A U.S. appeals court recently ruled that as the owners of the Macondo well, which blew out in April 2010 causing the worst-ever offshore oil spill incident in the U.S., both BP Plc. (NYSE:BP) and Anadarko Corp. (NYSE:APC) must face penalties under the Clean Water Act. The ruling affirmed the decision taken by the U.S. district court in New Orleans in 2012. This could mean billions of dollars in potential liabilities for both the companies.
The Macondo well blowout and subsequent explosion of the rig on April 20, 2010, killed 11 workers and resulted in millions of barrels of oil being spilled into the Gulf of Mexico. BP was the operator of the well with a 65% stake, while Anadarko held a 25% non-operating stake in the project. 
- BP Q4 Earnings: Profits And Cash Flows Suffer Due To Low Oil Price Environment, Company Focuses On Cost Cutting
- By What Percentage Can BP’s Revenues Grow Over the Next Five Years?
- What Has Led To More Than A 30% Decline In BP’s Revenues & EBITDA In The Last Five Years?
- How Has BP’s Revenue Composition Changed In The Last Five Years?
- What’s BP’s Fundamental Value Based On Expected 2015 Results?
- What’s BP’s Revenue & Earnings Breakdown In Terms of Different Products?
What Caused The Blowout?
A recent report by federal investigators probing the deadly incident points out that a safety equipment also known as the blowout preventer triggered the Macondo well blowout. A blowout preventer, or BOP, composes a set of specialized valves used to seal off an oil well in case of extreme erratic pressures and uncontrolled flow of hydrocarbons. According to the draft report, the pipe running from the subsea Macondo well to the Deepwater Horizon through the BOP, buckled because of a large pressure difference in the inside and outside of the pipe. As a result, the BOP, which was supposed to seal off the pipe, ended up puncturing it, allowing the oil to leak into the Gulf of Mexico. 
After the incident, both BP and Anadarko sought to shift the blame onto Transocean, which was contracted by BP to drill the well. The companies argued that the incident took place primarily because of the malfunctioning of Transocean’s drilling equipment; hence they should not be penalized for it. However, the recent appeals court ruling rejected this argument stating: “…although the defendants argue that the blowout preventer should have engaged and prevented the progression of the blowout, the need for this intervention only underscores the extent to which the oil was already unconfined and flowing freely. Accordingly, we find that the well is a facility from which oil was discharged in violation of [the Clean Water Act.]” ((Appeals Court Rejects BP, Anadarko Attempt To Skirt Blame For Gulf Disaster, commondreams.org))
According to the Clean Water Act, the U.S. government can seek fines up to $1,100 per barrel of oil spilled on a finding of strict liability. However, if the company is found to be grossly negligent, the fines can go up to $4,300 per barrel of oil. Under the law, Clean Water Act penalties are not supposed to be pro-rated based on fractional ownership of an oil well.
However, we believe that since Anadarko was not directly involved in drilling operations, its exposure to penalties under the Clean Water Act is not as significant. Earlier this year, Carl Barbier, a U.S. district judge, rejected a claim by the U.S. Justice Department lawyers that emails between Anadarko and BP just days before the oil spill incident support hefty environmental fines against Anadarko. The company’s CEO, Al Walker, hailed the court’s decision in an emailed statement following the ruling. 
On the other hand, BP’s potential liability from the Clean Water Act can go up to $18 billion depending on the court’s view of three key aspects in the ongoing lawsuit. Firstly, it will depend upon whether or not the court finds BP grossly negligent for its actions surrounding the spill, which will define the maximum limit on per barrel fine to be charged by the government. Secondly, it will depend upon the court’s view on the amount of oil that was spilled during the 87 days it took BP to cap the leaking well. Thirdly, the size of per barrel fines will also depend upon the court’s assessment of 8 penalty factors including the degree of fault and attempts made by the company to fix the damage. The court is scheduled to hear testimony on these 8 penalty factors January next year.
BP estimates that around 2.45 million barrels of oil was spilled in the Gulf of Mexico, net of the amount of oil captured on the surface. However, the U.S. Department of Energy estimates the net discharge of oil in the Gulf to be around 4.2 million barrels. The company has currently provisioned $3.51 billion for potential penalties under the Clean Water Act. The provision is based on its own initial estimate of the amount of oil spilled in the Gulf and the assumption that it would not be found grossly negligent in the whole incident. However, if the outcome of the case goes against these assumptions, BP’s oil spill expense can significantly escalate. If the court enforces the maximum, a $4,300 per barrel fine on BP for an estimated 4.2 million barrels of oil spilled, it could result in additional liabilities of as much as $14 billion to the company. Notes:
- BP, Anadarko May Face Billions in Fines on Spill Ruling, bloomberg.com [↩]
- Deepwater Horizon Oil Spill Linked To Failed Blowout Preventer, wsj.com [↩]
- Judge Rules Anadarko Not Culpable In Deepwater Horizon Disaster, petroglobalnews.com [↩]
- BP 2013 Annual Report, bp.com [↩]