BP's Oil Spill Bill Could Dwarf Exxon's Valdez Tab
By ANNE C. MULKERN of Greenwire
May 3, 2010
Oil behemoth BP PLC faces billions of dollars in costs connected to its oil spill in the Gulf of Mexico, analysts and legal experts predict.
The question now is just how big and fast that bill will grow.
With the possibility that it could take three months to stop the Deepwater Horizon spill, payments are likely to start at $2 billion and could reach more than $8 billion, experts said, while cautioning that it is early to make accurate estimates. Cleanup and damages, they said, are just part of the pain connected to this disaster.
BP also could take a hit to future earnings if it needs to slow other exploration and drilling in the Gulf of Mexico, where it has substantial acreage rights, analysts said. In the wake of the disaster, the company's stock price already has tumbled about 13 percent since the April 20 spill, shaving off $20 billion in market value.
And images of blackened water flowing toward Louisiana have soiled the reputation of the company that previously relabeled itself "beyond petroleum," analysts said. The disaster already appears poised to pass the scope of the 1989 Exxon Valdez disaster in Prince William Sound, Alaska.
"BP has worked very diligently over the past decade to build a brand as a responsible, socially conscious company," said Pavel Molchanov, analyst with Raymond James. "Although management's response to this disaster has been impressively rapid and transparent, there is no disputing that BP's reputation -- fairly or unfairly -- has been damaged, just as Exxon's reputation was damaged by Valdez in 1989."
There were no employee fatalities involved in the Exxon Valdez incident, while 11 people died in the Deepwater Horizon incident. Those deaths follow 15 fatalities in an explosion at BP's Texas City Refinery in 2005.
"In the damage to their reputation ... [the cost] is quite substantial," said Andrew Lipow of Lipow Oil Associates LLC consultants in Houston. "It's just another in a series of events that have associated fatalities with the BP name since 2005."
Analysts who put the cost of the Deepwater Horizon spill at anywhere from $2 billion to $8 billion also cautioned that the numbers could change quickly.
"Those estimates can either skyrocket or come down depending on when the flow of oil is stopped," Lipow said.
Molchanov predicted, "It's going to be in the billions. ... How many billions? The jury's still out."
BP earned $17 billion in net income last year and is projected to earn $23 billion in 2010, according to Raymond James.
"BP certainly is more than capable of covering all of the expenses that they'll be liable for," Molchanov said.
BP has said that it is spending $6 million to $7 million per day to shut off the flow and limit damage. It has offered repeated assurances that it takes responsibility for the spill. The company set up the toll-free phone number 1-800-440-0858 to take damage claims.
"We're going to continue to throw all of our resources at it until the flow of oil has been stopped and we've minimized the environmental impact," said John Curry, BP's director of external affairs. "We're spending a significant amount of money, but that's not the most important part for us right now. The most important part is to do what we can to address this issue."
President Obama also has said that BP will pay for the costs. That is expected to include reimbursing federal and local governments for work they put into stopping the spill.
The company is continuing several approaches to stop the leak, including chemical sprays, covering the leak with a type of dome and drilling another well to relieve the pressure. But drilling that second well will take at least 90 days. If the leak continues to discharge 5,000 barrels of oil a day, within about 50 days it will eclipse Exxon Valdez in terms of oil spilled. In the Exxon case, 250,000 barrels (or 10.8 million gallons) of oil spilled.
"This is shaping up to be worse than the Exxon Valdez accident" in terms of oil spilled and cost for damages, said Fadel Gheit, an Oppenheimer & Co LLC managing director and senior analyst in the oil and gas sector.
That is what led many analysts to use the Exxon Valdez as the barometer for what BP is likely to pay. Exxon paid more than $3.8 billion in cleanup and damage costs, plus about $500 million in punitive damages.
"We know that the price tag is going to be higher today, everything else being equal," simply because of inflation, said Molchanov with Raymond James. "How much higher? It's way, way too early to judge right now."
The next Valdez?
