Gulf of Mexico Leak Estimates Return to Haunt BP

by Trefis Team
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Oil major BP (NYSE:BP) may face a federal investigation on whether company officials deliberately lied to the government about estimates relating to the size of the Gulf of Mexico spill. According to sources quoted by the Wall Street Journal, investigators are looking into statements made by BP’s executives, trying to see if they provided the best estimates regarding the rate at which oil was leaking from the well. [1] BP disputes official estimates regarding the overall size of the leak, which will be crucial in deciding the penalty imposed on it based on the Clean Water Act. The oil major has already agreed to pay out billions of dollars in damages related to the incident and facing billions more in federal penalties in the future.

We have a $57.72 price estimate for BP, which is at a 50% premium to its current market price.

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Oil spill expenses

According to the Federal Clean Water act, BP can be fined a maximum of $1,100 per barrel for the oil that leaked as a result of the May 2010 accident. [2] In case of gross negligence the penalty can be as high as $4,300 per barrel. BP disputes the government estimate that the rate of flow from the well was between 53,000 to 62,000 barrels per day, and calculates its estimate of the potential liability under the Clean Water’s Act to be around $3.5  billion, assuming a flow rate of around 47,500 barrels a day. Federal investigators are now looking whether BP withheld information during the first week of the spill. Already, prosecutors have indited one of BP’s engineers for deleting messages that claimed that BP was understating the size of the leak.

Initial estimates of the leak varied widely from an 8,000 barrels / day according to Coast Guard to a worst case estimate saying that the size of the leak could be between 64,000 to 110,000 barrels /day. The variation was explained because of the difficulty in estimating the flow of oil from a leak thousands of feet below sea level. Observers say that despite the investigations, prosecutors will find it difficult to build a case against BP for withholding data because of the scale and the depth of cooperation between the company and government agencies during the operation to plug the leak

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  1. BP Probed on Leak Estimates, WSJ []
  2. Clean Water Act provision, BP []
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