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Three years after the Deepwater Horizon accident, BP is trudging up the courtroom steps. The oil and gas supermajor is due in court in New Orleans on Monday for what could be the definitive hearing on the April, 2010, incident in the Gulf of Mexico. The trial will assess liability and decide whether gross negligence was involved. It could make a $14-billion (U.S.) difference to BP's total Clean Water Act (CWA) penalties. That is a lot of money. But it is no longer the real issue.
The maximum penalty BP could face in a finding of gross negligence is $17.5-billion, based on a new estimate of 4.1 million barrels of oil leaking into the sea at a penalty of $4,300 a barrel. BP has set aside $3.5-billion of the sum in its $42-billion of provisions for the accident. The extra $14-billion is just over half of BP's net operating cash flow for 2012, though its ability to pay is not in doubt. The importance of the CWA is a gross negligence finding. No company wants to be found guilty of that. A conviction could cripple BP's ability to operate in the U.S., which accounted for 30 per cent of the 2.3 million barrels of oil a day (ex TNK-BP) that it pumped in 2012.
BP's future in the U.S. is the key uncertainty hanging over it, and the reason its share price has been in purgatory since the accident. Its shares are up over half from their post-accident low, but they are still a third below their pre-accident high. It would be a mistake, however, to assume that the high beckons again if BP gets a favourable outcome from the trial – a modest penalty and no gross negligence ruling. BP is a different, smaller company now, having sold $38-billion of assets including its TNK-BP stake and casting its Russian fortunes in with Rosneft.
Its shares trade at just under eight times forward earnings, bang in line with Shell and a shade above Total. BP looks on target to increase cash flow by 50 per cent by 2014, to over $30-billion a year, which opens up a lot of possibilities. But its future is not yet in its own hands. A favourable outcome to the trial would go a long way to making it so.