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Industrial Pollution

BP Reaches $18.7 Billion Agreement to Settle Deepwater Horizon Spill

Burgess COMMENTARY

Peter Burgess

BP Reaches $18.7 Billion Agreement to Settle Deepwater Horizon Spill

On July 2, 2015, the U.S. Department of Justice (DOJ) announced that BP agreed to pay approximately $18.7 billion to settle federal and state claims over the 2010 Deepwater Horizon oil spill disaster in the Gulf of Mexico (GOM). If approved by court, the agreement would result in the largest civil settlement with a single entity in U.S. history, though the figure is billions less than was originally sought. BP would pay the amount over 18 years in installments of approximately $1.1 billion per year, and would take BP’s total liabilities related to the oil spill to $54 billion.

After the 2010 Deepwater Horizon oil well blowout, which killed 11 oil workers and caused 4.9 million barrels of oil to spew into the ocean over an 87-day period, BP was faced with a range of potential penalties under the Clean Water Act (CWA). Court decisions since September 2014 ruled that BP was grossly negligent and was responsible for spilling more than 3 million barrels of oil into GOM, causing the company to face up to $13.7B in CWA penalties. Under the July 2 settlement, BP would pay $5.5B over 15 years and the remainder will cover environmental and economic claims. That figure is much closer to the $3.7 billion BP originally set aside for CWA penalties than the $13 billion sought by the federal government.The agreement removes uncertainty for oil companies and resolves the unknowns in BP’s accountabilities for the Deepwater Horizon oil well blowout. The settlement’s 18-year time span serves to mitigate impacts to BP’s cash flow. BP expects the settlement to add $10B to the $44B it has reserved for spill-related costs.

The settlement would end five years of litigation over the oil spill tragedy and enable the federal and state governments to invest in billions to advance efforts to restore the Gulf Coast environment and economy. According to BP’s Chief Executive Officer, Bob Dudley, the agreement provides BP with greater clarity and business certainty, allowing the company to continue assessing up to 50 oil and gas projects around the world. However, it remains to be seen how the penalties will impact BP’s ability to grow its oil production while maintaining its dividend payments to shareholders. Merger and acquisition activity in the oil sector has been tempered in the wake of Shell’s $70 billion takeover of BG Group, however, other major oil companies, such as ExxonMobil, could look to make a bid for BP, given that the penalties will be particularly costly in the current low price oil price environment..