Settling Accounts from the BP Gulf Oil Spill

800px-Defense.gov_photo_essay_100506-N-6070S-819By Elinor Tarlow — October 29 at 6:22 p.m.

More than four years ago, BP’s Macondo well exploded, killing 11 men and spewing millions of barrels of oil into the Gulf of Mexico. The surrounding waterways and marine life still bear the scars of the explosion: brightly colored coral colonies have turned brown and dull, some species of fish have developed heart and other deformities, and more than 900 bottlenose dolphins have been found dead or stranded since the explosion.

Although the Gulf States currently lack sufficient resources to assess the extent of the environmental damage and to remedy it appropriately, two recent legal developments lay the groundwork for distributing long-awaited funds to the states.

First, earlier this month, the Treasury Department finalized rules governing a trust fund that will distribute money to the Gulf States for environmental and economic restoration. Certain state and local governments may now apply for grants to support the recovery of communities affected by the oil spill.

The fund, which Congress established in June 2012 as part of the RESTORE Act, will receive 80 percent of the administrative and civil penalties paid to the United States under the Clean Water Act (CWA) by the parties responsible for the oil spill. A portion of these penalties will be distributed among five Gulf States—Florida, Mississippi, Alabama, Louisiana, and Texas.

Although there is currently $653 million available in the trust fund (from the $1.4 billion in fines Transocean paid in an earlier settlement), significantly more funding likely will come from another source—the CWA civil fines that BP will have to pay for its contribution in causing the oil spill.

Second, U.S. District Judge Carl Barbier recently issued a decision that provides some indication of how much money BP will have to pay for violating the CWA and, therefore, how much money the Gulf States ultimately will receive from the fund.

Under the CWA, a polluter must pay civil penalties of $1,100 for each barrel of oil spilled. The CWA provides an enhancement penalty, which imposes fines that are nearly four times as much per barrel if the polluter was “grossly negligent” in causing the spill.

Last month Barbier found that BP’s conduct leading up to the oil spill constituted “gross negligence.” Barbier defined “gross negligence” as similar to recklessness—“an extreme departure from the care required under the circumstances or a failure to exercise even slight care”—and found that because deepwater drilling is such an inherently risky operation, BP employees fell below this standard in two ways. First, Barbier determined that two BP employees were “grossly negligent” when they ignored the results of a critical safety test and decided not to investigate or notify anyone of the clear indications that the well was not safe to drill. Second, Barbier also found that a series of eight actions, including BP’s decision to drill the final 100 feet of the well with little or no margin, cumulatively constituted “gross negligence.”

As a result of Barbier’s determination, BP may pay civil fines under the CWA for as much as $18 billion. Barbier will conduct proceedings to determine the exact amount in January 2015.

This money, though, likely will not become available to the Gulf States anytime soon. In part because the fine is so large, BP will try to challenge Barbier’s determination of gross negligence and the ultimate penalty assessment. BP initially set aside only $3.5 billion for its civil fines under the CWA—roughly one-fifth of what Barbier could impose. And such a substantial fine could significantly affect the company’s economic outlook. To put the fine in context, $18 billion in penalties would be $6 billion more than BP collected in profits in 2012.

Indeed, BP has already appealed Barbier’s decision, alleging his opinion improperly relied on expert evidence that was excluded at trial. BP is now asking Barbier either to revise his ruling to exclude that evidence or to hold a new trial to allow BP to support its position. And BP has stated that, when Barbier begins the penalty proceedings, it will try to show that its conduct merits a penalty less than the $18 billion maximum.

The finalization of rules for the trust fund and Barbier’s decision to expose BP to enhanced penalties under the CWA are important steps in channeling much-needed money to the Gulf States for environmental restoration. But these are merely first steps. As BP winds its way through the court system, it may be some time before the Gulf States know exactly how much money they will be allocated and when they will have access to such funds. In the meantime, the fate of the Gulf States’ waterways and marine life hang in the balance.