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undertaken or organised extensive clean-up operations, and by the end of June 2010 had removed some 28 million Deepwater Horizon US gallons of oil and oily liquids, largely by skimming and its Legal oil from the surface. Containment booms have been extensively deployed but their effectiveness can be Ramifications reduced by high winds and rough seas. One controversial aspect of the response has been the use of the dispersant * Corexit, which has been sprayed onto the surface and, Stephen Tromans QC with the approval of the US Environmental Protection Agency (USEPA), injected at the site of the leak. Concerns have been expressed as to the toxicity and the The facts effectiveness of the dispersant, and in May 2010 the The basic facts are these. On April 20, 2010 an explosion USEPA required BP to reduce the volumes of dispersant occurred on a mobile offshore drilling unit, the Deepwater used, and use an alternative product or justify the decision 4 Horizon, floating about 50 miles off the Louisiana coast, to continue using Corexit. In addition, various attempts in the Macondo Prospect oilfield in the Gulf of Mexico. have been made by BP to reduce or stop the spill, using It was owned by Transocean Limited and leased by BP. Remotely Operated Vehicles (ROVs), the attempted The unit was designed to be used in ultra-deep waters placement of various containment domes over the and at the time of the explosion was drilling an damaged wellhead, the diversion and capture of flow, the exploratory well in waters roughly a mile deep. BP had pumping down of heavy drilling fluids (“top kill”) and purchased the drilling rights from the US Minerals most recently the drilling of relief wells through which Management Service in March 2008. BP was the operator cement could be injected to plug the damaged well and principal developer of the Macondo Prospect, the (“bottom kill”). It may be that the endgame for stopping minority partners being Anadarko Petroleum Corporation the flow is in sight and that by the time this article is 5 (25 per cent) and Mitsui Oil Exploration (10 per cent). published BP will have been successful—or it may not. The unit was being operated by Transocean under contract for BP. Subcontractors were also involved: for example The effects Halliburton Energy Services was installing and cementing The effects are not only those visible on the surface, but the production casing.1 Only six BP personnel were on also the extensive underwater plumes of pollutants which board at the time. have been observed by academic researchers. By June The explosion appears to have been caused by a bubble the spill had reached the Louisiana coast and barrier of methane gas which escaped from the well, up the drill islands in Mississippi, Alabama and Florida. Various column, and ignited. It burst through the floor of the rig ecologically important national parks and wildlife refuges and an intense fire engulfed the platform. Eleven workers have been affected. At risk are important and increasingly perished in the blast and fire. The unit burned for over a scarce oyster reefs, large populations of migratory birds, day, sank on 22 April, and now lies at the bottom of the sea turtles and other marine mammals. As well as the Gulf of Mexico. The first reports of oil leaking from the environmental damage, the economic effects have been well came on 22 April, when a large slick was observed considerable and will continue to be so. The Gulf of by US Coast Guards. Initial attempts to cap the well using Mexico ecosystem provides some 40 per cent of the remotely operated underwater vehicles were unsuccessful. seafood consumed in the United States. During May, the Estimates as to the rate at which oil is gushing from the National Oceanic and Atmospheric Administration damaged wellhead have of course varied widely,2 but the (NOAA) closed affected federal waters to commercial incident must rank as one of the largest oil spills ever and recreational fishing, an area which steadily increased. encountered.3 A fisheries disaster for the states of Alabama, Louisiana and Mississippi was declared on 24 May. The impact on The response tourism and related services in Florida and other states The oil is unfortunately relatively heavy in comparison will no doubt depend on how much further oil comes with other oil drilled off the Louisiana coast, and is therefore more resistant to clean-up techniques. BP has

* 39 Essex Street, London WC2R 3AT; [email protected]. It is difficult to keep up to date with the constant flow of information and new developments relating to the incident. This article includes developments up to July 11, 2010. 1 Other subcontractors working on the rig, though not necessarily at the time of the accident, were Schlumberger Ltd (wireline services) and MI-SWACO (mud engineers). 2 The official estimates of rates of release produced by the Flow Rate Technical Group of relevant US regulatory bodies and outside academics have increased as the incident has progressed and more information has become available, but there are huge difficulties in measuring or estimating the flow rates at such a depth. 3 The Ixtoc I spill in 1979, also in the Gulf of Mexico, involved an estimated 30,000 barrels of oil per day at its worst and an estimated 3 million barrels overall, but was shallower and less extensive. The Gulf War losses of oil in 1991 could have been up to 6 million barrels, and the massive Lakeview Gusher spill in California in 1910 involved 9 million barrels. Certainly President Obama was unequivocal in his Oval Office speech on June 15, 2010 that the BP oil spill is “the worst environmental disaster America has ever faced”. However, it is a moot point whether the damage even approaches that caused by ongoing spills in the Niger delta: see The Observer, May 30, 2010, “Nigeria’s agony dwarfs the Gulf oil spill. The US and Europe ignore it.” 4 http://www.epa.gov/bpspill/dispersants.html#qanda2 [Accessed July 20, 2010]. 5 “BP Heads for the Endgame — in the Gulf and in the Boardroom” The Times, July 9, 2010.

