Oil Spill Cleanup Costs to Range from $2-$12 Billion

As oil continues to spill into the Gulf of Mexico, Oxford Analytica assesses the legal liabilities and other costs for BP and other parties in this complimentary download.Selected excerpts:

The Deepwater Horizon spill is a major environmental and economic disaster. The worst case scenario is that a second, relief well may need to be drilled in order to stem the flow of oil, requiring at least three months to complete. Therefore, the offshore oil leaseholders are likely to take a huge charge, excluding reputational damage.

US law makes the ‘responsible parties’ — oil leaseholders BP (BP) and its minority partners, Anadarko (APC) and Mitsui, fully responsible for the costs of clean-up; in addition, fines will be levied and additional state and private legal claims will certainly be made.

BP and its lease partners are fully liable for spill cleanup costs under federal law — though statutory reform since the Exxon Valdez spill may have reduced exposure to (separate) damages. Total costs are difficult to estimate until the well is capped, but they are likely to range from 2-12 billion dollars.

The 1989 Exxon Valdez disaster spilled 250,000 barrels of oil, ultimately costing Exxon 4.3 billion dollars in cleanup costs, fines, and legal damages; some legal claims remain to be resolved.

US law has changed significantly since that time — partly in response to that spill:

As the ‘responsible parties’ under the relevant statutes, oil leaseholders are fully responsible for cleanup costs — though the law limits their (separate) liability for damages to 75 million dollars (absent findings of wilful misconduct or other special circumstances). Crucially, plaintiffs’ attorneys will seek to get around this cap.

Apportioning the cost of the disaster will be settled through extended litigation, as BP may opt to sue Transocean (RIG) – which operated the rig on its behalf; Halliburton (HAL) which attempted to cement the well), and Cameron International (CAM) – which made the blow out preventer- to recoup costs and damages it must pay; state and private actions will also target these companies, as they are not covered by any statutory damages cap.

Exxon pursued a ’scorched earth’ legal policy. BP, by contrast, has already pledged to pay all ‘legitimate’ claims. This may be driven by a desire to minimise reputational damage:

BP’s ability to pursue a conciliatory strategy, and privilege claims settlement over tough litigation tactics, depends on the scope of the spill, cleanup costs, and damages.
BP will pursue litigation against other defendants aggressively, attempting to recoup costs.
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