UPDATE 6-US bans BP from new govt contracts after oil spill deal

Wed Nov 28, 2012 6:20pm EST

* Suspension could threaten BP's offshore leases, military deals

* BP pleaded guilty over 2010 Gulf of Mexico oil spill

* BP says hopes to reach deal with EPA to resolve suspension

By Roberta Rampton and Timothy Gardner

WASHINGTON, Nov 28 (Reuters) - The U.S. government banned BP Plc on Wednesday from new federal contracts over its "lack of business integrity" in the 2010 Deepwater Horizon oil spill, possibly imperiling the company's role as a top U.S. offshore oil and gas producer and the No. 1 military fuel supplier.

The suspension, announced by the Environmental Protection Agency, comes on the heels of BP's Nov. 15 agreement with the U.S. government to plead guilty to criminal misconduct in the Gulf of Mexico disaster, the worst offshore oil spill in U.S. history. The British energy giant agreed to pay $4.5 billion in penalties, including a record $1.256 billion criminal fine.

BP and its affiliates are barred from new federal contracts until they demonstrate they can meet federal business standards, the EPA said. The suspension is "standard practice" and BP's existing U.S. government contracts are not affected, it said.

The EPA acted hours before a government auction of offshore tracts in the Gulf of Mexico, a region where BP is is the largest investor and lease-holder of deep-water tracts and hopes for further growth. BP is also the top fuel supplier to the U.S. military, the largest single buyer of oil in the world.

Suspension of contracts could give the government leverage to pressure BP to settle federal and state civil litigation that could top $20 billion if a court finds BP was grossly negligent in the Deepwater Horizon disaster.

An EPA official said government-wide suspensions generally do not exceed 18 months, but can continue longer if there are ongoing legal cases.

In a statement, BP said it has been in "regular dialogue" with the EPA, and that the agency has informed BP that it is preparing an agreement that "would effectively resolve and lift this temporary suspension." The EPA has notified BP that the draft agreement will be available soon, BP said.

U.S. operations accounted for more than 30 percent of BP's pre-tax profits in the third quarter, and the United States accounts for about a fifth of BP's global oil production.

The U.S. military has been a reliable customer of BP's jet fuel and other refined products. As recently as September, BP affiliates won two military fuel contracts worth as much as $1.37 billion, according to a website that tracks U.S. military contracts.

The EPA's action is a sign that all federal contractors will be held to high standards, said Scott Amey, general counsel for the Project on Government Oversight, a private watchdog group.

"BP had years to improve its business ethics and is paying the price for its inaction," Amey said.

On Nov. 15, BP Finance Director Brian Gilvary told investors on a conference call that any blanket ban could force the company to rethink its entire U.S. business.

The Justice Department says it intends to prove in a court case set to get underway in February 2013 that BP was grossly negligent under the Clean Water Act, a claim the company has adamantly denied.

"The critical question is whether this a shot across BP's bows to get settlement, or a more sustained stance, in which case the importance of the context is underlined" by Gilvary's comments, said Peter Hutton, an analyst with RBC Capital Markets.

The EPA's suspension will not impair BP's ability to produce oil and gas from existing U.S. assets, said Pavel Molchanov, an analyst with Raymond James & Associates Inc in Houston.

"BP's supply contract of fuels to the Pentagon might be at risk, but of course BP could supply other customers if this supply contract is not renewed," Molchanov said in a research note.

BP and the U.S. government likely worked out a deal on the timing of the suspension before BP agreed to sign off on the Nov. 15 criminal plea deal, said Samuel Buell, a Duke University Law School professor and former federal prosecutor.

"It's just inconceivable to me that BP's lawyers ... would have entered into that agreement last week without the issue of a suspension or debarment having been addressed," Buell said.

BP did not participate in Wednesday's federal auction of 20 million acres (8 million hectares) of drilling tracts in the Gulf of Mexico, one of BP's biggest oil production regions globally.

One long-time critic of BP applauded the decision.

"After pleading guilty to such reckless behavior that killed men and constituted a crime against the environment, suspending BP's access to contracts with our government is the right thing to do," U.S. Rep. Edward Markey, a Democrat from Massachusetts, said in a statement.

BP's U.S.-traded shares closed flat, while London-traded shares were down less than 1 percent at 427 pence.