[2010] I.E.L.R., Issue 5 © 2010 Thomson Reuters (Legal) Limited and Contributors 164 International Energy Law Review ashore. The same may be true of real estate values in been directed not only at BP, but also at the MMS for affected locations and of cruise ship operations in the failing to require provision of a remote control blowout Gulf. prevention device, operated by radio signal, of the sort required in Norway and Brazil since the 1990s,10 and The investigations which might11 have achieved activation of the system even though the rig and associated pipes and cables were BP’s website does not provide an explanation of the destroyed.12MMS was apparently influenced by the cost explosion, or of the failure of blowout prevention systems of such devices (US $500,000) and the contingency plans to avoid the escape of oil. The US Coast Guard and the in place for response using ROVs. There is concern that Minerals Management Service (MMS) began an the MMS has relied unduly and uncritically, or has been investigation into the incident on April 22, 2010. Issues swayed by, oil industry assurances in this regard.13 Other to be addressed include the cementing procedure being complaints include the routine overruling of staff used at the time of the explosion, and any possible biologists and engineers within the MMS when raising deficiencies in the blowout preventer and its back-up concerns, as to safety and environmental issues of drilling failsafe systems. Other investigations are in hand. These in the Gulf and Alaska, failure to require that lessees include the criminal investigation opened by the US obtain the permits required from the National Oceanic Attorney General on June 1, the work of the National and Atmospheric Administration under the Endangered Commission established by the President’s Executive 14 6 Species Act and the Marine Mammal Protection Act Order on May 22, and of course the House of and the exemption of BP’s Gulf operations from Representatives Sub-Committee hearings at which BP environmental impact assessment under the National and other oil company representatives appeared in June Environmental Policy Act (NEPA).15 Since the disaster 2010. The Sub-Committee on Oversight and there has been a fundamental restructuring of the MMS, Investigations indicated in no uncertain terms to Tony which by order of the Secretary of State for the Interior Hayward, BP’s Chief Executive, before his appearance, was renamed the Bureau of Ocean Energy Management, their view that BP had “… repeatedly chosen risky Regulation and Enforcement, with a new Director. The procedures in order to reduce costs and save time and 7 reforms include the somewhat obvious step of separating made minimal efforts to contain the added risk.” They the functions of leasing and regulation from that of raised a number of issues on which it was suggested 16 8 revenue generation, now with the Office of Natural corners had been cut in order to speed finishing the well, Resource Revenue, and a separate Bureau of Safety and including the well design of the final section, using a Environmental Enforcement. Whilst the Outer Continental single string casing which could be more vulnerable to Shelf Lands Act mandates consideration of both the leaks, and whether BP had ignored recommendations economic and environmental values of outer Continental from Halliburton, its cementing contractor, as to the use Shelf resources, and the potential impact on of oil and of an adequate number of centralisers to ensure proper gas exploration on the marine, coastal and human positioning of the casing and avoid potential gas flow environments,17 there was an obvious tension in the same problems. body dealing with revenue maximisation and environmental protection. The regulatory shortcomings Under the Outer Continental Shelf Lands Act of 1953, It is too soon to form any definitive conclusion on what the MMS had responsibility for approving drilling regulatory deficiencies may have contributed to the activities under Federal leases. The Act requires that disaster. Attention has centred on the blowout preventer, operations in the Outer Continental Shelf should be which it is clear was not effective, whether through failure conducted in a safe manner to prevent or minimise the to activate, or failure by the rams to cut through the well likelihood of blowouts, loss of well control, fires, casing,9 or both. In any event, it was a mechanism spillages, physical obstruction to other users of the waters intended to be failsafe, but which failed. Criticism has or subsoil and seabed, or other occurrences which may

