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BP Reaches Estimated $7.8 Billion Deal With Spill Victims

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BP Investors See Spill Deal Narrowing $44 Billion Gap
Smoke billows from controlled oil burns near the site of the BP Plc Deepwater Horizon oil spill in the Gulf of Mexico off the coast of Louisiana, U.S., on Saturday, June 19, 2010. Photographer: Derick E. Hingle/Bloomberg

March 3 (Bloomberg) -- BP Plc reached an estimated $7.8 billion settlement with businesses and individuals damaged in the 2010 Deepwater Horizon oil rig disaster that killed 11 people, removing one of three major litigation fronts facing the company over the biggest offshore spill in U.S. history.

The settlement, the amount of which both sides said may increase, will be paid out of a $20 billion trust set up to compensate spill victims, BP said yesterday in a statement. Lawyers for the plaintiffs said the accord, which must be approved by a judge, will resolve most claims for economic loss, property damage and injuries. The trust has about $14 billion remaining, and victims’ lawyers noted there isn’t a cap on damages BP must pay under the deal. BP said if the trust is exhausted, it will pay additional funds directly.

“This settlement will provide a full measure of compensation to hundreds of thousands,” Stephen J. Herman and James P. Roy, the plaintiffs’ co-liaison counsel, said in a statement. “It does the greatest amount of good for the greatest number of people.”

Billions in Fines

The U.K.-based energy company still faces as much as $17.6 billion in fines for pollution law violations in a suit by the federal government, which will now take the lead in any trial over the spill. U.S. District Judge Carl Barbier in New Orleans yesterday put off the trial scheduled to start March 5 in light of the settlement.

“The proposed settlement represents significant progress toward resolving issues from the Deepwater Horizon accident,” BP Chief Executive Officer Bob Dudley said in the statement.

Barbier said he will schedule a status conference with lawyers to discuss the settlement and set a new date for the trial, which will determine which companies are liable, and for how much, in the explosion aboard Transocean Ltd.’s rig.

Under the terms of the settlement, two groups of plaintiffs will be eligible to receive payment for their claims. The first will be those whose businesses or properties were damaged by the spill, and the second will include those who suffered injuries from spill exposure, three people familiar with the accord said.

BP may face as many as 200,000 claims from people who contend they are suffering medical problems as a result of exposure to oil or chemicals used to clean it up, two of the people said.

Judge Oversees Payouts

A claims administrator appointed by the judge will oversee the payouts, and in some cases, plaintiffs may have to prove their damages were caused by the spill, the two people said. The settlement will cover federal-court claims consolidated in New Orleans that are overseen by the Plaintiffs Steering Committee, said the people, all of whom declined to be identified because the talks were private.

BP’s Gulf Coast Claims Facility, which was set up to resolve spill claims more quickly than through litigation, will be shut down and pending claims will be transferred to a “transitional entity” administered as part of the settlement, the people said. The closing of the claims fund could come as early as March 5, two of the people said.

Also under the proposed accord, claimants who weren’t in line for payments under the existing BP claims facility, such as workers hired to clean up the oil spill, will be eligible for recovery, two of the people said.

Slap On Wrist

The settlement was hailed by Representative Edward Markey of Massachusetts, the top Democrat on the House Natural Resources Committee, who urged federal prosecutors to continue litigation against BP under the Clean Water Act.

“This is a victory for the people of the Gulf, and hopefully indicates BP’s willingness to accept financial responsibility for the rest of the penalties it owes,” Markey said in an e-mailed statement. “Billions more dollars are still outstanding for the U.S. laws broken and Gulf environment damaged by BP, and our government must not let the oil giant off with a slap on the wrist.”

John Kostyack, vice president for wildlife conservation for the National Wildlife Federation in Reston, Virginia, said the terms of the settlement appeared favorable to spill victims.

“It’s a step in the right direction, but we still have a long way to go,” Kostyack said in an interview, pointing to the government’s outstanding claims for Clean Water Act and other federal law violations. “Justice still hasn’t been done for the Gulf of Mexico.”

‘Rational Range’

Jason Kenney, an analyst at Banco Santander SA, called the proposed accord “a positive step” and “within the rational range of claim amounts assumed already in provisioning by BP.”

“While there are still settlements to be made with key plaintiffs, the reality is that sensible estimates for claims have been made,” Kenney, who has a buy rating for BP, said in an e-mail. “With the worst case scenario analysis looking increasingly unlikely, the discount in BP’s share price can also begin to unwind.”

BP rose to a 13-month high above 500 pence in London trading early this week after news a settlement was being negotiated. The stock may gain a further 15 percent if the company keeps payments for the spill within $10 billion of the $37 billion it has already set aside in costs, broker Brewin Dolphin Ltd. said at the time.

Stable Outlook

BP would be able to absorb as much as $40 billion of costs related to the spill and still maintain a stable outlook on its A2 debt rating, which is five levels above the lowest investment grade, Moody’s Investors Service said Feb. 24.

Some analysts caution that settlements could be large enough that BP shares fall. The cost may reach as much as $25 billion in addition to payments already made, making the total cost of the spill higher than provisioned, according to Morgan Stanley & Co. analyst Martijn Rats.

BP is still down 23 percent since the explosion. The company closed at 642.50 pence on April 19, 2010, the day before the disaster. Yesterday it rose 10 pence to 496.50 in London trading.

Under the proposed accord, if “definitive and fully documented agreements” aren’t reached within 45 days, either side has the right to terminate the settlement, according to BP’s statement. The deal will allow victims who aren’t satisfied with it to “opt out,” according to the London-based company.

Won’t Increase Charge

BP said the proposed settlement won’t increase the $37.2 billion charge it previously recorded in its financial statements for costs associated with the spill. That figure includes $20 billion BP set aside for the claims trust fund, from which the proposed settlement payout will be derived.

