Bloomberg News

BP’s Oil Spill Deal Sours as Claims Add Billions to Cost: Energy

June 05, 2013

BP’s Oil Spill Deal Sours as Claims Add Billions to Cost

The blowout of BP’s deep-water Macondo well off the coast of Louisiana in April 2010 killed 11 people and sent more than 4 million barrels of oil spewing into the Gulf of Mexico. Photographer: Derick E. Hingle/Bloomberg

BP Plc’s $8 billion settlement with victims of the 2010 Gulf of Mexico spill may have hurt Europe’s second-largest oil company more than it helped.

The company is relying on a U.S. appeals court to rein in awards by the settlement’s claims administrator for what it considers to be unreasonable demands, such as a $21 million payout to a rice mill 40 miles from the coast whose revenue rose the year of the spill.

BP has protested in court filings that administrator Patrick Juneau’s interpretation of last year’s settlement may add billions to the $42 billion bill for the worst offshore oil spill in U.S. history. BP has appealed U.S. District Judge Carl Barbier’s order agreeing with Juneau’s interpretation of the settlement.

BP contends that interpretation is wrong. More to the point, the London-based company may have agreed to a flawed deal as it rushed to move on after the accident, said David Berg, a Houston trial lawyer who often sues polluters on behalf of municipalities. The level of compensation was never capped and the settlement didn’t require proof that losses were caused by the spill, he said.

“BP cut itself a bad deal,” Berg said in an e-mail. “It is a stupid agreement leading to huge exposure, but it is BP’s agreement.”

Under the terms of BP’s settlement, economic losses suffered by businesses in the affected region are presumed to have been caused by the oil spill if they meet a certain numerical formula, regardless of other factors, said Berg, who has closely followed the litigation and isn’t involved in it.

BP ‘Panic’

“BP hoisted itself” when its attorneys didn’t negotiate a requirement that businesses prove their losses were caused by the spill in order to get paid, Berg said. This may have been caused by “panic within BP to get the agreement done and keep the Justice Department at bay by showing good faith,” he said.

BP slipped 1.2 percent in London trading to close at 464 pence. The shares, up 9 percent this year, are still down about 25 percent since the spill three years ago.

BP said last year when it reached the settlement of most economic and medical-injury claims by private parties that the agreement would cost $7.8 billion.

In a U.S. regulatory filing in February, BP increased its estimate of the settlement cost to $8.5 billion, based in large part on Juneau’s decisions regarding the disputed claims. In subsequent filings, the company simply said it could no longer publicly predict how much the settlement will cost.

Awarding Claims

“At the time they settled, BP believed the process would be equitable to both sides,” said Jason Gammel, an analyst at Macquarie Capital Europe Ltd. in London. “It’s played out in a way that’s clearly awarding claims they would not have viewed as being equitable.”

The U.S. Court of Appeals in New Orleans, which is scheduled to hear BP’s appeal on July 8, is unlikely to reverse Barbier’s decision, said Anthony Sabino, a law professor at St. John’s University in New York who specializes in complex litigation.

“The Fifth Circuit likely will give this short shrift,” he said in a phone interview, referring to the appeals court.

“A deal is a deal,” especially in the oil patch of the U.S., which includes Louisiana, where both the trial and appeals courts are located, Sabino said. “It’s not the job of federal judges to save you from yourself.”

The company was aware that the settlement could lead to claims being paid to plaintiffs who didn’t sustain losses or couldn’t prove losses were connected to the spill, he said.

‘False Positives’

“They knew about these so-called false positives,” Sabino said. “They agreed that they wouldn’t have absolute discretion or the last word on final payments.”

The appeals court will probably tell BP, “You knew they were there and you took the settlement with its benefits and its burdens,” he said.

The blowout of BP’s deep-water Macondo well off the coast of Louisiana in April 2010 killed 11 people and sent more than 4 million barrels of oil spewing into the Gulf of Mexico. The accident sparked hundreds of lawsuits against BP, Transocean Ltd. (RIG:US), owner of the Deepwater Horizon drilling rig that burned and sank, and Halliburton Co. (HAL:US), which provided cement services for the well.