6 This will be chaired by Senator Bob Graham and former USEPA Administrator William K. Reilly, to “consider the root causes of the disaster and offer options on safety and environmental precautions”. It has been suggested that the Commission will hold local hearings, which could “descend into a carnival-like atmosphere”: Financial Times, July 1, 2010. 7 Letter from Chairman of Committee on Industry and Commerce and of Subcommittee on Oversight and Investigations, June 14, 2010. 8 It is certainly true that the hire of the rig from Transocean was expensive, costing BP around $500,000 per day, plus contractor’s fees. 9 Concern has been expressed that the shear rams used to close the pipe may not be effective with the thicker casings used for deep water drilling: see “Safety Device Questioned in ‘04” Wall Street Journal, May 3, 2010. If correct, this may implicate the shear ram manufacturer, Cameron International Corp. 10 Such acoustic triggers are not required at present in the UK. However some oil companies such as Shell and Total are understood to use them even when not required by regulators. 11 It can only be “might” because such devices have never been put to the test in a major accident. 12 “Leaking Oil Well Lacked Safeguard Device” Wall Street Journal, April 28, 2010. 13 “Oil Spill Investigators find Critical Problems in Blowout Preventer” Wall Street Journal, May 12, 2010. 14 “US said to Allow Drilling without Needed Permits” New York Times, May 13, 2010. 15 “US Exempted BP’s Gulf of Mexico Drilling from Environmental Impact Study” The Washington Post, May 5, 2010. The article suggested that MMS granted between 250–400 waivers a year for Gulf of Mexico projects. 16 Revenues from oil and gas leases in federal land and waters are one of the largest sources of federal government income after taxation. 17 43 U.S.C. §1344.

[2010] I.E.L.R., Issue 5 © 2010 Thomson Reuters (Legal) Limited and Contributors 165 cause damage to the environment or to property, or federal authority determining that the blowout preventer endanger life or health.18 This should involve and associated systems will prevent a blowout occurring, consideration of the lessee’s Exploration Plan.19 Such that there is a response plan to ensure capacity to promptly Plans should, according to the Federal Regulations made stop a blowout should one occur, and that the applicant under the Act, include an oil spill response plan,20 which has the capacity to commence and complete a relief well in turn must include consideration of a worst case within a defined period if necessary. It contemplates discharge scenario which, for exploratory drilling regulations to require the use of blowout preventers and operations, means the daily volume possible from an prescribe standards for them, and to require independent uncontrolled blowout.21 The scenario must discuss how third-party certification of such preventer prior to drilling. to respond to the well flowing for 30 days under an There will also be wider consequences as other uncontrolled blowout scenario and details of the response jurisdictions consider what lessons should be learnt and to such a worst case accident. However, in 2008, the changes made—for example the increasingly deep drilling relevant Regional Director of the MMS for the Gulf of occurring in the UK waters west of Shetland.26 Mexico issued a notice22 under a provision which allows MMS to limit the amount of information or analysis to The claims be provided in plans. This notice, which dispenses with the requirements of worst case spill assessment for It is impossible to forecast accurately what the ultimate exploratory plans in specified instances, is now the subject costs to BP will be. By July 2010, BP’s own response of a Federal lawsuit filed by the environmental costs were well in excess of US $2.5 billion, including claims paid and federal costs. On top of these costs to non-governmental organisations (NGOs) the Sierra Club 27 and the Gulf Restoration Network against the Department date will be further third-party compensation claims, of the Interior and the MMS, on the basis that it which at present are mainly from affected fishermen, unlawfully exempted exploratory drilling operations from shrimpers, charter-boat operators and hoteliers. However, important requirements on worst case response scenarios.23 if the reports of claims by members of the public along The Initial Exploration Plan produced by BP in February the Gulf Coast to have suffered sickness, headaches and 2009 under the heading “Blowout Scenario” simply stated chest pains from exposure to airborne volatile organic (apparently in conformity with the MMS notice): compounds are accurate, then the claims so far made could be just the tip of the iceberg for BP. Many of the “A scenario for a potential blowout of the well from lawsuits are class-actions filed in Texas and Florida. which BP would