BP Fights to Shrink Gulf Spill Estimate to Cap Verdict

Sept. 30 (Bloomberg) –- Bloomberg’s Brian Swint reports the latest on the BP trial for the Gulf of Mexico oil spill which is entering it’s second phase involving the size of the spill and how prepared the company was. He speaks to Anna Edwards and Mark Barton on Bloomberg Television’s “Countdown.” (Source: Bloomberg)

BP Plc (BP/), seeking to reduce potential water-pollution fines of as much as $18 billion, is trying to convince a judge that less oil spilled in the 2010 Gulf of Mexico disaster than the U.S. claims and that it capped the deep-sea gusher as quickly as possible.

U.S. District Judge Carl Barbier in New Orleans, who is presiding over the trial that began today, is already weighing whether the company’s actions in causing the April 20, 2010, blowout and subsequent spill reached the level of gross negligence, which would trigger higher fines and punitive damages.

Decisions in phase two of the trial, covering the size of the spill and BP’s efforts to contain it, might mean billions of dollars to the company and its co-defendants.

“The evidence will show BP’s outright lies caused the oil to flow” for 87 days, plaintiffs’ attorney Brian Barr said today in his opening statement.

BP did everything it could to stop the flow of oil, Mike Brock, a lawyer for the company, said in his opening statement. Critics who suggest otherwise are engaging in “Monday morning quarterbacking at its worst,” said Brock, a former lineman for the University of Alabama.

A finding by Barbier supporting BP’s assessment that the spill was 40 percent smaller than the government’s estimate might shave as much as $7.5 billion from the maximum fines the company faces under the U.S. Clean Water Act.

Source: Office of Judge Barbier via Bloomberg

U.S. District Judge Carl Barbier of New Orleans poses in this undated handout photo released to the media on Feb. 23, 2012. Close

U.S. District Judge Carl Barbier of New Orleans poses in this undated handout photo... Read More

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Source: Office of Judge Barbier via Bloomberg

U.S. District Judge Carl Barbier of New Orleans poses in this undated handout photo released to the media on Feb. 23, 2012.

High Stakes

A finding that BP’s actions let the spill continue longer than it might have might save its co-defendants, Transocean Ltd. (RIG) and Halliburton Co. (HAL), as much as 70 percent of any judgments against them.

“It’s a high-risk gamble for both sides,” said John Levy, an attorney in Cherry Hill, New Jersey, specializing in complex litigation, including maritime and environmental law.

“The judge is probably going to compromise” on the volume estimates, said Levy of Montgomery McCracken Walker & Rhoads LLP. Given the participation by the U.S. government and other experts in the spill response, getting a judge to find gross negligence will be “a long shot for the plaintiffs,” he said.

BP has taken a charge of $42 billion related to the spill, according to its earnings statement released in July. The company has spent more than $26 billion including cleanup and claims, BP said on its website.

Share Drop

BP shares fell as much as 40 percent in the weeks after the blowout and remained down 31 percent from the day before the incident at the beginning of trading today. BP fell 1.8 percent to 433.10 pence today in London.

Photographer: Chris Ratcliffe/Bloomberg

The headquarters of BP Plc stand behind metal railings in St. James's Square in London. Close

The headquarters of BP Plc stand behind metal railings in St. James's Square in London.

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Photographer: Chris Ratcliffe/Bloomberg

The headquarters of BP Plc stand behind metal railings in St. James's Square in London.

The trial “is still weighing on the shares,” said Peter Hutton, an analyst at RBC Capital Markets in London. “Investors are rightly concerned about the risks.”

Lawyers for the plaintiffs and the primary contractors on the project, Vernier, Switzerland-based Transocean and Houston-based Halliburton, claim BP delayed capping the well by misrepresenting the size of the spill and the chances of the first effort to contain it. The spill victims also claim that BP wasn’t prepared for a deep-water blowout.

