Oil spill costs: What will BP really pay?

http://money.cnn.com/2010/05/06/news/economy/BP_liability/
Oil spill costs: What will BP really pay?
Alabama National Guard members worked this week on a containment barrier to protect the coastline from the leaking oil spill.
Steve Hargreaves
May 6, 2010

NEW YORK (CNNMoney.com) -- The Gulf oil spill is going to cost billions to clean up, a tab BP has publicly pledged to pay in full.

But thanks to the unpredictable nature of the oil slick and the legal maze surrounding maritime law, what BP will pay and to whom is very much an open question.

Start with the costs. Estimates to clean the spill and compensate other parties for the economic damage run from $2 billion to $14 billion. One politician even said it could run into the hundreds of billions.

The truth is that no one has any idea yet.

The spill, which the Coast Guard says is still leaking oil at a rate of roughly 200,000 gallons a day, could stay near the coast of Louisiana, as it's doing now. It hasn't had much of an impact on the shoreline so far, and the dispersants being sprayed on it appear to be helping to keep it at sea.

If the containment device BP is preparing to put over the leak in the next few days works, or if the company can activate the broken valve that would shut off the well, the costs would be comparatively minimal. Say, a billion or two.

If the leak worsens, as company officials say it could, and the oil gets caught up in Gulf currents that bring it around Florida's beaches and up the East Coast, then things get very grim. Fishing grounds and beaches would be polluted. That spikes the cleanup cost and cuts into the revenue of thousands of other businesses.

BP loses $32 billion in value on spill

"It's really bad when people start throwing around numbers," said Fadel Gheit, a senior energy analyst at Oppenheimer. "It almost paralyzes the people working on this into inaction."

Then there's the question of what percentage of the total tab BP will actually pay.

Under federal law, BP (BP) and its minority partners in the well, Anadarko (APC, Fortune 500) and Mitsui, have to cover all the cleanup costs. BP Chief Executive Tony Hayward has pledged several times to honor that commitment.

But then there are the losses to the fishing, tourism and shipping industries if the oil closes parts of the coast. These costs could easily exceed the cleanup bill.

Here, Hayward has been less clear.

"When I said 'Will you be responsible for the economic damages?' he said, 'That's something we'll have to work out in the future,'" Sen. Bill Nelson, R-Fla., said Tuesday following a meeting with Hayward.

A BP spokesman said the company would cover all "legitimate claims," but pointed out that it's just too early to tell what those are or how high they'll climb.

BP's liabilities may be capped by a federal rule that limits the payouts for economic damages stemming from an oil spill to $75 million. Once that threshold is reached, a federal fund kicks in, covering an additional $1 billion. The federal fund is paid for by a 8-cents-a-barrel tax on oil produced or imported into the United States.

Then again, BP may not be able to use the liability shield. Carl Nelson, a Tampa-based maritime lawyer, said the $75 million cap only applies when a company has no violations related to an accident. That rarely happens. BP will almost certainly be found to be at fault in some way for the spill.

To ward off any confusion, lawmakers in the House and Senate have introduced bills raising the liability cap from $75 million to $10 billion, an initiative they've dubbed the "Big Oil Bailout Prevention Act." Lawmakers say there's precedent for making the law retroactive: Witness the Superfund, which forced polluters to reimburse the government for toxic cleanup.

Given the public outrage over the spill, and the fact that it's an election year, the bills stands a good chance of passing.

But not everyone thinks it's a good idea. If the cap is increased, Nelson predicts that it will only raise the cost of buying insurance for all companies producing offshore oil.

"You're going to pay for that at the gas pump," he said.

Then there's the issue of which companies are at fault.

BP is the main operator, and as such must pay for the cleanup costs. Subcontractors on an oil well -- in this case, that's Halliburton (HAL, Fortune 500), Transocean (RIG) and Cameron (CAM, Fortune 500), among others -- typically obtain legal releases from the main operator. In its most recent annual filing, Transocean noted that it has "generally been able to obtain some degree of contractual indemnification" from its clients against liability for "pollution, well and environmental damages."

That might protect them from federal lawsuits or action by BP, said Nelson, but it still does not prevent them from being sued by out-of-work fisherman or hoteliers.

Let the legal games begin.