expect to have the highest volume There will also be claims by the affected states for of liquid hydrocarbons is not required for the natural resource damages and lost tax revenues: in June 24 operations proposed in this EP” 2010, the state of Louisiana unsuccessfully attempted to and that: obtain legislation to allow it to instruct private attorneys to act on a contingency fee basis for natural resource “discussion of response to an oil spill resulting from damages claims in respect of the spill. The costs of the activities proposed in this plan is not required restoring, rehabilitating, replacing or acquiring the for this Exploration Plan.” equivalent of the damaged environmental resources could 28 Following their June 2010 hearings, the US House of obviously be massive, and United States and state Representatives Subcommittees on Energy and governments have begun the process of seeking to assess Environment and Oversight and Investigations has the value of the damaged or endangered ecosystems and concluded that each of the major oil companies’ spill resources, and to establish a baseline for assessing further response plans “are practically identical to the tragically damage that may occur. flawed BP oil spill response plan” and that “no oil Irrespective of the prima facie limit of US $75 million company appears to be better prepared for a disastrous for non-response costs placed by the Oil Pollution Act of spill than BP was”.25 Both regulatory and legislative 1990 on the liability of BP, as the responsible party reform will inevitably follow. There has already been operating an offshore facility, BP has agreed following introduced into Congress the Blowout Prevention Act of its meeting with the President on June 16, to create a US 2010, which would require that no drilling of “high-risk” $20 billion fund, to be built up by quarterly payments offshore wells should take place without the relevant and backed in the interim by its US assets as surety, to

18 43 U.S.C. §1332. 19 43 U.S.C. §1340. 20 30 C.F.R. §203. 21 30 C.F.R. §254-47. 22 Notice to Lessee No. 2008 G-04, issued April 1, 2008. Available at http://www.earthjustice.org/library/legal_docs/gomr-ntl-08-g04.pdf [Accessed July 20, 2010]. 23 http://healthygulf.org/201005181296/media/press-releases/fishermen-and-conservationists-sue-us-department-of-interior-for-illegal-waivers-of-blowout-and-spill-response -planning-in-bp-oil-drilling-disaster [Accessed July 20, 2010]. 24 On the basis that the worst case scenario for the EP did not replace the worst case scenario in BP’s approved regional Oil Spill Response Plan, to which BP had the capacity to respond. 25 Letter of Chairmen to oil company chief executives, June 28, 2010. 26 See “BP Disaster Puts Spotlight on Safety of Drilling in North Sea” (June 2010) ENDS Report 425, p.5. 27 By the end of June, according to BP’s website, more than 80,000 claims had been submitted and almost 41,000 payments made, totalling over $128 million. 28 It has been suggested they could easily exceed US $10 billion: Bloomberg, May 21, 2010.

[2010] I.E.L.R., Issue 5 © 2010 Thomson Reuters (Legal) Limited and Contributors 166 International Energy Law Review meet claims for individual compensation, natural resource an allegation refuted by BP. This would appear to be an damages and response costs incurred by state and local attempt to put down a marker that Anadarko may argue governments. Creation of this fund has been linked to BP that contractually it is not bound to share these costs with suspending dividend payments, selling assets and cutting BP, and indeed it has since been reported that Anadarko its capital expenditure budget. It is important to note that has refused to pay a bill submitted by BP in June for the US $20 billion does not represent a cap on BP’s around US $272 million for its share of BP’s costs liability. BP must presumably have decided that agreeing incurred.32 to this course was in the interests of its shareholders, Other parties have also been on the receiving end of presumably by minimising the cost of fighting lawsuits civil claims. On May 13, Transocean and a number of its and by preserving as much goodwill as possible with the affiliates controversially, and apparently on the instruction US Government. It seems unlikely in any event that BP of its insurers, filed a petition in the US District Court for would have been able successfully to sustain reliance on Southern Texas under the 160-year old Limitation of the US $75 million cap in the Oil Pollution Act,29 since Shipowner’s Liability Act of 1851. The main aim was to the limit does not apply if the incident was proximately establish an orderly process for consolidation of claims caused by gross negligence or wilful misconduct, or the