Because the Gulf of Mexico is far more open than the area where the Exxon Valdez disgorged oil, it is easier to get crews and equipment in to try and stop the spill and erect booms to protect the shore, Molchanov said.
"The not-so-good news is a lot more people live around the Gulf" than in Prince William Sound, Alaska, Molchanov said, meaning that "the potential economic damage is probably going to be greater."
BP faces a different environment than did Exxon, however.
The aftermath of the Exxon Valdez case shifted the legal landscape around oil spills. In the Valdez case, the law that applied said that only those who had been physically touched by the oil could collect damages, said Dave Oesting, lead counsel for plaintiffs in that case and an attorney at Davis Wright Tremaine in Anchorage. Congress in 1990 passed the Oil Pollution Act, which lifted that restriction. Now those who believe they have related economic damages can file claims.
That could mean a wide range of businesses and people will seek compensation in the Deepwater Horizon spill, attorneys said. Already 26 lawsuits have been filed, the Associated Press reported. Louisiana fishermen and shrimpers are seeking (pdf) millions of dollars in damages for the ongoing oil spill, which they say could destroy their livelihoods. One lawsuit names two commercial shrimpers as the plaintiffs, and another comes from the captain of a charter boat that fishes near rigs off the Gulf Coast.
The shrimpers case, which seeks class-action status, also lists 10 other groups of lawyers representing plaintiffs, including New York-based environmental advocate Robert F. Kennedy Jr. That firm had already received calls Friday from other businesses that foresee financial harm, including hotels and scuba diving businesses, commercial fisheries and municipalities, said Kevin Madonna, a partner at the firm Kennedy & Madonna LLP.
The group of plaintiffs eventually "could be very, very large," Madonna said.
Given that the geographic area of the spill is large and that there are heavily populated areas nearby, Madonna said, "I don't see how the damages could be anything less than the Valdez damages."
The Oil Pollution Act has not been applied in a spill of this scope and remains untested in some areas, Madonna said, adding that this case "is going to be the mother of all tests."
In addition to cleanup costs, payments that BP will have to make likely will include damage to natural resources, including animals that are killed because of the oil, and damage to property and property values on the beaches where oil hits, attorneys and analysts said.
There is the potential for even more widespread economic damage if the oil spill disrupts traffic on the Mississippi River for an extended period, Lipnow said. Agricultural goods from the Midwest are exported out of the Port of New Orleans, he said.
"If you had the Mississippi River closing for weeks, you would start seeing impacts," Lipnow said.
The Exxon Valdez case took 21 years to resolve and ended up at the U.S. Supreme Court. Cases connected to BP could move faster because of the Oil Pollution Act, which clarifies an oil company's liability, Oesting said.
"It should be a much more expeditious process," Oesting said.
Punitive damages cannot be collected if a suit is filed under that act, attorneys said. But suits seeking punitive damages could be filed outside that act, Madonna said.
Drilling caution
BP and other oil companies will likely need to re-examine their technology and make sure they have proper precautions to prevent future incidents, Lipow said.
"Moving forward for exploration and production is certainly going to be at a slower pace and certainly at a higher cost for them," Lipnow said.
The political environment also is likely to shift. Already, President Obama has tabled for a month his plan to expand offshore drilling.
"I continue to believe that domestic oil production is an important part of our overall strategy for energy security," Obama said in comments at the White House on Friday. "But I've always said it must be done responsibly, for the safety of our workers and our environment."
That could have an impact on BP and other oil companies, Gheit said.
"The 'drill, baby, drill' crowd, I think they're going to get a sobering reminder that there's no free lunch," Gheit said. "We just cannot do things without proper planning."
Others said they expected BP and other oil companies would move forward without any significant longer-term problems.
"Thousands of offshore wells have been drilled in the Gulf without anything of this sort happening," Molchanov said. "It's truly a once-in-a-decade type of event, maybe even more rare than that.
"Similarly, BP will continue to refine and market refined products in the U.S.," Molchanov said. "I don't believe there will be any widespread 'boycott,' though it's possible that some individual consumers may avoid its fuel stations."
Copyright 2010 E&E Publishing.
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