Q+A: How would penalties apply to the Gulf oil spill

WASHINGTON Fri Jun 11, 2010 3:24pm EDT

WASHINGTON (Reuters) - With the U.S. government doubling its estimate of oil coming out of the broken well on the sea floor of the Gulf of Mexico, companies linked to the spill, including BP Plc, face an increasing liability and potential penalties. Following are some questions and answers for how it could play out.

Q: WHO COULD BE SUBJECT TO PENALTIES?

A: The U.S. Justice Department has launched both a criminal and civil investigation into the oil spill but officials have not identified the targets. However, the likely companies that will be the focus of the investigation include BP, Transocean Ltd, which operated the drill rig, Cameron International, which provided the blowout preventer, and Halliburton Co, which was in charge of the cement for the oil well.

Q: WHAT ARE THE LAWS AND FINES?

A: In addition to the payments for the cleanup and recovery from the biggest oil spill in U.S. history, the companies that are deemed to be responsible for the oil spill could be subject to penalties under a number of laws. They include:

* Clean Water Act - makes it illegal to discharge any pollutants into major bodies of water such as the Gulf. Civil penalties can be up to $1,100 per barrel of oil spilled in waterways but if negligence is found and proven, the fines can go up to as much as $4,300 per barrel.

* Migratory Bird Treaty Act - protects migratory birds and makes it illegal to harm some 836 species of birds as well as their nests and eggs. That list (found here: here) includes the brown pelican, which have been particularly affected by the oil spill. Fines can be up to $15,000 per violation.

* Endangered Species Act - makes it illegal to harm or kill any animal or plant on the endangered species list, including acts that change or degrade the habitat, feeding or breeding. The list includes several types of sea turtles and already a few dozen have been affected by the oil slick. Civil fines can go up to $25,000 per violation. (www.fws.gov/endangered/)

* Criminal violations: experts note that criminal penalties could be assessed and they could be as much as double the economic loss and recovery costs, however that will likely be negotiated.

Q: WHAT ARE THE POSSIBLE TOTAL FINES?

The White House has already estimated that the costs for the response, cleanup and penalties will reach into the billions of dollars. Before the new flow rate of up to 40,000 barrels (1.68 million gallons/6.36 million liters) per day was revealed, some financial analysts estimated that the Clean Water Act fines could stretch from $700 million to as much as $4.2 billion.

With the new estimates, as much as 2 million barrels (84 million gallons/318 million liters) of oil may have spilled from the well when it ruptured on April 20 through June 3 when the underwater pipe was sawed off to clear the way for a new cap to be placed on it. The flow was estimated to have increased as much as 5 percent after that cut.

Just based on that initial 2 million barrels of oil, the range of civil penalties could be between $2.2 billion and $8.6 billion. Penalties could be applied to each company found responsible for the leak, though one expert said that they would likely share the burden instead and that there would probably be a limit to those penalties imposed.

"At some point there is a limit to how much BP is going to be able to pay ... particularly since they also have to pay the clean up costs and have to address national resource and economic damage claims," said Professor David Uhlmann, from the University of Michigan Law School and former chief of the Justice Department's environmental crimes section.

Q: HOW DOES THIS COMPARE TO PAST CASES?

The closest comparison available is the Exxon Valdez spill in 1989 when 260,000 barrels of oil spilled into Alaska's Prince William Sound. Exxon ended up paying $125 million in criminal penalties as well as $900 million in civil penalties and damages.

In 2006, more than 5,000 barrels of oil spilled onshore on Alaska's North Slope due to a leak in a BP-owned pipeline. The company was fined $20 million for negligence under the Clean Water Act.

Q: CAN THE COMPANIES AFFORD IT?

A: Questions have been raised whether the companies can afford the cost of the cleanup, recovery and penalties, however most experts consider the chances of default to be small. Here is a snapshot of how much the companies earned last year in net income and how much cash they had on hand at the end of 2009.

BP posted about $16.8 billion in net income last year and had $8.3 billion in cash and cash equivalents at the end of the year.

Cameron earned $475.5 million in net income in 2009 and had about $1.86 billion in cash and cash equivalents at the end of last year.

Halliburton posted about $1.15 billion in net income in 2009 and had $2.1 billion in cash and equivalents at the end of the year, plus $1.3 billion in short-term U.S. Treasury securities.

Transocean earned almost $3.2 billion in 2009 and had $1.1 billion in cash and cash equivalents at the end of the year.

Q: COULD THE COMPANIES NEGOTIATE A SETTLEMENT?

A: Put simply, yes. As has occurred in the past cases, the responsible parties could try to negotiate a plea agreement and civil settlement with the Obama administration over the charges, damages and penalties related to the oil spill. Exxon and BP have negotiated pleas in similar spill cases and experts have said that could and likely will happen in this disaster.

There are a couple factors that could play into any negotiation. One is the growing tension between the Obama administration and BP, including about whether the company has been as forthright as possible in the eyes of the government. A second factor is that BP has been held criminally liable for past acts, including the spill in Alaska and a fatal explosion at a refinery in Texas. In those cases, BP negotiated a settlement with the U.S. government rather than face a court battle.

"There's no question that BP will pay a larger criminal fine for its role in the Gulf oil spill than they would have had they not had a criminal history," Uhlmann said, but added that the company would likely cut a deal.

"They're not going to seek the maximum because this is all going to be resolved through a plea agreement on the criminal side, through a consent decree on the civil side," he said. The companies are going to negotiate for some middle ground and the government's likely to agree to a middle ground."

Q: WHEN WOULD ACTION TAKE PLACE?

A: Experts have said the investigation and possible settlement negotiations could take years and could depend on how adversarial it gets between the companies and the Obama administration. In comparison, the government is still today pursuing about $92 million from Exxon from the Valdez case.

(Editing by Eric Beech)