BP Spill Trial Starts Amid Settlement Pressure

Howard Erichson in Bloomberg Businessweek, March 02, 2012

Media Source

By Margaret Cronin Fisk and Jef Feeley on March 02, 2012

BP Plc (BP/), Transocean Ltd. and Halliburton Co. (HAL), with billions of dollars on the line, are set to find out from a federal judge who among them is to blame for the April 20, 2010, explosion and sinking of the Deepwater Horizon oil rig in the Gulf of Mexico.

U.S. District Judge Carl Barbier in New Orleans, who will hear the case without a jury, is to rule whether London-based BP should get help from the other firms involved in paying the $26 billion in costs associated with the disaster and its resulting offshore spill, the largest in U.S. history.

BP has been in talks with the other parties, including its most formidable opponent -- the federal government, two people familiar with the negotiations said. A $14 billion deal with Gulf businesses and property owners has been proposed, three people familiar with the accord said, and the trial was put off a week so talks could continue uninterrupted. Barring a deal by all sides, though, the judge will begin hearing evidence March 5 on whether the companies must pay punitive damages to victims and fines to the government for polluting the Gulf of Mexico.

“There’s tremendous pressure on everybody to settle,” said Anthony Sabino, a law professor at St. John’s University in New York. With billions of dollars at stake, “They will talk until the moment the judge hits that gavel -- and beyond.”

Courthouse Steps
Carl Tobias, who teaches product-liability and mass-tort law at the University of Richmond in Virginia, said he wouldn’t be surprised to see the case resolved “on the courthouse steps.” One reason that government and plaintiffs’ lawyers haven’t agreed to settle may be a desire to make BP suffer some bad publicity generated by trial testimony, Tobias said.

“That kind of negative publicity never does any company any good,” he said. “That may be a factor in the settlement calculus.”

Scott Dean, a spokesman for BP, declined to comment on the trial or potential outcomes stemming from a settlement.

Earlier this month, BP reached an accord with co-defendant M-I Swaco, a unit of Houston-based oil services company Schlumberger Ltd. (SLB) that employed two of the 11 workers killed in the rig’s explosion. Mitsui & Co.’s MOEX Offshore 2007, a partner in the well, said the same day it would pay $90 million to resolve federal Clean Water Act claims.

BP earlier settled with MOEX; Anadarko Petroleum Corp., a 25 percent-owner of the well, and Cameron International Corp., which provided blowout-prevention equipment. Cameron and Swaco are still defendants after settling only with BP.

Hundreds of Lawsuits
The disaster sparked hundreds of lawsuits by businesses and coastal property owners against BP, its partners and contractors, including Transocean, the Vernier, Switzerland- based owner and operator of the rig, and Houston-based Halliburton, which provided cementing services.

The U.S. government also sued BP, Transocean (RIG), MOEX and The Woodlands, Texas-based Anadarko for violations of federal pollution laws. Louisiana and Alabama sued as well.

Non-government plaintiffs in the case include fishermen, shrimpers, restaurants, hotels, workers and business and property owners along the Gulf coast affected by the spill.

The proposed settlement between BP and lawyers for businesses and individuals would transfer the $14 billion remaining in a company fund set aside for out-of-court settlements to plaintiffs’ lawyers. They would then distribute the funds to clients based on the harm suffered. BP would close the Gulf Coast Claims Facility, which originally had $20 billion.

Government Fines
Such a settlement wouldn’t include fines by the federal government, lawsuits by state governments or claims between BP and partner companies involved in the disaster, the people familiar with it said. While lawyers for plaintiffs whose cases have been consolidated before Barbier proposed the settlement, attorneys for other spill victims may oppose it as inadequate, the people familiar said. Brent Coon, a Houston-based lawyer for spill victims, said another problem with the settlement proposal is lawyers for the steering committee don’t represent the majority of victims in the case, which he said raises questions about their ability to act in the best interests of all claimants.

