BP (LSE: BP) (NYSE: BP.US) could be liable for tens of billions of dollars more in fines relating to the Deepwater Horizon oil spill, after the company was sideswiped by federal courts in New Orleans.
The court lifted an injunction that had blocked the payment of business claims for economic losses, part of the agreement BP made to settle with victims of the oil spill during 2012. The injunction had been in place to stop the payment of fictitious claims, which BP had claimed were costing the company billions in additional costs.
Of course, BP scrambled to put together a defence for this attack, filing a request for the Supreme Court to block disputed compensation. BP’s defence was based on the fact that if claims were allowed to continue, the company faced “staggering [costs]…far exceeding the actual injury caused by the spill“. However, this request was almost immediately blocked.
Fraudulent claims
Unfortunately for investors, this ruling from the Supreme Court is likely to lead to significant additional costs for BP. Indeed, the payment of claims to businesses have already exceeded the original estimate.
Of the $2bn already paid out to businesses, it’s estimated that $76m has gone to entities that had nothing to do with the spill. Additionally, BP has claimed that $546m has gone to claimants located far from the spill, who would have suffered little or no economic impact.
All in all, of the $2bn in claims already paid out, 31% are suspected to be fraudulent. There is a further $1bn in business claims waiting to be paid out now the court has ruled in favour of claimants.
Misinterpretation
BP’s management has accused Patrick Juneau, the court-appointed administrator of compensation claims, of working in favour of claimants throughout the claims process.
As a result, businesses have been able to make claims without showing detailed evidence of losses caused by the spill. All they need to do instead is pass what’s called a “causation test”. Nevertheless, both the courts and Mr Juneau agree that did BP consent to this method of testing.
Still, thanks to pressure from BP, compensation payments will now be paid according to a new methodology, set out by Mr Juneau in March. Claims administrators now have to make an effort matching the businesses’ costs and associated revenues when calculating profits lost as a result of the spill. Hopefully, this new method of calculation will avert some claims.
Not all bad news
But while BP braces itself for a wave of new claims, the company did receive some good news last week. It has been found that the Deepwater Horizon disaster was, in part, caused by the failure of a vital piece of safety equipment that BP was not responsible for.
The piece of equipment that reportedly failed was the blowout preventer, which was the responsibility of the owner and operator of the drilling rig, Transocean. Indeed, if the blowout preventer had functioned as intended, steel rams would have closed over the top of the well, preventing further leaks.
This is likely to be a key piece of information when BP goes to court next January, in a trial to determine the penalties to be levied on the company under the Clean Water Act. If BP were to be found guilty under the Clean Water Act the company could face additional fines of up to $18bn.
