BP Has Road Map in Citgo Oil-Spill Case for Macondo Fine

A Citgo Petroleum Corp. oil-spill case gives a template for the way BP Plc (BP/)’s liability and penalty will be decided in the government’s Clean Water Act lawsuit over the worst U.S. offshore spill.

U.S. District Judge Richard T. Haik in Lafayette, Louisiana, ruled Sept. 29 that Citgo must pay $6 million, or $111 per barrel of oil spilled at its Lake Charles refinery in 2006. That’s about 10 percent of the maximum $1,100 under the Clean Water Act. The amount can rise to $4,300 for gross negligence.

In the BP case, U.S. District Judge Carl Barbier in New Orleans will oversee a trial to begin Feb. 27 on fault and on whether there was gross negligence, which BP denies. Barbier will use his findings in a later trial on the penalty.

The spill size and BP’s cleanup efforts may keep the penalty at the low end of the scale, said Anthony Sabino, a St. John’s University law professor in New York.

“When you get into the stratosphere of a half billion, or $1 billion, that punishment may be unjust by itself,” said Sabino, a specialist in litigation and oil-and-gas law.

A fine of $111 a barrel would be $455.1 million, using the government estimate of 4.1 million barrels spilled. The maximum amount, $1,100, would mean a $4.51 billion penalty; the top figure for gross negligence, $17.6 billion.

The company declined to comment on the litigation through a spokesman, Scott Dean. BP shares closed little changed in London at 465.6 pence.

BP’s Fine Estimate

BP set aside $3.5 billion for Clean Water Act fines for the Macondo spill, assuming $1,100 a barrel and its own estimate of 3.2 million barrels, according to an annual report extract posted on the company website.

“The actual per-barrel penalty a court may impose, or that the government might agree to in a settlement, could be lower than $1,100 per barrel if it were determined that such a lower penalty was appropriate based on the factors a court is directed to consider in assessing a penalty,” BP said.

Barbier by law must weigh eight factors in determining the penalty. “The company expects to seek assessment of a penalty lower than $1,100 per barrel based on several of these factors,” BP said on the website.

They are the seriousness of the violation, the economic benefit to the company of failing to comply with the law, the degree of the company’s culpability, other penalties imposed for the spill, the history of previous violations, efforts to minimize the effects of the discharge, the economic impact of the penalty on the violator and “any other matters as justice may require.”

Refinery’s Benefits

In his finding on the last test, Haik noted that Citgo employs 1,200 people and said the Lake Charles refinery “is one of the largest in the nation and its existence has a positive impact on the state of Louisiana.”

The $6 million penalty imposed on Citgo, owned by Petroleos de Venezuela SA, Venezuela’s state-run oil company, was based on the company’s figure of 54,000 barrels spilled, 1/76 the size of the BP spill.

The U.S. claimed Citgo was “guilty of gross negligence and willful misconduct for its failure to remove the millions of gallons of waste oil that had accumulated” in tanks for almost for almost five years before the spill, Haik wrote. The government is appealing his decision.

The judge found Citgo’s actions or inactions, while clearly negligent, didn’t “rise to the level of gross negligence or willful misconduct.”

“Its failures subject it only to those penalties arising from regular fault,” he wrote.

‘Good Recovery’

“Although the environment was significantly impacted, the evidence shows that it has made a good recovery over the following years,” the judge wrote.

In attacking the spill, Citgo, after early failures, made a “full force effort to minimize the damage,” Haik ruled. It used 1,500 people and two cleanup companies and said it spent $65 million, he wrote.

Eddie Lewis, a lawyer for Citgo, declined to comment on either spill case, other than to say he expects Haik’s decision to be upheld. The government filed a notice of appeal Nov. 30. Jason Barbeau, a Justice Department attorney, declined to comment on it.

Petroleos de Venezuela last year reported $3.2 billion in profit from $94.9 billion in revenue.

BP spent $17.7 billion last year on the response to the Macondo spill and has set up a $20 billion compensation fund for victims. Third-quarter profit was $4.9 billion, and profit for the 12 months ended Sept. 30 was $23.2 billion.

Middle Ground

Noah Hall, an environmental-law professor at Wayne State University in Detroit, said the BP penalty probably will be lower than the maximum allowed and large enough for President Barack Obama to claim the company has been punished enough.

“It’s the norm that the maximum fines are not imposed,” Hall said. “The Justice Department won’t seek the maximum, either.”

David Uhlmann, a University of Michigan law professor, predicted the government will push for more than $5 billion.

“If the government was willing to accept $1,100 a barrel, BP would have written a check for that months ago,” said Uhlmann, a former head of the Justice Department’s environmental-crimes unit.

“It’s going to be very difficult to convince the judge that the fine shouldn’t be in the billions of dollars,” he said.

Maximum Penalty Unlikely

On the possibility of the top gross-negligence fine, Uhlmann said the government “never receives the maximum civil penalty in any environmental case. The likelihood they will obtain $4,300 per barrel is all but nonexistent.”

The April 2010 Macondo well blowout and following explosion killed 11 workers and set off the worst offshore oil spill in U.S. history. The accident led to hundreds of lawsuits against London-based BP and its partners and contractors.

Barbier, who is overseeing suits over environmental and economic loss and personal injuries from the explosion and spill, was named to the bench by President Bill Clinton. Haik, the Citgo judge, was appointed by President George H. W. Bush.

The U.S. last year sued BP; Transocean Ltd., the Vernier, Switzerland-based owner of the Deepwater Horizon drilling rig that exploded; and the minority partners in the well, Anadarko Petroleum Corp. (APC) and Mitsui & Co. (8031)’s Moex Offshore LLC unit.

The oil company asked Barbier to exclude evidence in the liability phase about incidents unrelated to the Macondo well, including its 2006 oil spill in Prudhoe Bay off Alaska’s North Shore and a 2005 explosion at its Texas City, Texas, plant.

Prior Fines

The company paid a $50 million fine for violating the Clean Air Act in Texas and a $20 million fine after pleading guilty to a misdemeanor violation of the Clean Water Act in Alaska.

The U.S. asked the judge to allow evidence of prior acts to help determine “whether BP should be subject to heightened penalties under the Clean Water Act’s provisions for gross negligence and willful misconduct.”

BP and the Justice Department may negotiate a settlement, with the company agreeing to pay $1 billion to $2 billion, said Hall of Wayne State.

“This is more of a political decision than a legal decision,” Hall said. “This will probably end in a settlement with a figure that will allow President Obama to say he hit BP with the largest civil environmental fine in U.S. history, while also assuring BP investors.”

The BP case is U.S. v. BP Exploration & Production Inc., 2:10-cv-04536, U.S. District Court, Eastern District of Louisiana (New Orleans). The case is part of In Re Oil Spill by the Oil Rig Deepwater Horizon in the Gulf of Mexico on April 20, 2010, MDL-2179, U.S. District Court, Eastern District of Louisiana (New Orleans).

The Citgo case is U.S. v. Citgo Petroleum Corp., 2:08- cv-00893, U.S. District Court, Western District of Louisiana (Lafayette).

To contact the reporters on this story: Margaret Cronin Fisk in Detroit at mcfisk@bloomberg.net; Brian Swint in London at bswint@bloomberg.net.

To contact the editors responsible for this story: Michael Hytha at mhytha@bloomberg.net; Will Kennedy at wkennedy3@bloomberg.net.

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