$16 billion question: BP’s liability in Macondo disaster

When The National Oil Spill Commission’s Final Report was released last month, Commission Co-Chair William Reilly summarized the findings, saying:
Our investigation shows that a series of specific and preventable human and engineering failures were the immediate causes of the Deepwater Horizon fire. But, in fact, this disaster was almost the inevitable result of years of industry and government complacency and lack of attention to safety.
That said, this month the commission released an addendum document called Chief Counsel’s Report. It contends that the Macondo blowout and spill were “not inevitable” at all. The Executive Summary, penned by Reilly, a former Republican EPA chief, and Co-chair Bob Graham, a former Democratic senator, stated:
Better management of personnel, risk and communication by BP and its contractors would almost certainly have prevented the blowout.
To me, the Counsel’s Report reads like a clarification. While the Final Report mainly integrated the story of the blowout into a larger narrative of regulatory and industry failures, the Chief Counsel report focuses on the cascade of specific human errors that led to tragedy on April 20. The Final Report dealt with the Macondo blowout as if it were a symptom of industry-wide problems, concluding that a systemic complacency about risk was the “root cause” of it all. Not so fast, the Counsel’s Report seems to warn.
While root causes may increase risks throughout the industry, they did not in themselves make the Deepwater Horizon disaster inevitable. Root causes might increase risks, but the Counsel Report emphasizes that better leadership and management could have mitigated risk and averted the lethal well blowout.
The Counsel’s Report supports its argument with detailed evidence that may have immense ramifications, since BP is facing billions in civil penalties. If the Final Report stood alone, without the Chief Counsel’s addendum, BP could more easily argue that they were just part of a bad system that made a blowout “almost inevitable.” They might say that they were just unlucky, rather than negligent. The root causes of  industry dysfunction converged at the Macondo. It’s a wake-up call for everyone, but  we weren’t significantly more irresponsible than other drillers, BP could be expected to argue. It could’ve happened to anyone. The Counsel’s Report seems to preempt this argument, by cataloguing the specific errors by BP that preceded the blowout.

To be sure, the Counsel’s Report  doesn’t focus exclusively on BP. There’s plenty of damning evidence against Transocean and Halliburton, as well. For example, new details emerge about previous incidents, like a near blowout on a Transocean rig in the North Sea in December 2009. A well barrier failed and a metric ton of oil and mud gushed onto the rig floor and spilled into the Atlantic. Transocean put an advisory online about the lessons learned from the incident, but there’s no evidence the Deepwater Horizon rig (also owned by Transocean) was notified about it. The Counsel’s Report goes on to say that “events at Macondo may have unfolded differently” if these lessons from the North Sea rig were shared with the Deepwater Horizon crew.

(Don’t get confused. Transocean’s “near miss” in the North Sea in 2009 differed  from BP’s “near miss” in Azerbaijan, the December 2008 incident uncovered by WikiLeaks. That time, BP determined a bad cement job to be the culprit. But don’t confuse that bad cement job with the bad cement job in the 2009 Montara blowout, which became the biggest oil spill in Australia’s history. That’s a different case altogether. A Thailand company owned the Montara well, although investigations blamed the spill on a bad cement job by Halliburton.  But don’t confuse the  Montara, off Australia, with the Macondo,  in the Gulf — even though Halliburton did the cement on both wells. And finally, please don’t confuse the Macondo, with the other group of wells in the Gulf that have been leaking since 2004.)

There’s been precious little reporting on the Counsel’s Report, so please read David Hammer’s recent article in the Times Picayune, especially this part:

The commission presented its final report to Congress on Jan. 11, but [chief investigator Fred Bartlit Jr.] continued to gather new details and responses to previously unanswered questions, resulting in Thursday’s report. The Justice Department is considering possible criminal charges and might seek to increase civil pollution fines if it determines the spill was the result of gross negligence or willful misconduct, so the greater detail could prove to be significant evidence.
Indeed. The implications of the report are very significant, since billions in fines are at stake, and there’s remarkable political consensus on directing those fines to coastal restoration projects.(Another quick digression: I mentioned the word “fines,” and a definition might be in order for Louisiana state oil regulators, so rarely do they impose them. Fines are monetary punishments assessed for an offense, like when a company pollutes the environment, for example.)

