BP Temporarily Banned From Contracts With U.S. Government

BP and Chevron Are Riskier Bets for Oil Investors
A boom is deployed to contain oil in Perdido Bay in Orange Beach, Alabama, on June 19, 2010. The BP Plc oil spill, which began when the leased Transocean Deepwater Horizon oil rig exploded on April 20, gushed as much as 60,000 barrels of oil a day into the Gulf of Mexico, the government said. Photographer: Kari Goodnough/Bloomberg

BP Plc, which agreed to plead guilty to criminal charges after the worst oil spill in U.S. history, will be suspended from winning new contracts from the federal government, the U.S. Environmental Protection Agency said today.

The EPA said it imposed the ban because the company’s conduct during the 2010 Deepwater Horizon disaster showed a “lack of business integrity.” The action doesn’t affect existing contracts, and BP said it already was working to get the ban lifted. The incident killed 11 people and caused the largest environmental disaster in U.S. history, it said.

BP on Nov. 15 reached a settlement with the Justice Department, agreeing to pay $4.5 billion to end all criminal charges and resolve securities claims relating to the Gulf explosion. At the time, the company said it hadn’t been advised of any government action on contracts and specialists said it might escape even a temporary ban.

The suspension “sends the signal to BP, and incidentally to the whole oil and gas drilling industry, that the United States will take strong steps to protect itself against a recurrence of that tragedy,” said Charles Tiefer, a law professor at the University of Baltimore who focuses on government contracting.

‘Negative Mark’

“BP quite likely did more damage to the United States than any other federal contractor that I can remember, in terms of inflicting many billion dollars of environmental harm and destruction,” he said.

Tiefer, who served on the U.S. Commission on Wartime Contracting, added that the EPA’s action will “take a toll” on BP. Even after the suspension expires, BP may have “an extremely negative mark” with the U.S. government, which includes a contractor’s past performance as part of its evaluations for awards, he said.

While the EPA didn’t say how long the ban would last, suspensions generally don’t exceed 18 months or until the end of legal proceedings.

In a statement, the company said it was working with the EPA to demonstrate “present responsibility” so it can have the suspension lifted.

“BP has been in regular dialogue with the EPA and has already provided both a present responsibility statement of more than 100 pages and supplemental answers to the EPA’s questions based on that submission,” it wrote.

Proposed Agreement

The agency has informed BP that it is preparing a proposed agreement that “would effectively resolve and lift this temporary suspension,” it said. “The EPA notified BP that such a draft agreement would be available soon.”

BP shares fell less than 1 percent to close at 429.4 pence in London. They had dropped as much as 2.9 percent after the suspension was announced.

BP produces about 770,000 barrels of oil equivalent a day in the U.S., more than 20 percent of the company’s global output. BP had revenues of $131 billion in U.S. last year, more than a third of its global total.

The company in fiscal year 2011 was the Defense Department’s biggest fuel supplier with awards valued at about $1.35 billion. Its contracts with the military surged 33 percent from $1.02 billion in the previous year, according to data compiled by Bloomberg.

Defense Contracts

The firm received 49 percent more in defense contracts in 2011 than the No. 2 fuel supplier, San Antonio-based Valero Energy Corp. BP won a $782 million Pentagon award for fuel in May even as it continued to face legal challenges. Full fiscal 2012 figures aren’t yet available.

“The suspension of BP is surprising and a win for holding all companies, big or small, accountable to the federal government and taxpayers,” said Scott Amey, general counsel for the Washington-based Project on Government Oversight.

Amey questioned whether the government could put BP “in timeout” because it is a top federal contractor supplying petroleum products to the Pentagon.

“Let’s see how long the suspension lasts or if the military grants any waivers,” he said.

The company will be able to seek permits to drill on parcels for which it has already been awarded leases in previous auctions, said Tommy Beaudreau, director of the U.S. Bureau of Ocean Energy Management.

Oil Leases

BP didn’t bid in an auction for offshore oil leases that were opened today, Beaudreau said. The leases give winning bidders the right to seek permits to drill in sections of the Gulf of Mexico. The agency said the company wouldn’t have been awarded any of the leases even if it had been the high bidder, due to the temporary ban.

“That suspension applies only to new contracts with the federal government and does not apply to activities under BP’s existing leases.” Beaudreau said.

News of the suspension follows a Nov. 23 announcement that Lamar McKay, head of BP’s U.S. operations, will move to London to become chief executive officer of the company’s exploration and production unit called Upstream. McKay will report to Chief Executive Officer Bob Dudley.

“This signal from the U.S. on management integrity has real significance,” said Peter Hutton, an analyst for RBC Capital Markets.

Boeing Ban

The critical question is whether this is “a shot across BP’s bows to get settlement, or a more sustained stance,” he said.

Large companies or their divisions have been suspended or debarred in the past. The Air Force in 2003 suspended three units of Boeing Co. in response to allegations that several former employees conspired to steal trade secrets from Lockheed Martin Corp. during a competition. The suspension was lifted in 2005.

“When someone recklessly crashes a car, their license and keys are taken away,” said Massachusetts Representative Edward Markey, the top Democrat on the House Natural Resources Committee. “The wreckage of BP’s recklessness is still sitting at the bottom of the ocean and this kind of time out is an appropriate element of the suite of criminal, civil and economic punishments that BP should pay for their disaster.”

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