In the latest twist in the Gulf of Mexico saga, the US Court in New Orleans has ruled that the 2010 Deepwater Horizon disaster led to a smaller oil spill than originally claimed — and that should mean a lower penalty for BP (LSE: BP) (NYSE: BP.US) than feared.
Contrary to the US government’s estimate of a spill of 4.09 million barrels, the judge put the volume at a significantly lower 3.19 million barrels.
The size of the spill itself and BP’s degree of negligence are the two main factors determining the level of penalties, and unfortunately for BP the court stuck to its earlier ruling that the company had been grossly negligent in the events that led up to the explosion — BP is still appealing that.
However, the latest ruling did decide that BP had not been grossly negligent in its efforts to control the subsequent spill.
The bottom line
So what might BP have to shell out now?
A Clean Water Act penalty up up to $17.6bn had been on the cards should the government’s claims have been upheld, but the new ruling should lower that to a maximum of $13.7bn (approximately £9bn). We won’t know the final sum until the third phase of the trial, which is due to commence on 20 January.
But the court will consider a number of factors, including BP’s efforts to minimize the effects of the spill and the success of those efforts, and so the “not grossly negligent” ruling on the aftermath will hopefully knock a bit off the total. BP itself says that it “believes that considering all the statutory penalty factors together weighs in favor of a penalty at the lower end of the statutory range“, so we’ll hopefully end up somewhere short of that possible $13.7bn.
What does this mean for shareholders? It’s definitely good news, but put into perspective the likely reduction of around $4bn in BP’s fine is relatively small compared to the total costs — BP has already spent or set aside more than $42bn for fines, compensation and other costs, and has sold off more than $39bn in assets to help pay for it.
Subdued reaction
And the market reaction has been subdued, with the shares up a modest 2.5% to 402p by mid-morning.
But perhaps the main benefit is that the uncertainty had been reduced, and if there’s one thing that institutional investors hate it’s uncertainty. BP is now a step closer to being able to put the disaster behind it (at least in financial terms) and get on with its business.
And then all BP will have to face is the possibility of two or three years of sub-$50 oil!
