CLARIFICATION: This story has been updated to clarify comments by attorney David Uhlmann about the federal government’s role in the legal case and the potential size of the criminal penalties.
A year after one of its hired drilling rigs exploded in the Gulf of Mexico, the worst may be yet to come for global energy-giant BP.
A federal task force was organized this spring to step up a criminal investigation of BP and other companies involved in the April 20, 2010, explosion that killed 11 workers and led to the biggest oil spill in U.S. history. Just weeks after the Justice Department probe was reconstituted, word leaked about possible manslaughter charges in the case, and the Gulf crisis that had begun to fade from many memories was suddenly back in the media spotlight.
People who live in the region, of course, haven’t forgotten about the torturous, three-month struggle to cap BP’s gushing Macondo well, located a mile deep in the ocean and less than 50 miles from the Louisiana shore. According to government estimates, the spill released more than 200 million gallons of oil and untold volumes of natural gas. Nearly 2 million gallons of chemical dispersants were also dumped into the water in an effort to break down the oil more quickly; scientists will be studying for years the potential effects on health and the environment. The reminders of the disaster remain visible nearly every day: Since January, for example, residents have reported seeing dolphin carcasses washing up on beaches, and marine scientists are investigating whether the deaths could be linked to the BP spill.
While cleanup efforts continue on the 650 miles of beaches and coastal habitat affected by the spill, more than 350 civil lawsuits against BP and its contractors have been consolidated into a gargantuan federal case in New Orleans. U.S. District Judge Carl Barbier is presiding over complaints seeking economic or health-related damages in the case, which some have labeled “the mother of all litigation.” It is likely to drag on for years. In Houston, U.S. District Judge Keith Ellison is hearing a separate case that consolidates seven lawsuits filed by investor groups.
“To say there is stress on individuals and families doesn’t do the word ‘stress’ justice.” —Rep. Jo Bonner, R-Ala., on the slow pace of compensation
At the same time, a $20 billion fund established by BP to compensate victims opting not to file lawsuits is gradually being dispensed by arbitrator Kenneth Feinberg, a Washington-based lawyer. (See NJ, 9/18/10, p. 30.) Earlier this month, the Gulf Coast Claims Facility reported that out of more than 500,000 individuals and businesses that have filed claims, about 174,000 had been paid a total of $3.7 billion.
The slow pace of compensation for victims has infuriated lawmakers, including Sen. Bill Nelson, D-Fla., who has called for Feinberg’s resignation. A Florida woman who lost much of her income last year when beach rentals collapsed saw her home go into foreclosure while she was waiting for a claim to be paid, Nelson told The News Herald of Panama City in February. “This is outrageous,” he said. “I want the accountability; I want the transparency immediately forthcoming, or else the president ought to consider putting someone else [in charge of] running the claims facility.”
The process has been “imperfect,” said Rep. Kathy Castor, D-Fla., although she added that Feinberg and BP have moved to speed things up since the deadline for filing claims was reached last November.
Rep. Jo Bonner, R-Ala., who represents two coastal counties that he called “the economic epicenter of this tragedy” because of their heavy reliance on tourism dollars, was much harsher in his assessment of the compensation-fund process. “It is abysmal,” he said.
As of early April, only 233 of 6,800 business claims filed in Alabama had been paid, and many owners are giving up hope, Bonner said. Calls to a help line jumped from 192 in February to 795 in March, largely because people have reached the end of their rope, he said. “To say there is stress on individuals and families doesn’t do the word ‘stress’ justice,” Bonner said.
See You in Court
Castor and Rep. Steve Scalise, R-La., recently formed a Gulf Coast caucus in the House and are focused on passing legislation that would direct that 80 percent of all fines and penalties collected by the Justice Department in spill prosecutions go back to the Gulf for restoration projects. “I think that because the BP disaster did so much damage to our economy, a portion of it should go to economic development,” Castor said. “When the BP disaster hit, it was almost like a second wave because of the economic downturn.”
How big the penalties will be is the $64 million question for BP or, more accurately, the $41 billion question. That is the figure the company has projected as its total costs for the spill—aside from the $20 billion compensation fund—and it has already sold enough assets, including oil and gas fields in Texas, in the past year to cover more than half that amount. But payouts could climb past that figure if the government and the courts come down hard on the London-based company.
There is little doubt that the new federal task force will file criminal charges against BP; Transocean, the owner of the Deepwater Horizon rig that BP was leasing for its Macondo project; and Halliburton, the oil-services conglomerate that was handling cement work on BP’s well, said David Uhlmann, a former chief of the Justice Department’s Environmental Crimes Section who is now a law professor at the University of Michigan.
“No question about it,” Uhlmann said. Prosecutors, he said, will not have a hard time showing that as BP’s well was being sealed for later production, negligence occurred that led to the explosion.
Several government investigations and numerous documents filed in court cases provide substantial evidence of safety lapses by BP and its partners before the accident:
• The White House commission that investigated the spill concluded in January that “a failure of management” and “systemic failures” led to the accident, and it cited at least nine decisions by managers that increased risk while potentially saving time and money for BP.
• One of the commission’s cochairmen, former Environmental Protection Agency Administrator William Reilly, called managers for BP, Transocean, and Halliburton “breathtakingly inept,” and said that the three companies have a “culture of complacency.”
• Even before it released its final report, the commission appointed by President Obama contended that BP had “impeded” efforts to control the blowout by underestimating the amount of oil flowing from the well, and the panel released evidence that both BP and Halliburton knew the cement mixture used to try to seal the well was unstable.
