BP’s gusher of fines

If the damage from BP’s massive spill in the Gulf of Mexico was just about lost oil production, the $60 million of crude that’s oozed into the ocean—based on official estimates of the rate of the leak—would barely register as a rounding error on the company’s financial statements. Instead, the staggering bill BP faces for cleanup costs, lawsuits and fines will run well into the billions.

For BP the costs are twofold. First up is the ongoing tab for the cleanup, which has already topped US$930 million. So far those efforts, including the most recent “top kill” plan to pump heavy drilling fluid into the pipe to stop the gusher, have failed miserably, and so the bill for the cleanup is expected to soar. But the real costs will only hit BP once attention shifts from the ocean to the courtroom.

After the Exxon Valdez spill in Alaska, laws were changed that now expose BP to US$1,100 in civil fines for each wayward barrel. The penalty could rise sharply to $4,300 per barrel if a federal court rules the spill resulted from gross negligence. The official estimate for the scale of the leak, at up to 19,000 barrels a day, now seems wildly conservative. Some scientists believe it could be as high as 110,000 barrels a day, meaning if BP is found negligent, fines could reach US$20 billion—and that assumes the spill gets halted immediately. The Guardian newspaper calculated that if the spill continues for another two months, BP could face civil penalties in excess of $60 billion. “We continue to estimate the total gross cost of this incident to eventually be measured in the tens of billions,” David Kotok, chief investment officer of Cumberland Advisors, wrote in a report. So far the crisis has already wiped US$55 billion from BP’s market cap, which now stands at US$134 billion.

BP’s case will take decades to wind through the courts, and the company is guaranteed to fight any fines or penalties it deems excessive. BP may even succeed in shrinking its final costs substantially. After all, Exxon originally faced US$5 billion in punitive damages, but after two decades in court, it managed to wrangle that down to just US$507 million.