into a single Federal court, and establish a single fund violation of an applicable Federal regulation by either from which claims could be paid. The petition indicated BP, or its agent or employee, or contractors. In any event that over 100 claims had been filed against Transocean there will be some interesting issues arising in respect of in multiple states and courts. The petition also sought that claims against the fund, or whether victims will prefer to Transocean’s liability be limited to the value of its interest sue in the courts. The fund’s administrator and Special in the rig (put at some US $26.7 million). Transocean is Master, Kenneth Feinberg, who also administered claims the world’s largest offshore drilling contractor, with a arising from the 9/11 terrorist attacks, has indicated that current fleet of some 139 mobile offshore units. This claims can cover lost wages and profits, business move to limit liability by way of a law used by the owners interruption, personal injury and death, that it is essential of RMS Titanic not surprisingly attracted criticism. The to err on the side of the claimant when dispensing funds, US Department of Justice referred to it as “simply and that this should be reflected in the amount of unconscionable”, and Transocean has subsequently corroboration required.30 There are likely to be huge confirmed agreement with the US Government that claims numbers of quite small, perhaps borderline, claims which filed under Federal laws such as the Clean Water Act, will all mount up. Reports have referred to claims from Clean Air Act and Oil Pollution Act will not be affected.33 electricians, cab drivers, waitresses, and strip-joint The claim by Transocean to limit its liability will still, owners, who all claim to have been affected financially however, extend to claims by BP or other responsible by the spill.31 Speculation has occurred as to whether for parties, and to personal injury claims. There is likely to example a New York travel agent could claim for reduced be an ongoing dispute about jurisdiction, as plaintiff revenues from holiday bookings in the affected area. A lawyers wish the action to proceed in the US District of line will have to be drawn somewhere, but exactly where East Louisiana, where most victims live. The US Judicial it is impossible to tell. If there is no physical damage to Panel on Multidistrict Litigation will meet to consider property or to natural resources such as beaches, but how best to handle the various lawsuits. public perception leads to loss of value of businesses or Insurance coverage disputes also seem inevitable. BP to lost business, it must be questionable whether under itself is understood to have no external insurance in place applicable Florida law, or Louisiana or Texas law, there for the accident, but may attempt to claim on policies would be a valid cause of action. Undoubtedly that will held by others. On May 21, 2010, a number of Lloyd’s not stop the plaintiff attorneys trying. of London syndicates brought proceedings in Houston aimed at disallowing a possible claim for US $700 million The other parties under a policy held by Transocean, on the basis that it did not cover subsea pollution.34 Various shareholder There may also be contractual disputes between BP, its derivative suits and class actions are also under way or drilling partners and contractors. As a partner with a 25 are contemplated, on the basis that BP directors breached per cent interest, Anadarko Petroleum Corporation would their fiduciary duties to shareholders by exposing the be liable to contribute to response costs incurred by BP. company to civil and criminal liability.35 However, these However, on June 18, the CEO of Anadarko stated that may prove difficult in the light of the recent Supreme research suggested that BP’s behaviour and actions were Court decision in Morrison et al v National Australia likely to represent gross negligence or wilful misconduct,

29 33 U.S.C. §2704. 30 International Business Times, June 30, 2010 available at http://www.ibtimes.com/articles/31767/20100630/special-report-bp-oil-spill-a-gusher-for-lawyers.htm [Accessed July 20, 2010]. 31 The Observer, June 20, 2010 available at http://www.guardian.co.uk/environment/2010/jun/20/deepwater-oil-spill-victims-compensation-bp [Accessed July 20, 2010]. 32 The Times, July 10, 2010. 33 “Old Maritime Law Doesn’t Shield Transocean” Wall Street Journal, June 14, 2010. 34 International Business Times, June 30, 2010 available at http://www.ibtimes.com/articles/31767/20100630/special-report-bp-oil-spill-a-gusher-for-lawyers.htm [Accessed July 20, 2010]. 35 The first such suit, Firpo v Hayward , was filed in the New Orleans Federal Court on May 7, 2010, and others have followed.