• A panel of experts organized by the National Academy of Engineering issued a preliminary report in November citing numerous problems with the management of BP’s drilling operation; it cited a lack of experience among key workers on the rig and poor decision-making protocols. The panel, which plans to release a final report in June, also said that BP and its contractors had given insufficient consideration to risks.
• A lawsuit filed in March by the Louisiana attorney general charged that “warning signs of well flow were being transmitted to the rig, to Halliburton’s Houston office and BP [Exploration and Production’s] Houston office in real time for almost an hour before hydrocarbons reached the rig, alerting rig workers to shut down the well.” But, the suit said, top managers at BP and Halliburton either ignored or did not notice the warning signs.
• Documents filed in a civil suit by the New York and Ohio public-pension funds, which together held nearly 50 million BP shares that lost value due to the spill, stated that Kevin Lacy, BP’s former vice president for drilling operations in the Gulf, resigned his position five months before the accident because he was worried that the company was not following safety protocols.
For BP, a recent track record of serious environmental and safety violations could reduce the chances the company will receive any leniency for possible crimes connected to the Gulf disaster. BP pleaded guilty to a Clean Air Act felony and paid a $50 million fine after a 2005 explosion at its Texas refinery killed 15 workers and injured 180 others. It also pleaded guilty to a criminal misdemeanor and paid $16 million in fines and restitution for a pipeline leak that led to the shutdown of the nation’s biggest oil field at Prudhoe Bay, Alaska, in 2006.
A Justice Department task force led by John Buretta, a federal prosecutor from New York City with experience in terrorism and organized-crime cases, is weighing all the evidence. Attorneys and investigators from the department’s Criminal Division, its Environment and Natural Resources Division, and the U.S. Attorney’s Office for the Eastern District of Louisiana are involved.
The government began its prosecution for the Gulf spill in December by filing civil charges against BP and eight other companies, citing violations of the Clean Water Act and the Oil Pollution Act. Uhlmann speculated that prosecutors went with a civil case first so they would not be left behind in the rush to litigate against BP. “They knew the criminal case was going to take some time and the train was leaving the station on discovery in the civil litigation,” he said.
A combination of civil and criminal charges could push the penalties against BP past $10 billion under the Clean Water Act alone, Uhlmann said. He also said he expects prosecutors to cite the Migratory Bird Treaty Act, as the government did against Exxon for the Exxon Valdez tanker spill in Alaska in 1989.
The civil provisions of the Clean Water Act allow for fines of up to $1,100 per barrel of oil spilled in cases of negligence, and up to $4,300 per barrel if gross negligence is proved. Based on the government’s estimate of 4.9 million barrels spilled and 800,000 captured, fines could range from $4.5 billion to $21 billion, depending on the level of negligence determined.
In a filing earlier this month responding to the government’s civil charges, BP argued that fines do not have to be assessed on a per-barrel basis but could also be “based on the number of days of the discharge.” BP has also challenged the government’s estimate of the size of the spill, arguing in a document filed with the White House’s spill commission that the total should be reduced by about 50 percent.
On the criminal side, if the government uses a law called the Alternative Fines Act, which allows penalties in an environmental crime to be double the amount of damages caused, fines could reach up to $40 billion but will probably be closer to $10 billion, Uhlmann said.
Combined, the civil and criminal penalties sought from BP will easily be the highest in U.S. history, Uhlmann said. Rarely do penalties rise above $1 billion, and in this case the amount is certain to be in the tens of billions. Damages in the civil cases consolidated in New Orleans could also reach into the billions of dollars, especially if the court agrees that punitive damages should be assessed against the defendants.
Keith Jones, a Louisiana lawyer whose 28-year-old son, Gordon Jones, died on the Deepwater Horizon rig, is confident that BP and others will move to settle with victims’ families, but the company’s attorneys have to be wary of the possibilities.
“BP is not going to let the death cases go to trial,” Jones said. “BP is mighty exposed, whether damages are based on the extent of their ability to pay or on the size of their wrongdoing. The issue that BP fears is not paying for the damages they caused—they’ve got lots of money for that. What they fear is punitive damages.”
In the civil case filed in federal court by Louisiana, the state wants BP and its partners to pay at least $1 million a day in damages for violating state and federal environmental laws. Other cases filed on behalf of businesses alleging harm from the spill have argued that BP officials violated the Racketeer Influenced and Corrupt Organizations Act—the RICO statute often used against organized crime—by deliberately misleading the government and investors about the company’s ability to drill safely in the deep waters of the Gulf of Mexico.
For its part, BP seems determined to put the spill behind it and get on with the business of drilling for oil and gas at its lease holdings around the world, including in the Gulf. Investec analyst Stuart Joyner estimates that Gulf drilling represents about 15 percent of BP’s value, which was listed at $270 billion in its 2010 annual report. Company sources told London newspapers last month that BP hopes to resume work this summer on at least 10 deepwater wells in the Gulf where it has halted operations since the spill. According to the reports, BP has offered to give the government 24-hour access to its drilling sites and promised not to resume exploratory drilling yet, but the company added that it hopes to start this work as well later this year.
However, Interior Secretary Ken Salazar said in early April that the government has struck no deal with BP.
The author’s book, Poisoned Legacy: The Human Cost of BP’s Rise to Power, will be released by St. Martin’s Press on June 7.
This article appears in the April 16, 2011 edition of National Journal Magazine.