Barbier has scheduled a three-phase trial: In the first phase, he will determine which companies share blame for the explosion, and whether any of them engaged in gross negligence or willful misconduct.

Such a finding might trigger punitive damages -- or damages meant to punish rather than compensate for losses -- to be paid to non-government plaintiffs.

Clean Water Act
Those companies sued by the federal government would face enhanced penalties under the U.S. Clean Water Act. That law lets the government seek fines as high as $1,100 a barrel of oil spilled for simple negligence, often described as a failure to exercise ordinary care; and $4,300 a barrel for gross negligence, or a conscious act or omission. One test for gross negligence is the economic benefit of not complying.

More than 4 million barrels were spilled in the disaster, according to U.S. estimates, leaving BP liable for as much as $17.6 billion in fines. The London-based company set aside $3.5 billion to pay Clean Water Act fines based on its own lower estimate of barrels spilled and no finding of gross negligence.

Barbier on Feb. 22 held BP and Anadarko (APC) automatically liable under the act, allowing the U.S. to seek $1,100 a barrel spilled. Transocean’s liability is to be determined at trial.

On Feb. 24, Transocean alleged in a court filing that BP officials overseeing the Macondo well ignored questions about whether safety tests done hours before the blast were flawed.

Well Tests
Donald Vidrine, the senior BP manager on the Deepwater Horizon on April 20, 2010, talked with an engineer about unsatisfactory well tests less than an hour before an explosion killed 11 workers and sent oil pouring into the waters off Louisiana, Transocean’s attorneys said. While Mark Hafle, a Houston-based BP drilling engineer, warned Vidrine in a phone call that stability tests on the well might be flawed, “neither man stopped work” at the facility, Transocean said. BP’s Dean declined to comment on the Transocean filing.

The judge is to conduct two subsequent nonjury proceedings on the size of the spill and efforts to contain it. Jury trials on damages to victims would follow, he has said. The outcomes might provide a template for settlement of the remaining cases, some of which might be distributed to other courts.

Three-Month Trial
The first phase may last as long as three months. Barbier said he might not make any rulings until all three phases are finished.

In the first phase, he will also consider rig-owner Transocean’s claim that its financial liability to non- government parties is capped at $27 million under a 160-year-old maritime law limiting a vessel owner’s exposure to the value of its ship and cargo.

Beyond the lawsuits, the Justice Department said in June 2010 that it was investigating the possibility of criminal violations related to the blowout and spill. The agency said it created a task force led by its criminal division to investigate the disaster. None of the companies has been charged with a crime. Barbier won’t consider any criminal allegations in the trials.

BP already paid $26.6 billion in cleanup costs and economic damages to individuals, businesses and governments harmed by the spill, it said Feb. 7. The energy company lowered its reserve to cover costs tied to the sinking of the rig to $37.2 billion from more than $40 billion, after reaching settlements.

Shares Down
Shares for the defendant firms fell after the explosion. The litigation and potential liabilities remain a drag on these stocks, Brian Youngberg, an analyst at Edward Jones in St. Louis, said Feb. 22 in an interview.

“Investors to some degree have rotated to other companies they see as good values without the uncertainty from the spill,” said Youngberg, who has a “hold” on BP’s American depositary receipts and doesn’t own shares.

An out-of-court settlement, even for an amount higher than investors expect, might be a boon to BP by removing the “worst case scenario,” he said. “The question is, how long will that take?” BP shares were about 23 percent below their pre-disaster price at the end of the day yesterday.

The plaintiffs claim each of the five companies in the trial -- BP, Transocean, Halliburton, Cameron and Swaco -- share blame for the explosion and spill.

‘Crucial Safety Issues’
BP and other companies connected to the well “ignored crucial safety issues, cut corners and violated federal and state law to save time and money in favor of production and profit,” lawyers for businesses and individuals said in a master complaint in December 2010.

