What is BP’s potential liability?

Under Section 1002 of the Oil Pollution Act – which was passed as result of the Exxon Valdez oil spill – any responsible party is “liable for the removal costs and damages”. The removal costs are just that. However, the damages include the following:

  1. Damages for injury to, destruction of, loss of, or loss of use of, natural resources;
  2. Damages for injury to, or economic losses resulting from destruction of, real or personal property;
  3. Damages for loss of subsistence use of natural resources;
  4. Damages equal to the net loss of taxes, royalties, rents, fees, or net profit shares due to the injury, destruction, or loss of real property,personal property or natural resources;
  5. Damages equal to the loss of profit or impairment of earning capacity due to the injury, destruction, or loss of real property, personal property, on natural resources.

There is a cap of  $75 million over and above the total removal costs. But this cap will not apply if there is gross negligence or willful misconduct involved.

The real big liability comes under the Clean Water act. Under Section 311 of the Act, BP would incur much higher civil penalties. The Clean Water Act calls for a civil penalty of $1100 per barrel of spilled oil. The amount of oil spilled has been estimated to be as high as 40,000 barrels a day. As of June 11, BP will have spilled 2.08 million barrels of oil into the Gulf of Mexico. This translates to a civil liability of $2.28 billion as of June 11. If the government can demonstrate gross negligence on the part of the discharger, the Clean Water Act calls for a penalty of $4300 per barrel. This would increase the civil penalty to $8.9 billion as of June 11.

Now you understand why the estimated amount of oil spill has varied over a large range depending on who’s doing the estimating. We are talking big bucks here.

BP Oil’s share price has been cut in half since the spill began 7 weeks ago. The company is now valued at $105 billion on Wall Street. Perhaps that’s the real penalty.


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