Hammer helpfully summarizes some of the “significant evidence” detailed in the latest report:

For example, during what might have been the most important test of the Macondo well’s ability to withstand a blowout — the negative pressure test run just hours before the actual accident — the top BP man on the Deepwater Horizon rig attributed disturbing pressure readings to a purported force called the “bladder effect,” something most scientists consider a myth.
The entire Louisiana delegation, the National Oil Spill Commission and President Obama all agree that at least 80 percent of BP’s fines from the Clean Water Act should be directed to repair and restore the Gulf Coast.

So the question becomes: 80 percent of what, precisely?

Well, if BP is deemed to have been grossly negligent, they will pay Clean Water Act fines of $4,300 per barrel spilled which would total over $21 billion. Absent a finding of gross negligence, BP will pay $1,100 per barrel, which would be over $5 billion. (Criminal charges and penalties for BP are another matter.)

Unfortunately, BP has a team of lawyers ready to dispute everything from the “gross negligence” tag to the total volume of oil spilled. They want to keep their civil penalties as small as possible, and I wouldn’t expect them to manage their defense as badly as they managed the Deep Water disaster. In theory, though, if the current 5 million-barrel spill figure holds up, and BP is deemed grossly negligent, and Congress directs eighty percent of the money to the Gulf Coast, that would mean upwards of $16 billion for restoration. Obviously, that would be an enormous windfall for a region that has suffered two mega-disasters in 5 years, both of them exacerbating the slow-motion catastrophe of coastal loss, now  nearing the point of no return.

Interestingly, back in the so-called spendthrift Bush years, the budget was supposedly too tight for things like coastal restoration and Cat 5 flood protection for South  Louisiana. Now, the political climate has turned, um, even more frugal.  Thus, the BP civil penalties under the Clean Water Act might represent the biggest lump sum Louisiana can expect for coastal restoration in the foreseeable future. That heightens the relevance of the Chief Counsel’s report, which portrays BP’s management failures as overarching and exacerbating the mistakes made by Transocean and Halliburton. In short, findings like the “bladder effect” episode from the Chief Counsel’s investigations might have billion dollar consequences for Louisiana’s coast.

We shouldn’t get too excited, though, because the smart money is always on “the under” when it comes to penalties an oil company will ultimately pay. BP will likely negotiate reductions in any civil fines, and the government will settle quickly for pennies on the dollar, because they know BP could drag things out for years in court. Louisiana needs as much as it can get as quickly as possible because the window of opportunity to save the coast is closing fast. So, while there’s a big difference between the Obama administration settling for $2 billion versus say $10+ billion, there’s also a big difference between getting something in the next year or two versus five or 10 years down the road.

The situation is a tricky cost/benefit analysis, but the stakes are high, and I’m hopeful the Chief Counsel’s report will assist the Obama administration in zealously fighting BP for as much as possible, as fast as possible. They can’t expect much assistance from Louisiana’s leaders, though. Our conservative politicians have been less than hawkish on environmental penalties over the years. Even after the Macondo, they believe oil spill liabilities should remain capped and errant royalty loopholes for Gulf drilling should stay uncorrected. They unanimously want 80 percent of the penalties, but I haven’t seen them step up and demand that BP should pay the $21 billion maximum civil penalty, as the Clean Water Act requires for gross negligence. That’s the real question. Perhaps they think such an exorbitant fine would set a bad precedent, one that would increase business costs for oil companies, increase our dependence on foreign oil and ultimately raise gas prices.I’ll try to remember those concerns over the coming decades while Big Oil enjoys record profits and the southern third of Louisiana washes away.
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