“BP willfully, with the intent to deceive, misrepresented its knowledge of the flow rate causing it to eschew available source control methods that would have stopped the flow of oil weeks earlier,” lawyers for the plaintiffs and co-defendants said in a Sept. 18 court filing.

Safest Option

BP has countered that its estimates on the flow rate weren’t used to determine which method to use to stop the gusher and that it tried the safest option first. The London-based company also contends the U.S. approved and oversaw all the decisions on capping the Macondo well.

“One overarching principle governed the team’s work, ‘Don’t make it worse,’” BP lawyers said in court papers. The joint BP and U.S. well-control team’s goal of minimizing the risk of causing an uncontrollable underground blowout “accounted for the time required to shut in the Macondo well,” the company said.

“No one wanted to close the Macondo well more quickly than BP, but BP was faithful to the key principles that guided the entire source control effort, which was to proceed with caution and to obey the direction of the federal leadership,” company lawyers said in court papers.

The blowout of the Macondo well off the coast of Louisiana in April 2010 killed 11 people aboard the Deepwater Horizon drilling rig and set off the largest offshore oil spill in U.S. history. The accident sparked hundreds of lawsuits against BP, as well as Transocean, owner of the rig that burned and sank, and Halliburton, which provided cement services for the project.

Rising Cost

BP last year reached a partial settlement, initially valued at $7.8 billion, of most private-party claims. The company has since increased the estimated cost of the agreement to $9.6 billion or more, based what it considers a faulty interpretation of claims by the administrator of the settlement.

BP has appealed the interpretation. The company also has sought a reduction in the budget request from the claims administrator, calling it excessive.

U.S. Magistrate Judge Sally Shushan today ordered BP to provide $111 million in four days to fund the claims administrator’s fourth-quarter budget, after the program reduced its request by $20 million. “Further reductions sought by BP are not currently supported by sufficient evidence,” Shushan said.

Phase One

The first phase of the trial, which started in February, addressed actions by BP, Transocean and Halliburton leading to the explosion in the Macondo well and the sinking of the Deepwater Horizon.

The second phase, which began today, is split into two parts, with this week’s considering allegations that BP’s failings caused the spill to last longer. Next week’s will determine how much oil was spilled into the Gulf of Mexico.

The U.S. government contends BP’s well spewed 4.2 million barrels of oil into the Gulf before it was capped almost three months later. BP estimates the flow at 2.45 million barrels. Both agree that their numbers would have been higher if 810,000 barrels hadn’t been captured by a siphoning device at the wellhead before it could spill into the Gulf.

Barr today called government regulators’ approval of the spill response plan “irrelevant.”

“The government is not in the business of drilling wells. That’s BP’s business,” he said. “BP’s plan was nothing more than a plan to plan.” BP knew as early as 1991 that “it needed to do more” to prepare an oil spill response, he said.

Maximum Penalty

If the company is found by Barbier to have acted with gross negligence in causing the explosion or extending the spill, it faces a maximum penalty of $18 billion under the Clean Water Act, using the government estimate, and a maximum of $10.5 billion, using the BP assessment. The maximum fines if Barbier rejects gross negligence would be $2.7 billion under the BP assessment and $4.6 billion using the government numbers.

Under the U.S. Clean Water Act, polluters face penalties of a maximum of $1,100 per barrel spilled, unless they’re found to have acted in a grossly negligent or reckless manner in causing the spill. The maximum penalty, with a finding of gross negligence, is $4,300 per barrel. A judge will determine the fines, using multiple factors including BP’s attempts to mitigate the event.

The nature and extent of injuries to natural resources “may also turn in part on the quantity of oil released,” Justice Department lawyers said in a Sept. 5 filing. BP still faces unspecified billions of dollars in additional expenses to restore the damaged gulf coast environment, under U.S. law.