Bank Ltd et al , decided on June 24, 2010, which restricts “patently lacks any analysis of the asserted fear of the ability of shareholders to pursue foreign companies threat of irreparable injury or safety hazards posed in the US courts. by the thirty-three permitted rigs also reached by the moratorium.” The moratorium There was no evidence that the Secretary had balanced Following the incident, President Obama requested a environmental safety with the policy of making 30-day general safety review of installations. The exploration leases available; or that alternatives such as response of the Secretary of State for the Interior, Ken individualised suspension relating to specific target rigs Salazar, has been twofold. Firstly, on April 26, 2010, he had been considered. Accordingly the plaintiffs, the court ordered immediate inspections of all deepwater drilling found, were likely to succeed in establishing that the rigs in the Gulf of Mexico, and careful monitoring of agency’s decision was arbitrary and capricious, and a work under existing permits to drill. Secondly, on May preliminary injunction was justified. 6, 2010, he directed the MMS as a temporary measure to On appeal, the US Fifth Circuit Court of Appeals heard stop issuing new offshore drilling permits pending oral argument on July 8, 2010 on the preliminary motion completion of the review of the adequacy of existing of the Department to stay the injunction. The safety systems. Permits approved after April 20, 2010 Department’s request to stay the injunction, pending the and where drilling had not commenced by May 6, were substantive appeal (which will be heard in late August or 38 similarly suspended. On May 27, 2010, the results of the September) was denied by a 2/1 majority. The brief initial 30-day review were announced and Secretary reasoning of the majority was that the Government had Salazar imposed a 6-month blanket moratorium on not shown that it would suffer irreparable injury if the offshore drilling in waters deeper than 500 feet, to give stay was not granted, because there was no evidence that time for Commission appointed by the President to drilling activities which have been suspended would complete its review. In addition, wells which had already resume pending the appeal; however, the Government been permitted and which were being drilled in the Gulf was given permission to apply for the injunction to be of Mexico were required to halt drilling at the first safe stayed if drilling is resumed. Accordingly there is for the stopping point and to be secured. moment something of an uneasy stalemate, but it seems The moratorium was challenged by a number of unlikely that the Government will simply let the issue operators on the basis that they would suffer irreparable drop, and indeed the Interior Secretary issued a statement economic damage. On June 22, 2010, Judge Martin after Judge Feldman’s decision to the effect that a new Feldman of the US District Court in the Eastern District form of order was being considered. Whatever the of Louisiana granted a preliminary injunction against the outcome of the litigation, operators in the Gulf can no Secretary of the Interior, preventing the ban being doubt expect a much more onerous regime of permitting, enforced.36 An appeal was made by the Department of environmental impact assessment and inspection. The the Interior to the Court of Appeals (5th Circuit). Judge offshore drilling debate has of course been a controversial Feldman’s decision will have made uncomfortable reading political football in the United States for some years, for the US Government. There had been a failure to particularly since President George W. Bush in 2008 explain the reasons for the moratorium, or to justify it. rescinded the executive order imposed by his father The general principles for judicial review of George H. W. Bush in 1990 and continued by President administrative action, as expounded by the Supreme Court Clinton in 1998, restricting new offshore drilling to Texas, in Motor Vehicle Manf. Ass’n of the U.S. v State Farm Louisiana, Mississippi, Alabama, and parts of Alaska. Mutual Auto. Ins. Co. ,37 are very similar to those applied Prior to the Deepwater Horizon spill, President Obama in the United Kingdom: the ultimate standard of review had been in favour of limited and controlled expansion is narrow, requiring “arbitrary and capricious” conduct. of offshore drilling, for energy independence and In particular Judge Feldman noted that one basis to find economic reasons. To what extent the disaster will impact a decision to be arbitrary and capricious is because of on that approach remains to be seen, but it is worth failure to give any consideration to obvious alternatives, concluding with a few crude facts. Americans use between which he found to be the case for the moratorium. The 20–21 million barrels of oil per day: 10,000 gallons per 39 court was “… unable to divine or fathom a relationship second of every day. Some 30 per cent of oil in the between the findings and the immense scope of the United States comes from the western and central Gulf moratorium”. The report was “incident-specific and of Mexico. Oil production in these areas has been falling driven” and in recent years, but new deep-water discoveries could reverse this trend. The political and economic consequences of foregoing that resource, despite the greater risks involved, would be far-reaching and hence it will have to be the case that some workable solution,

36 Hornbeck Offshore Services LLC v Salazar . US District Court for the Eastern District of Louisiana. 37 463 U.S. 29 (1983). 38 Judges Smith and Davis; Judge Dennis dissenting. 39 John Hofmeister (former President, Shell Oil Company), Why We Hate the Oil Companies (New York, Palgrave Macmillan, 2010), p.29.

