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Who’s Under Fire in DOJ Gulf Oil Spill Lawsuit

by | published December 17th, 2010

On Wednesday, December 15, the U.S. Department of Justice (DOJ) filed its initial action in response to the Macondo-1 Well blowout on April 20 and the subsequent oil spill in the Gulf of Mexico.

This marks the real beginning in a series of court challenges that will unfold over the next several years.

With this initial filing, the DOJ needed to do two things: 1) set the dimensions of the primary legal battle to follow; and 2) provide some focus, on a national level, to the 77 court actions and more than 200 damage suits already lodged to date.

The government’s move had certainly been anticipated – and it may not be the last.

The Lawsuit Answers Four Major Questions

First, we now know the defendants answering the charges, at least in this initial filing. (The DOJ can always add defendants and charges later, in amendments to the complaint, or file new suits altogether.)

Defendants are BP (NYSE:BP), as operating company for the project, hardly a surprise; minority partners Anadarko Petroleum Corp. (NYSE:APC) and Mitsubishi (through its untraded unit, MOEX Offshore 2007); rig owner Transocean Ltd. (NYSE:RIG); the asset holder of the Deepwater Horizon drilling rig, Swiss private Triton Asset Leasing; along with the insurer, QBE Underwriting of Lloyd’s Syndicate 1036.

Second, we know the government will be pursuing both criminal and civil penalties.

Remember, the explosion on the rig killed 11 people.

By deciding to pursue a criminal as well as a civil case, the DOJ will need to be careful that procedures in the civil action do not prejudice the criminal proceedings. But it also potentially increases the consequences for those found guilty, either under this complaint or later ones.

Third, the DOJ is asking for financial liability without limitation.

However, Lloyd’s liability is capped by its Certificate of Financial Responsibility, which spells out the maximum coverage provided by the insurer. Also, the suit does not include Lloyd’s, along with the other companies charged, with failure to exercise necessary precautions and lax monitoring of the drilling process.

And fourth, we now know that the financial penalties sought are going to be heavy.

The government is seeking $1,100 per barrel of oil leaked, a figure that rises to $4,300 if one or more of the defendants is found to have acted with gross negligence.

Word I am hearing is that the government will employ a figure of 4.9 to 5 million barrels as the total leak volume. That translates into a judgment – only under the EPA’s Clean Water Act – of $5.5 billion (ordinary negligence) or $21.5 billion (gross negligence) against each company, without limiting liability under any other provision or other suit.

BP clearly will be the center of the attention in this matter, as the most visible project participant, holder of the lease, and the company in the crosshairs of both government and public attention throughout the crisis and the cleanup. APC has flatly denied any liability, and RIG has claimed that the disaster is a result of BP’s lack of adequate operational management.

What It Will Mean to Share Value

Let’s outline how the announcement of the DOJ’s lawsuit is affecting the investor’s approach to the publicly traded companies involved.

The impact will obviously extend out as the case develops. But the initial results were only modest drops for BP and APC – both down less than 0.02% in trading Thursday.

RIG, on the other hand, is again under pressure. When the blowout first occurred, RIG was hit hardest. Yesterday, while the two publicly traded production companies were showing only modest losses, RIG declined by more than 3.5%.

Of interest, as well, are several companies not named in the DOJ filing…

Halliburton Co. (NYSE:HAL), whose cementing job came under fire in both the BP spill report and in material leaked from the spill commission, was not named. Neither was Cameron International Corp. (NYSE:CAM), the manufacturer of the blowout preventer (BOP) that was of major interest throughout the spill episode. Both HAL and CAM saw share values increase yesterday, by more than 1%.

These two companies could still be added onto this complaint or become the subjects of new ones. But the DOJ seems intent, at this point, on establishing who is liable for procedural and managerial shortcomings on the drilling rig itself.

This is only round one in a multi-year legal battle between the government and the companies. It is also virtually certain that, as the liability discussion becomes more protracted, BP, Transocean, and Andarko will end up embroiled in their own cross-suits.

BP is likely to remain on the defensive in these actions, because the overall tenor of the liability issue will have been structured by the DOJ complaint filed Wednesday.

And BP clearly remains the primary target of the government.

Sincerely,

Dr. Kent Moors

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  1. felix mosso
    December 17th, 2010 at 13:49 | #1

    Hi, For what it’s worth, I saw the original airing on “60 Minutes” after the explosion and fire of the BP well. The hour was spent listening to I THINK one of the guys from the control room on the RIG.
    What I heard him say about WHAT HAPPENED was not anything that I’ve heard on the Media since. Seems as tho there might be a cover up going on as you might expect. I emailed Channel 2 about it and one other
    Media station and GUESS WHAT, no one answered me. So that makes the
    possible cover up more obvious to ME, anyway.

    Have a nice trip.

  2. Kenneth Sloan
    December 17th, 2010 at 14:25 | #2

    Are BP lawsuits related to the drop in BPT price per share Thursday 17th of December or is BP took over the running of the limited partnership?

  3. carlos goldstein
    December 17th, 2010 at 14:41 | #3

    why did shares of bpt drop so much yesterday?

  4. Vonster
    December 17th, 2010 at 15:11 | #4

    For a true examination of culpability, and who the government is comprised of, and maybe even why the spill was ‘allowed’ to happen, one should check out ‘Conspiracy Theory with Jesse Ventura’, on TRUtv. I recorded it as best I could on a wonky PVR system, but it sure looked juicy. Hopefully, for those interested, TRUtv has an archived episode website that you can access and watch on the internet.

  5. John
    December 17th, 2010 at 15:44 | #5

    Will any of the judgement $ filter down to those of us who have lost most or all of our income d/t the drilling moratorium?? Doubt it. Note that BP and GCCF moratorium related Loss Of Income claims are denied. Government Immunity protects Salazar and the DOI agaist lawsuits. Perhaps if Obama is proven as inelligible to hold office all immunity would disappear? Am now forced to employ attorney in hopes of some time in the distant future to recoup losses.
    Meanwhile those of us who have done things right and had nothing to do with BP’s well are on the verge of bankrupcy while still expected to help bring our domestic petroleum to market. And when we close our doors, inexperienced newcomers must learn to do things right.

  6. Richard Lefcourt
    December 18th, 2010 at 17:53 | #6

    Just curious. I can understand the potential for criminal charges (Obama’s anti-capitalist position is to be expected) but if BP has been picking up the clean-up costs all along, how can financial damages be reasonably assessed? Or is the government just pulling a number out of thin air for the sake of punishment?

  7. Richard Schmidt
    December 18th, 2010 at 19:11 | #7

    I own BP stock which I purchased before the blow out in the gulf. Is it wise to hang on this BP stock?

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