BP contends in court papers that Juneau’s interpretation of the settlement accord has resulted in the company paying “baseless awards” that weren’t contemplated in the agreement, according to a May 3 appellate filing.

BP Protesting

BP is protesting Barbier’s decision that allows businesses to submit claims for losses based on their own accounting, without requiring matching of revenues with expenses. This has led to claims for damages unrelated to injuries sustained, BP contends.

Under the settlement, the payments for claims are based on a numerical formula, primarily depending on distance from the spill, using sample periods before and after the event. Businesses that claim losses don’t have to prove direct impact or a link to it. They are assumed to have suffered because of the spill’s general economic impact across the region, according to court filings.

The ruling upholding Juneau’s “flawed interpretation of the settlement agreement has effectively rewritten parts of that agreement related to business economic loss claims,” Geoff Morrell, a BP spokesman, said in a statement.

‘Arbitrary’ Methodology

“The methodology being used to evaluate these claims is arbitrary and irrational: it is not based on the terms of the settlement and disregards basic accounting and economic principles,” Morrell said. He said Juneau’s interpretation “undermines the very basis on which the settlement was approved, effectively putting the entire class settlement at risk.”

The company and the Plaintiffs Steering Committee, or PSC, “agreed to a settlement intended to fairly compensate those affected by the spill and BP remains committed to doing just that,” Morrell said. “It is preposterous for the PSC to suggest that the issues presented in the Fifth Circuit appeal are the result of nothing more than a ‘bad deal’ negotiated by BP.”

“BP -- in a settlement agreement it co-authored -- itself defined which losses were caused by the spill in agreeing to an objective, transparent claims process,” Steve Herman, co-lead counsel for the plaintiffs, said today by e-mail. “Simply put, BP guessed wrong on the cost and is now trying to wrest control of the settlement from the independent, neutral claims administrator in an effort to save money for its shareholders.”

‘Cottage Industry’

BP said in court filings that a “large cottage industry” has been created by trial lawyers offering to file spill-loss claims for businesses that experienced no losses.

“There is no reason for a defendant in BP’s position to enter into a settlement agreement that would provide windfall compensation to thousands of businesses that could never have hoped to recover a penny in litigation,” Ted Olson, a lawyer for BP, said in one filing.

The company said in a May 31 filing that it wants the court to force the settlement administrator’s “accountants to engage in accounting, using well-accepted definitions of the agreement’s terms” rather than “accept the garbage in, garbage out approach” pushed by the plaintiffs, which has resulted in payment of bogus claims.

Seeking clients for claims, the Perry Draper Law firm in Tampa, Florida, said in an advertisement: “In our experience, about 80 percent of all businesses qualify for BP oil compensation. If the numbers work, there is no need to provide proof that BP caused your loss.”

Wide Eligibility

“Most businesses, even if they are located hundreds of miles inland, are eligible to participate,” Thomas L. Young, a lawyer also based in Tampa, said on his firm’s website that BP attached to a court filing. BP “intentionally” agreed to this payment formula, Young said. He encouraged regional businesses not to feel they are taking money “out of a more deserving party’s hands” by claiming a share of the oil spill payout because BP’s settlement fund is uncapped.

This isn’t unusual in mass-tort litigation in the U.S., Sabino said. “Welcome to America, the land of the free and the home of the opportunistic,” he said.

BP complained that it has had to pay $9.7 million to a construction company in northern Alabama that does no business in the Gulf region and whose profit rose in 2010. A digital printing business in Alabama also received $3.7 million even as its profit increased.

‘Fictitious’ Losses

BP said the company was initially unaware it was paying what it calls “fictitious” losses until the last quarter of 2012, when business-loss awards approved by Juneau “accelerated dramatically,” according to the May 3 filing.

