based BP, as owner of the well, and Transocean Ltd., the owner of the rig, are named as defendants. Also sued in more than 100 complaints are Cameron International Corp. and Halliburton Energy Services Inc., which provided blowout- prevention equipment and drilling services, respectively.

Any of these companies may be included in government efforts to recoup money spent on the cleanup, said Rachlinski. Though primarily responsible as the leaseholder, BP may seek to pass on liability by suing the other firms as well.

Anadarko, Mitsui

Also involved in the Deepwater Horizon well were Anadarko Petroleum Corp., which owns a 25 percent stake, and Mitsui & Co. which has a 10 percent share, said Philip Weiss, an analyst at Argus Research in New York.

Michael Geczi of Switzerland-based Transocean didn’t return a call seeking comment. Scott Amann, a spokesman for Houston- based Cameron, declined to comment.

“All questions on liabilities will be answered in time,” said John Christiansen, a spokesman for The Woodlands, Texas- based Anadarko. He said the company is focused on stopping the spill and cleaning it up.

Anadarko has insurance coverage of about $177.5 million on the well, the company said in regulatory filings.

Cathy Mann, a spokeswoman for Halliburton, said the Houston-based company is assisting “in efforts to identify the factors that may have led up to the disaster.” Akio Kamiya, a Mitsui spokesman, didn’t return an e-mail seeking comment.

Exxon Valdez Payout

In 1991, Exxon agreed to pay $900 million to settle Alaska and U.S. claims for environmental damages to public resources caused by the Valdez spill, said Marten, the Seattle lawyer. That included restoring habitats and fisheries.

In a class action filed by non-governmental parties also damaged in that disaster, Irving, Texas-based Exxon was eventually ordered to pay an additional $1.4 billion, said attorney Brian O’Neill, who represented the plaintiffs.

In the Gulf spill, U.S. and state governments have already begun assessing the value of endangered resources, according to the National Oceanic and Atmospheric Administration. The agency is coordinating with natural resource trustees in Alabama, Mississippi, Florida and Louisiana, and a preliminary assessment “is being done cooperatively with BP,” the NOAA said. BP must pay for the assessment, Marten said, citing the 1990 law.

Mississippi Attorney General Jim Hood ordered state agencies to photograph and gather samples from all coastal environments after the well blew out, to establish a baseline for what conditions existed before the spill reaches shore.

“We’ve done the grass counts, the fish counts, the shrimp counts, so we’re prepared for a before-and-after picture, if the worst comes,” Hood said in an interview.

Parish Files Claim

This week, the district attorney in Louisiana’s coastal Terrebonne Parish filed one of the first governmental claims for natural-resource damages following the spill.

The suit demands that BP, under state wildlife laws, repay “the value of each fish, wild bird, wild quadruped and other wildlife and aquatic life unlawfully killed” or injured.

Federal and state government claims for fouled marshes and coastal waters may exceed the $10 billion proposed by Obama, said Houston attorney Tommy Fibich, who represents fishermen.

“No matter what the land or water was worth, or how much it costs to restore it, you’ve got to put it back to the way it was before,” Fibich said in an interview.

BP fell 22.1 pence to 506.7 pence in London at 4:45 p.m. local time. The shares have declined 23 percent since April 20.

The company’s cash reserves are enough to pay any judgments, “even if they spent $20 billion on this,” said Argus analyst Weiss. “I haven’t heard any numbers yet that the company would be hamstrung.”

Still, Weiss said he downgraded BP shares to “hold” from a “buy” recommendation on April 30.

“There are so many unknowns, so many things that have yet to be determined,” he said.

To contact the reporters on this story: Margaret Cronin Fisk in Southfield, Michigan, at mcfisk@bloomberg.net and; Laurel Brubaker Calkins in Houston at laurel@calkins.us.com.

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