BP Seeks to Prove Gulf Spill Errors Weren’t Negligence

BP Plc (BP/), Transocean Ltd. (RIG) and Halliburton Co. (HAL) must convince a federal judge that mistakes that led to the 2010 Gulf of Mexico oil spill don’t amount to gross negligence if they are to avoid billions of dollars in damages for the largest offshore oil spill in U.S. history.

The trial, which began today, is one in which the judge and not a jury will weigh the evidence. It focuses on fault and whether one or more of the companies acted with willful or wanton misconduct or reckless indifference -- the legal requirement for establishing gross negligence.

For BP, owner of the Macondo well that blew up in the Gulf, a finding of gross negligence would mean the company is liable to the U.S. for as much as $17.6 billion in Clean Water Act fines, as well as unspecified punitive damages to claimants who weren’t part of the $8.5 billion settlement the company reached last year. For Transocean and Halliburton, findings of gross negligence would mean the companies can be held liable for punitive damages for all plaintiffs.

Going to trial “is a big gamble,” said John Levy, a lawyer specializing in complex litigation, including maritime and environmental law. “If you go to trial with this much money at stake, someone isn’t evaluating it correctly.”

Photographer: Kari Goodnough/Bloomberg

Oil floats in the Gulf of Mexico near Orange Beach, Alabama on June 18, 2010. BP, over-budget and behind schedule for the Macondo well, cut corners and ignored tests showing unsafe pressure levels as it tried to complete the project, according to the plaintiffs. Close

Oil floats in the Gulf of Mexico near Orange Beach, Alabama on June 18, 2010. BP,... Read More

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Photographer: Kari Goodnough/Bloomberg

Oil floats in the Gulf of Mexico near Orange Beach, Alabama on June 18, 2010. BP, over-budget and behind schedule for the Macondo well, cut corners and ignored tests showing unsafe pressure levels as it tried to complete the project, according to the plaintiffs.

Unsafe Pressure

The blowout and explosion aboard the Deepwater Horizon drilling rig killed 11 workers and spilled more than 4 million barrels of oil into the Gulf of Mexico. The accident sparked hundreds of lawsuits against London-based BP, Vernier, Switzerland-based Transocean, owner of the Deepwater Horizon, and Houston-based Halliburton, which provided cement for the well.

BP, over-budget and behind schedule for the Macondo well, cut corners and ignored tests showing unsafe pressure levels as it tried to complete the project, according to the plaintiffs. They also claim that Halliburton’s cement job was defective and that Transocean disabled safety systems and failed to maintain the rig and adequately train its crew.

BP lodged complaints against its contractors, with its own claims that Transocean failed to maintain the drilling rig and Halliburton provided defective cementing services and concealed problems with the cement before and after the explosion.

Transocean and Halliburton pointed fingers back at BP. BP rose 1.6 percent to 451.15 pence in London.

U.S., States

The U.S. and Gulf states are considering a $16 billion accord with BP over pollution fines and natural-resource damages claims, the Wall Street Journal reported, citing unidentified people familiar with the matter. Scott Dean, a spokesman for BP, declined to comment, as did Joy Patterson, a spokeswoman for Alabama Attorney General Luther Strange, and Amanda Larkins, spokeswoman for Louisiana Attorney General Buddy Caldwell. Wyn Hornbuckle, a Justice Department spokesman, also declined to comment on any settlement proposal.

Photographer: Derick E. Hingle/Bloomberg

Birds perch on pipes for an oil well in the Gulf of Mexico off the coast of Louisiana on July 15, 2010. The blowout and explosion aboard the Deepwater Horizon drilling rig killed 11 workers and spilled more than 4 million barrels of oil into the Gulf of Mexico. Close

Birds perch on pipes for an oil well in the Gulf of Mexico off the coast of Louisiana... Read More

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Photographer: Derick E. Hingle/Bloomberg

Birds perch on pipes for an oil well in the Gulf of Mexico off the coast of Louisiana on July 15, 2010. The blowout and explosion aboard the Deepwater Horizon drilling rig killed 11 workers and spilled more than 4 million barrels of oil into the Gulf of Mexico.