New Alignment

Transocean and Halliburton, defendants in the first phase of the trial over the fault for the blowout, are aligned in this phase with the plaintiffs suing BP, including the states of Louisiana and Alabama. The two contractors contend that the well could have been capped as early as May 15, 2010, reducing by about 70 percent the amount of oil ultimately spilled.

The co-defendants and plaintiffs claim BP was grossly negligent in its response to the spill. BP denies any negligence, much less the higher allegation of gross negligence.

The allegations revolve around a method BP used to try to cap the well, called Top Kill, which involved pumping drilling mud and other material into the Deepwater Horizon’s blowout preventer, which was still atop the well on the sea floor. Top Kill failed in late May 2010 and the well wasn’t capped until July.

Rejected Method

BP rejected another proposed method, called BOP-on-BOP, which would have landed a second blowout preventer onto the lower portion of the failed Deepwater Horizon blowout preventer, because it would have precluded using an alternate solution if that effort failed, the company said.

“BP repeatedly withheld evidence showing significantly higher rates” of barrels of oil per day than the 5,000 barrels daily represented to the government, Brad Brian, Transocean’s attorney, told the judge today.

“With the heavy flow rate they knew was coming out of that well, Top Kill was not a slam dunk,” Brian said. BP’s consultants knew it would fail, he said.

Even after Top Kill failed, “BP would still not come clean about the flow rate,” Brian said. “The false diagnosis” shaped the recovery effort and “delayed the capping of the well for many, many weeks,” he said.

“BP knew or should have known from its modeling that the top kill effort was likely to fail,” John L Wilson, a hydrologist at New Mexico Tech in Socorro, New Mexico, testified today, reading a quote from his study posted on a screen.

Flow Rate

Top Kill was destined to fail because the well flow rate exceeded 15,000 barrels per day from the reservoir, said Wilson, an expert for the plaintiffs.

“It defies common sense,” that BP knew Top Kill wouldn’t work and did it anyway, Brock, the company lawyer, said in his opening statement today.

“It was not possible” to accurately estimate the flow of oil following the blowout, he said, citing the unknown condition of the BOP on the sunken rig.

“The United States of America was not misled,” Brock said. Admiral Thad Allen, the U.S. commander of the spill response, recognized that flow rate estimates were inconsistent, Brock said.

“As Admiral Allen has said, ‘All God’s children had flow rate estimates,’” Brock said. BP was not a member of the Flow Rate Technical Group of scientists and engineers formed before Top Kill, he said.

BP ‘Circle’

BP took multiple steps that were the “industry standard” in the days after the blowout to stop the gusher, Brock said. This included immediately using undersea robots to try and activate the BOP and drilling relief wells, starting on May 2, 2010.

Brock played a video clip of his deposition with Allen taken last year. Brock asked the national incident commander how he would characterize BP’s response to the spill.

“I would characterize it at a very high level,” Allen replied in the deposition.

The well was finally capped on July 15, 2010, through the use of a device called a capping stack. The plaintiffs claim BP should have had this device available before the blowout.

The capping stack was a unique response to a unique event, BP has countered in court papers. The government has never required having a pre-built capping stack and no one in the oil industry has ever had one, BP said.

“Before this, no one had a capping stack,” Brock said today of the remedy.

Two Parts

The source control part of this phase of the trial is scheduled to last one week. The segment on quantification of the spill is scheduled to take three weeks.

Barbier hasn’t indicated when he will decide on this phase, or on the issues of fault and gross negligence, which were tried in the first one.

Anadarko Petroleum Corp. (APC) is also a defendant in the segment determining the size of the spill. The U.S. has claimed that Anadarko, as an owner of a 25 percent share of the well, is liable for Clean Water Act fines, though Barbier ruled it can’t be held responsible for the incident or the response.

The case is In re Oil Spill by the Oil Rig Deepwater Horizon in the Gulf of Mexico on April 20, 2010, 10-md-02179, 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; Allen Johnson Jr. in federal court in New Orleans at ajohnson182@bloomberg.net.

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

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