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Fire boat response crews battle the blazing remnants of the offshore oil rig Deepwater Horizon, off Louisiana, in this April 21, 2010, file photograph. (Reuters)
Fire boat response crews battle the blazing remnants of the offshore oil rig Deepwater Horizon, off Louisiana, in this April 21, 2010, file photograph. (Reuters)

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BP’s path to oil spill deal just got harder Add to ...

Macondo is back. After March’s $7.8-billion (U.S.) settlement with Gulf Coast fishermen and other private plaintiffs, a deal with the U.S. government over civil and potential criminal liability for the 2010 Gulf of Mexico disaster seemed to be in reach for BP. It probably still is – the two sides are still in talks ahead of a civil trial in January. But sharp rhetoric in new filings by U.S. government lawyers is a reminder that the British oil major faces a tough path to securing a favourable outcome. The market’s reaction – wiping $5-billion off BP’s market value – looks appropriate.

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U.S. lawyers say they have e-mails showing that BP is guilty of gross negligence in the 2010 explosion on the Deepwater Horizon rig and subsequent oil spill. It’s not a change of position. But the language is unusually sharp, decrying a “corporate culture of recklessness” and executives engaging in behaviour that “would not be tolerated in a middling size company manufacturing dry goods for sale in a suburban mall.” The decision to quote BP managers’ e-mails, which complain of a “huge level of paranoia from engineering leadership … driving chaos” in the days before the spill suggests time hasn’t softened the Justice Department’s approach.

The financial stakes are high. BP’s $38-billion of provisions for the disaster includes $3.5-billion to cover Clean Water Act fines. A finding of gross negligence would raise BP’s financial liability under the act from a potential $4.5-billion to up to $21-billion.

The new filing was a response to BP’s request for final approval of the $7.8-billion plaintiffs’ deal. Having not raised a specific objection to that settlement, the government may be keen to signal that it won’t be a pushover in its own litigation. The fact that it’s an election year only heightens the political stakes.

A settlement still looks like the most likely outcome. But securing a favourable deal just got harder for BP. The hit to the market cap suggests investors are now anticipating a new financial hit that exceeds what BP has already set aside for Clean Water Act fines, but well short of the maximum it could get done for at trial. That looks like a measured reaction to potentially more difficult circumstances.

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