U.S. District Judge Carl Barbier will apply maritime law, which governs this phase of the litigation. A trial on efforts to contain the spill is set for September. One or more trials on damages will follow, barring any out-of-court settlements.

“We believe that there is overwhelming evidence that BP, Transocean and Halliburton were all grossly negligent, and we look forward to introducing that evidence at trial,” said Steve Herman, a lead attorney for the plaintiffs.

Barbier will apportion fault for the explosion and spill among BP and its subcontractors. Halliburton and Transocean would only be responsible for punitive damages, based on Barbier’s ruling last year that the project contract required BP to indemnify them for compensatory damages.

Banks, Casinos

BP is responsible for any compensatory damages awarded to plaintiffs who haven’t previously settled. These plaintiffs, including businesses such as banks and casinos and those harmed by the deep-water drilling moratorium imposed by the U.S. after the spill, are also seeking punitive damages. BP has said it will fight these claims.

The companies’ chances of defeating allegations of gross negligence are improved by the trial being before a judge and not a jury, said Levy, who represents companies in insurance, product liability and environmental disputes and isn’t involved in this case.

“Judges rarely award punitive damages,” he said in a phone interview. “Judges see mistakes, even horrible errors in judgment, as being resolved by fair compensatory damages.”

Shares for all three companies plummeted after the disaster before rebounding.

BP Risk

Any movement in the shares directly because of the trial will mainly relate to the market’s perception of the total amount owed by each of the three companies, Brian Youngberg, an analyst at Edward Jones in St. Louis, said in a phone interview.

BP shares are seen as having the greatest risk during the trial, he said. Even so, investor concern has subsided.

“During the trial period investors will be looking at more of the underlying operations of these companies,” Youngberg said.

Investors are resigned to the companies going to trial, Youngberg said.

“There had been a bit of optimism built in prior to this past week that there would be a settlement,” he said. “That optimism has definitely waned.” Youngberg has hold ratings on all three companies.

“There’s some numbness that’s there,” Phil Weiss, an analyst at Argus Research in New York, said in a phone interview. “The amount of overhang on these stocks now from Macondo is probably less than it was.” Weiss rates Transocean and Halliburton shares as buys and BP as hold.

Partial Settlement

The trial, initially set to begin last March, was rescheduled after BP reached a settlement with most individual and other so-called private-party plaintiffs.

The settlement, which isn’t capped, is estimated at $8.5 billion by BP and excludes claims of financial institutions, casinos, private plaintiffs in parts of Florida and Texas, and residents and businesses claiming harm from the deep-water drilling moratorium.

It also didn’t cover federal government claims and those of Gulf Coast states Louisiana and Alabama, or lawsuits against co- defendants. Lawyers for the U.S. and the two states will be presenting evidence at the trial, along with attorneys for the private parties. BP has said the states are claiming at least $34 billion in damages.

The U.S. government sued BP and Transocean in 2010 for violations of the Clean Water Act and the Oil Pollution Act, seeking fines, cleanup costs and natural-resources damages.

Transocean Guilty

Last month, Transocean pleaded guilty to a misdemeanor Clean Water Act violation and agreed to pay $1.4 billion, including $400 million in criminal penalties. The company said then it hadn’t settled natural-resource damages claims.

BP pleaded guilty to 14 federal charges, including 12 felonies, and admitted it misinterpreted a critical pressure test just before the explosion. It agreed to pay $4 billion in fines and penalties, plus $525 million to settle a Securities and Exchange Commission claim that the company underestimated the size of the spill.

Barbier hasn’t determined how the plea can be used in the trial. Barbier ruled Feb. 21 that the plaintiffs couldn’t use as evidence in the civil trial certain documents related to the criminal case, including the so-called criminal information, which spelled out federal prosecutors’ allegations against the company, as well as the indictments of three BP employees.

Pollution Fines

The plea didn’t cover the U.S. lawsuit against BP and the company remains at risk for as much as $17.6 billion in fines. The Clean Water Act provides for penalties of as much as $1,100 for each barrel spilled for simple negligence, or $4,300 a barrel if gross negligence is found.