[2010] I.E.L.R., Issue 5 © 2010 Thomson Reuters (Legal) Limited and Contributors 168 International Energy Law Review striking a better balance between exploration, production Government is not short of possible means of ratcheting and environmental safety will have to be hammered out. up the pressure on BP. The Alternative Fines Act45 which It seems unlikely that the answer politically will be a deals with criminal sentencing could also come into play. draconian denial of access on the basis of environmental This permits the government to seek a greater fine than risk, in the face of rising global demand for oil and the statutory maximum, based upon calculating twice the significantly higher energy prices for US consumers and amount of the illegal gain from the crime, or twice the voters. loss caused by the illegal activity. There has been speculation that the costs might be such The final accounting as to call into question the solvency of BP, which would be an extraordinary situation if a single incident could Estimating what BP’s final losses will be from the threaten a company of BP’s size, which generated over incident has become something of a parlour game. US $27 billion of cash flow in 2009 and ended that year Estimates have ranged between around US $30 billion to with net assets of US $105 billion. We are probably not as much as US $90 billion. The truth is that no-one knows anywhere near tobacco litigation territory in terms of at present. They will clearly massively exceed the US $4 global claims and costs (a US $206 billion master billion suffered by Exxon following the Exxon Valdez settlement staged over 25 years). However, much will spill, which included criminal and civil penalties, clean-up turn on whether and when BP is successful in stemming costs and damages to victims, given the scale of the spill the flow of oil, and both BP and the UK Government and the much more populated nature of the area affected. have been forced to think the unthinkable. One of the The components of the final cost will be criminal leading US experts on insolvency law has stated that the penalties, civil penalties, clean-up costs, natural resource disaster means there are “definitely scenarios that end in damages and private lawsuits. One element of comfort the complete destruction of BP”.46 On July 7, 2010, it was for BP is that following the decision of the Supreme Court 40 reported that BP had agreed an unprecedented deal with in Exxon Shipping Co. v Baker , punitive damages should the US Department of Justice to give pre-notification of not exceed a 1:1 ratio with compensatory damages. any planned or contemplated events that might involve More worrying for BP is the likelihood of civil substantial transfer of cash or corporate assets, or of any monetary penalties under the Clean Water Act of 1972 corporate restructuring, reorganisation, mergers, which are linked to the amount of oil spilt, and are divestments or disbursements.47 This would appear to increased significantly if gross negligence is proved. indicate a mistrust on the part of the US Government as Under a provision added into the Act after the Exxon to possible future BP steps should the costs of the incident Valdez case, the penalty could be up to US $4,300 per simply become too high to bear. It also indicates that this barrel leaked where there is a violation of the relevant 41 situation involves an unprecedented scenario whereby permit. The question is whether the US Government normal legal principles could simply be overborne by will use these powers to bring civil judicial and political muscle: the US Department had no right to administrative actions against BP and other parties, and compel BP to give such an undertaking,48 but there is a what penalty it will seek, applying the USEPA penalty clear threat implicit of worse consequences for BP should calculation methodology. The potential exposure could 42 it fail to do so. What is worrying is that all of this naked be staggeringly high, and may well represent a display of political force comes before answers have been significant bargaining chip held by the US Government provided as to fundamental questions on the real cause in its dealings with BP. However, establishing a breach of the disaster, BP’s culpability, and how far culpability of the Clean Water Act permit in relation to offshore extends to other parties, including the US federal drilling operations could lead into uncharted legal government agencies themselves. It has been said by the territory, as a single blanket permit covers such operations Director of Global Governance Watch that: in the Gulf. But in any event the matter may not ultimately rest solely on negotiations between BP and the US “… by coercing BP to create its US $20 billion Government. The NGO Center for Biological Diversity compensation fund, the Obama administration has has already issued a citizens’ enforcement suit under the undermined the rule of law in a manner that will Clean Water Act43 seeking the maximum civil penalty profoundly impact the business operations of against BP, a figure which could be as much as US $19 transnational corporations in the United States and billion if the spill continues to 1 August 2010.44 The US around the world. Although, in the short term, the

40 128 S. Ct. 2605, 2633 (2008). 41 33 U.S.C. §1319 42 On the basis of BP’s estimate of 5,000 barrels per day, the penalty if gross negligence is proven could be $21.5 million per day, or $5.5 million otherwise: see Reuters Special Report, May 26, 2010 available at http://reuters.com/assets/print?aid=USTRE64O75Q20100526 [Accessed July 20, 2010]. By comparison, BP’s net profits in Q1 of 2010 were around $6.7 million per day. 43 33 U.S.C. §1365. 44 http://www.ecosphericblog.com/669/lawsuit-seeks-19-billion-in-clean-water-act-penalties-from-bp/ [Accessed July 20, 2010]. 45 18 U.S.C. § 3571 46 “Congress Acts to Stop BP Hiding Behind Bankruptcy Law” The Times, June 23, 2010. 47 “Washington Ties BP’s Hands to Stop Sale of World Assets” The Times, July 7, 2010. 48 Though it had been previously reported that legislation was being drafted which would compel BP to file for bankruptcy of any of its subsidiaries in US courts, thereby allowing US creditors and courts to take control of BP’s assets. See “Congress Acts to Stop BP Hiding Behind Bankruptcy Law” The Times, June 23, 2010.

