What the Gulf Oil Spill Will Likely Cost BP: An Update

Many fear that BP (BP) won't pay much for its oil spill, citing the $75 million liability limitation cap. But those fears are overblown -- and not because BP promises to make good on "all legitimate claims." (Can you imagine the shareholder lawsuits if BP voluntarily covered many billions in damages when it could've stopped at $75 million?)

Although eliminating or at least radically raising the cap is good public policy, whether or not such a change could be made to apply retroactively to BP, it's far from clear that the cap is applicable in this case.

There's no cap if the spill was caused by BP's gross negligence, or by violations of federal safety, operational or construction regulations. Although BP's cozy relationship with the Minerals Management Service resulted in waivers from at least some government regulations, the more information that emerges about the spill's causes, the more likely it seems that gross negligence, rule violations or both were involved -- perhaps even leading to criminal charges.

Fines Based on Spill's Size

Moreover, there are many other sources of liability. First, there are civil fines, which have no finite cap. Under the U.S. Clean Water Act, these fines are keyed to the size of the leak, ranging from $1,100 to $4,300 per barrel spilled.

That makes the lack of an accurate assessment of the spill's size -- and the government's failure to force an realistic accounting promptly -- more sinister. How much in potential civil fines will BP avoid because of a lack of focus on measuring the spill size from Day 1? If we're lucky, not much, since the size can be estimated from video, and footage from Day 1 onwards exists, though it hadn't been routinely released until recently.

However, it's unclear whether the Environmental Protection Agency would try to apply the fines or seek maximum penalty levels, according to Reuters. It also reports that other companies involved in the Deepwater Horizon platform and the oilfield could share liability with BP. They include rig owner Transocean (RIG), cementing contractor Halliburton (HAL), blowout preventer manufacturer Cameron (CAM), and Anadarko (APC) and Mitsui, which also hold stakes in the oilfield.

Another source of expense to BP is the potential liability under state laws, because the federal law specifically didn't pre-empt it. Even if today's top-kill maneuver (BP's latest attempt to stop the spill) works, so much oil has leaked that several states will eventually be impacted, and plaintiffs attorneys will forum-shop to find the greatest potential liability.

Mere Blip on BP's Bottom Line?

And then there's the issue of how big the spill becomes. Even if the top-kill maneuver succeeds, the damage already done is devastating and will last for generations. If it fails, BP will keep trying other tactics, but the only sure way to end the leak is with a relief well, a move that will take months to complete. Think of the size of the civil fines alone if the spill goes on that long. Imagine the total clean-up bill, which isn't capped in any case.

Right now, analysts are bullishly thinking this spill's expense is essentially a blip on BP's bottom line. "BP can easily absorb $20 billion of costs before you start getting worried about this," Dow Jones Newswire quotes Panmure Gordon analyst Peter Hitchens.

Maybe, just maybe, if the top-kill maneuver works, they're right. But I doubt it. And if the spill continues for months more, that analysis is surely delusional.