The U.S. estimated that 4.9 million barrels gushed from the doomed Macondo well. BP and the government agreed last week that 810,000 barrels of oil that the company captured before they entered Gulf waters wouldn’t be included in Clean Water Act fine calculations. The agreement cut BP’s highest potential government fine by $3.4 billion.

The U.S. will pursue a finding of gross negligence, Hornbuckle, the Justice Department spokesman, said in an e-mail.

“We intend to prove that BP was grossly negligent and that the company engaged in willful misconduct in causing this disastrous oil spill,” he said.

“We are seeking civil penalties and a judgment that BP and others are liable without limitation for removal costs and natural resource damages -- exposure that could amount to billions of dollars,” Hornbuckle said.

‘Very High Bar’

“Gross negligence is a very high bar that BP believes cannot be met in this case,” Rupert Bondy, group general counsel of BP, said in a Feb. 19 statement. “This was a tragic accident, resulting from multiple causes and involving multiple parties.”

Beverly Stafford, a spokeswoman for Halliburton, declined to comment on the trial.

“We continue to believe that we have substantial legal arguments and defenses against any liability and that BP’s indemnity protects us,” Halliburton said this month in an SEC filing.

“The facts of the case are on Transocean’s side,” Lou Colasuonno, a spokesman for the company, said in a phone interview.

The spill victims also sued two other contractors, Cameron International Corp. (CAM), maker of the blowout preventer on the project, and M-I Swaco, a unit of Schlumberger Ltd. (SLB), that provided drilling fluid.

Cameron’s Deal

Houston-based Cameron agreed to pay BP $250 million in December 2011 in exchange for the oil company’s indemnifying it from damage claims. The settlement didn’t cover fines or penalties or punitive damages. The Schlumberger unit settled with BP last year without disclosing the terms.

Both will be at the trial as the judge weighs comparative fault for the disaster. Neither has much risk of being forced to pay more money because “they had little or no ability to make determinations or change outcomes,” said Anthony Sabino, a law professor at St. John’s University in New York who specializes in complex litigation.

“As such, they are at a remove from the main parties --and that’s good news for them,” he said. “By being outliers to the critical events here, it’s tough to say they were negligent, and nearly impossible to meet the high legal standard that they were so reckless as to constitute gross negligence and thus be liable for punitive damages.”

Joao Felix, a spokesman for Schlumberger, and Jeff Altamari, spokesman for Cameron, declined to comment on the trial.

Well Partners

BP’s partners in the well, Anadarko Petroleum Corp. (APC) and Mitsui & Co. (8031)’s MOEX Offshore 2007, won’t be part of this trial. Anadarko, which had a 25 percent share in the Macondo well, agreed to pay BP $4 billion to settle its share of oil spill claims. MOEX, which had a 10 percent share, settled for $1.07 billion. Barbier has ruled that MOEX and Anadarko can’t be sued under maritime law because they didn’t have control of the operation.

The U.S. also sued the partner firms under pollution laws. MOEX settled government claims for $90 million last year, while Anadarko still has U.S. claims pending against it. John Christiansen, an Anadarko spokesman, contended that any potential damages would have “no significant impact” on the company. “We had no culpability,” he said.

Settlement Talks

The trial is expected to last three months. Barbier hasn’t indicated if he will make a decision on the level of negligence after this phase, or wait until after the next segment, which will address the size of the spill and the efforts to contain it.

Settlement negotiations will probably continue through the trial, said St. John’s Sabino.

“I still expect a settlement before judgment,” he said. “Not because they want to, but because they have to.”

“Anything is possible if you leave it in the hands of the judge,” Sabino said. “Why risk having Judge Barbier rule against you to any degree when you can lock in a settlement?”

A settlement would eliminate risk and replace it with certainty, he said.

“A settlement is something you can live with,” he said.

The case is 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).

To contact the reporters on this story: Margaret Cronin Fisk in Detroit at mcfisk@bloomberg.net; Jef Feeley in New Orleans federal court at jfeeley@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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