The fund will also be used to pay “state and local government claims, state and local response costs, natural resources damages and related claims,” BP said.

So far, BP said it has spent more than $22 billion on the spill, which breaks down to $8.1 billion to individuals, businesses and government entities and $14 billion on operational response.

The proposed settlement includes $2.3 billion earmarked for economic losses related to the seafood industry in the Gulf of Mexico, the company said. It doesn’t include pollution claims by the U.S. government, or “certain other claims against BP, such as securities and shareholder claims” pending in separate litigation consolidated in federal court in Houston.

Wyn Hornbuckle, a Justice Department spokesman, said yesterday in an e-mail the government hopes the announced settlement “will provide swift and sure compensation to those harmed by the Deepwater Horizon oil spill.”

Maybe Not Enough

BP warned that, although the accord is for $7.8 billion, the $14 billion remaining in the trust may not be enough to satisfy all the costs the fund was created to address.

“It is not possible at this time to determine whether the $20 billion trust will be sufficient to satisfy all of these claims as well as those under the proposed settlement,” BP said. “Should the trust not be sufficient, payments under the proposed settlement would be made by BP directly.”

Yesterday, BP appealed a ruling by Barbier denying it access to additional insurance coverage held by Transocean. BP had filed claims with Transocean’s carriers seeking access to $750 million in coverage.

In his ruling in November, Barbier sided with Lloyd’s of London, along with other excess underwriters, who opposed the claims, contending Transocean’s contract with BP didn’t provide such coverage.

Previous Settlement Talks

Before yesterday’s settlement announcement, BP had been in talks with lawyers for spill victims over a $14 billion deal to be funded by liquidating the remainder of the claims facility, three people familiar with the matter had said.

Settlement talks between all parties have been going on for months, two people familiar with the talks have said, as the parties seek to avoid a trial over the accident. All declined to be identified because the negotiations were private.

In addition to killing the 11 workers, the April 2010 Macondo well blowout destroyed the Deepwater Horizon and sent more than 4 million barrels of oil spewing into the Gulf of Mexico over three months.

It spawned hundreds of suits against BP, Vernier, Switzerland-based Transocean, and Houston-based Halliburton Co., provider of cementing services.

The U.S. Clean Water Act lets the U.S. seek fines of as much as $1,100 for each barrel of oil spilled as a result of simple negligence, often described as a failure to exercise ordinary care. The maximum increases to $4,300 a barrel for gross negligence, or a conscious act or omission, leaving BP liable for as much as $17.6 billion.

Set Aside

BP set aside $3.5 billion to pay Clean Water Act fines based on its own lower estimate of barrels spilled and no finding of gross negligence.

U.S. Attorney General Eric Holder, whose lawyers will now be leading the way in any trial, said Feb. 28 the U.S. has a “strong” case over liability for the explosion.

“We are prepared to go to trial,” Holder said in testimony before a U.S. House Appropriations subcommittee in Washington.

A trial would cover not only federal and state government pollution claims, but also cross-claims between BP and its partner companies in the Macondo site and rig. Barbier would decide whether BP can demand those firms pick up some of the estimated $26 billion in costs spawned by the disaster.

“Deals made by other players do not change the facts of this case and we are fully prepared to argue the merits of our case based on those facts,” Lou Colasuonno, a spokesman for Transocean, said yesterday in an e-mailed statement about the settlement.

Ignored Questions

Transocean alleged in a Feb. 24 court filing that BP managers overseeing the well ignored questions about whether safety tests done hours before the blast were flawed.

Beverly Stafford, a spokeswoman for Halliburton, echoed Colasuonno’s comments.

“Halliburton will continue to defend its position regarding the Macondo well incident,” she said in a statement.

BP agreed in October to a $4 billion accord with Anadarko Petroleum Corp., which owned a 25 percent stake in the Macondo well. It also agreed to drop claims against drilling fluid provider M-I Swaco, a unit of Houston-based Schlumberger Ltd.

Attorneys for some spill victims have argued in court filings that officials of the fund, run by Washington-based lawyer Kenneth Feinberg, used “coercive tactics” to force business and property owners to accept inadequate payments for their claims and give up their rights to sue.

‘Good News’

Today, Feinberg called the settlement “good news” in a statement posted on the claims facility website. Feinberg said his team reviewed more than 1 million claims submitted by 573,000 claimants. The facility has paid about $6.1 billion to approximately 225,000 individuals and businesses in 18 months.

While lawyers for victims whose lawsuits have been consolidated before Barbier proposed yesterday’s settlement, attorneys for other spill victims may oppose it.

Brent Coon, a Houston-based lawyer representing spill victims, said in a Feb. 27 interview that the $14 billion remaining in BP’s trust fund may not provide enough compensation for those harmed in the disaster, let alone the $7.8 billion allowed for in the proposed settlement.

Plaintiffs’ lawyers and the companies still haven’t been able to pin down the total number of claims tied to the spill because filing deadlines don’t expire for a year, he said.

“The total claims could double from where they are now,” Coon said.

Steering Committee

Coon added that lawyers for the steering committee don’t represent the majority of victims in the case, which he said raises questions about their ability to act in the best interests of all claimants.

“A very small minority of lawyers are negotiating a deal that leaves them in control of the purse strings and let’s them dole it out,” he said. “I know a number of lawyers who are extraordinarily hostile to that idea.”

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: Jef Feeley in New Orleans federal court at jfeeley@bloomberg.net; Laurel Brubaker Calkins in Houston federal court at laurel@calkins.us.com; Edvard Pettersson in Los Angeles federal court at epettersson@bloomberg.net.

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

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