The volume of disputed claims increased further after BP appealed Barbier’s decision upholding Juneau’s interpretation, the company claimed in court filings. Juneau’s flawed process, “rather than actual losses, is driving new claims,” company lawyers said in court papers.

While BP’s lawyers contend the company didn’t contemplate that it would have to pay claims for economic losses unconnected to injuries, Barbier said that negotiations did take that into consideration. In his ruling, the judge cited a letter from a company executive to Juneau in September.

Such results are an “inevitable concomitant of an objective, quantitative, data-based test,” Mark Holstein, an in-house lawyer for BP, said in the letter, according to Barbier.

Judge’s Ruling

“BP’s interpretation injects a subjective notion of alternative causation and a degree of complexity that are contrary to the settlement’s terms,” Barbier said in his March 5 ruling supporting Juneau’s actions.

BP is protesting a loss-calculation formula that it knew about and accepted, victims’ lawyers have said in court papers. Claimants are using comparable months to determine losses, as provided for in the settlement, and counting revenue when they receive it, the lawyers contend. BP says claimants should have to match revenue with expenses and use comparable months to avoid inflating losses.

Claimants can participate in the settlement if they are part of the covered groups or in the geographic locations specified in the agreement, victims’ lawyers said in an April 17 filing with the appeals court. Under the settlement, all economic losses are “presumed to be caused by the spill,” they said, citing language from the agreement.

‘Buyer’s Remorse’

BP is experiencing “buyer’s remorse,” the lawyers said in the filing. The company didn’t mention the issue while seeking final approval of the settlement and is now legally barred from raising it, they said. “The compensation framework, as applied by the claims administrator, was touted by BP’s own experts as a basis for the district court’s approval,” according to the lawyers.

Halliburton had warned before the settlement was approved that some claimants with no losses might be paid under the terms of the agreement.

Halliburton said the settlement was flawed and filed an objection that included the opinion of Marc Vellrath, a financial economist from Orinda, California.

“The economic damages settlement agreement does not require rigorous demonstration of injury or examination of causation for members of the proposed class,” Vellrath said in the Aug. 31 filing.

Economic losses that could have been attributed to the general financial condition of the Gulf region or lingering effects of Hurricane Katrina wouldn’t be taken into consideration in determining or off-setting payments, he said.

‘Mechanical Formulas’

The agreement “reduces the calculation of payment amounts to mechanical formulas based on patterns that may or may not correspond to actual damages,” Vellrath said. Barbier didn’t consider Halliburton (HAL:US)’s objection when approving the settlement in December because the cementing contractor wasn’t a party to the agreement between BP and victims’ lawyers.

There may be limited recourse for BP with these claims, said Sabino, the law professor. “BP’s best chance” is for the Fifth Circuit to bounce the matter back to Barbier to review whether the claims administrator may be using flawed data, he said.

That would lead to a “case by case analysis” and wouldn’t strike down the settlement or change the interpretation of its terms, Sabino said. Barbier has already upheld Juneau’s interpretation three times and further objections may receive the same reception, he said.

Sabino’s advice to BP is to “Shut up, write the check.”

“Anything else is a waste of time,” he said.

The case is In re Oil Spill by the Oil Rig Deepwater Horizon in the Gulf of Mexico on April 20, 2010, 10-md-02179, U.S. District Court, Eastern District of Louisiana (New Orleans).

To contact the reporters on this story: Margaret Cronin Fisk in Detroit at mcfisk@bloomberg.net; Brian Swint in London at bswint@bloomberg.net; Laurel Brubaker Calkins in Houston at laurel@calkins.us.com.

To contact the editors responsible for this story: Michael Hytha at mhytha@bloomberg.net; Will Kennedy at wkennedy3@bloomberg.net.


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Companies Mentioned

  • RIG
    (Transocean Ltd)
    • $41.27 USD
    • -0.14
    • -0.34%
  • HAL
    (Halliburton Co)
    • $70.74 USD
    • -0.48
    • -0.68%
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