BP, behind schedule on the Macondo project, pushed forward ignoring warning signals, the plaintiffs said. Among the accusations is that BP ignored recommendations and used “too few centralizers,” or devices to ensure the steel pipe lining the well could be properly secured.

“In the same e-mail that had recognized the risks of proceeding with insufficient centralizers, BP official Brett Cocales shrugged off using only six, flippantly concluding, ‘who cares, it’s done, end of story, will probably be fine,”’ according to the complaint.

Transocean “bypassed or disabled key safety systems” on the rig, “including a gas safety valve and fire alarm system that were intended to monitor for fire and explosive and toxic gases, with utter disregard for the safety ramifications,” victims’ lawyers said in a court filing in February 2011.

Company Blame
The companies are blaming one another as well.

BP accused Transocean of breaching its contractual duty to maintain the drilling rig adequately, to fix engine problems, to train its crew and to coordinate efforts to fight fires on the vessel properly.

“The simple fact is that on April 20, 2010, every single safety system and device and well control procedure on the Deepwater Horizon failed, resulting in the casualty,” BP said in its complaint.

BP said a Halliburton engineer and others at the company concealed problems with its foam cement slurry before and after the explosion. The cement was supposed to prevent blowouts.

Halliburton claimed BP gave inaccurate information about the location of hydrocarbon zones, a risk factor, in the Macondo oil well to avoid stalling the project. Halliburton said it wouldn’t have pumped cement had it known.

‘Well Design’
“BP decided on the well design,” Halliburton said in its complaint. “BP decided when to conduct rig activities. BP decided what products and services to use, and whether to accept or reject its contractors’ recommendations regarding those products and services.”

The financial risk to some of the companies has fallen with pretrial settlements and rulings. In July, Barbier dismissed racketeering allegations against BP. In November, he threw out the Alabama and Louisiana environmental claims brought under state laws.

In January, the judge said indemnity provisions in the drilling contract with Transocean required BP to pay most damages for the spill. This left Transocean liable only for federal pollution fines or penalties, punitive damages and payments to workers injured or killed.

In a separate ruling, Barbier held that Halliburton must be indemnified under the drilling contract. Both decisions are subject to reversal if the court finds these companies’ conduct violated the contract, the judge said.

Agreed to Pay
In its settlement with BP, Houston-based Cameron in December agreed to pay $250 million to the well owner, in exchange for indemnity for all compensatory damage claims.

Cameron still might face punitive damages. It denies there were flaws in the blowout preventer. Oil and gas were already surging toward the rig when workers tried to activate the equipment to seal the well, Cameron said.

Echoing Tobias at the University of Richmond, Howard Erichson of Fordham University said an accord between BP and the companies opposing it would remove the risk of further public relations and financial harm that may result from a long trial.

“Trials can be all-or-nothing risks,” said Erichson, a law professor who teaches complex litigation. “In general, companies don’t like taking those kinds of risks.”

Most lawsuits over injuries and deaths have been settled by Transocean, as part of its agreement in the drilling contract, according to court filings. One of the injured workers, Buddy Trahan, a Transocean rig supervisor, asked Feb. 20 to have his case against BP sent to a Texas state court for trial. More settlements should follow, said St. John’s Sabino.

‘Playing Chicken’
“None of these companies will collapse, but there are substantial damages if a judgment goes the wrong way,” he said, adding that coming this close to trial without settling may mean some parties are “playing chicken.”

“Chicken is very dangerous for both sides,” he said. “If neither side turns away, it can result in an enormous collision.”

The case is In Re Oil Spill by the Oil Rig “Deepwater Horizon” in the Gulf of Mexico on April 20, 2010, MDL-2179, U.S. District Court, Eastern District of Louisiana (New Orleans).

To contact the reporters on this story: Margaret Cronin Fisk in Southfield, Michigan, at mcfisk@bloomberg.net; Jef Feeley in U.S. District Court for the Eastern District of Louisiana in New Orleans at jfeeley@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net