action may win the approval of those residents of Administration to be co-operating as fully as they would the Gulf region whose lives have been devastated wish.53 It has been reported that the Head of the new by the spill, long-term, this action will create Bureau of Ocean Energy Management, Regulation and significant uncertainty on the part of transnational Enforcement, Michael Bromwich, has said that the record corporations and investors upon whose success the of performance by an oil company should be a relevant economic well-being of America’s future depends.”49 factor in deciding that the company should be awarded drilling leases. It has also been noted that proposals have There may have to come a point for BP when it will have been made in relation to the energy reform bill currently to fight rather than carry on conceding. under consideration in the House of Representatives that The uncertainties as to the future costs have seriously a company’s safety record should be relevant to leasing affected BP’s share price, though it remains to see decisions and that Representative George Miller has whether the damage will be long-lived. By late June, BP’s proposed a ban on BP leasing further offshore rights for shares were at a 14-year low, having halved in value and a period of seven years. It may be that BP will in any wiped almost £68 billion off its market value, though event shift its focus away from the United States,54 though they have since recovered somewhat.50 Transocean’s this would be a big strategic step to take. shares have also been said to have lost nearly half their All in all, this incident will cause BP multiple problems value since the incident.51 Where the shoe may really for years to come. The company will probably survive, pinch for BP is in respect of market concerns over but whether in its current form seems doubtful. Major liquidity and possible default on debts as the big bills tranches of its assets will have to be sold, and as the crisis keep coming in. Debt is expensive and asset sales may has deepened the weakened company has been subject take time to realise. These are worries enough to have to increasing speculation on possible takeovers by other prompted Prime Minister David Cameron to express his oil giants. It is a salutary reminder of the way in which concerns at the time of the G8 meeting in late June, that fortunes in this industry can be changed by one incident, some limit or certainty must be provided over the of the immense political pressure which can come from maximum extent of BP’s exposure to avoid the threat of an environmental disaster and of the fact that, however destruction or serious damage to one of the United big a company, getting on the wrong side of the Kingdom’s most important companies.52 Questions must Government of a nation as powerful as the United States also arise over BP’s future prospects for exploration in of America is very bad news indeed. the United States, at least if it is not seen by the

49 http://globalgovernancewatch.org/spotlight_on_sovereignty/bp-compensation-fund-threatens-the-rule-of-law-on-a-global-scale [Accessed on July 20, 2010]. 50 “Concerns Grow over Eventual Clean-up cost of Gulf Disaster” The Times, June 26 2010. 51 Wall Street Journal, June 14, 2010. 52 “Cameron Fears Oil Spill Could Ruin BP” The Times, June 26, 2010. 53 “BP’s Alaskan Prospect under Fresh Scrutiny” The Times, June 25, 2010. 54 It has been reported that BP is in discussions to sell its stake in the Alaskan Prudhoe Bay project to Houston-based Apache Corporation in order to raise funds, in what The Times Energy Editor described as “the first sign of what appears to be a major strategic shift in focus away from the US”: The Times, July 11, 2010.