New Law on BP Spill Fines Raises Stakes for Gulf States

U.S. Gulf Coast states have a higher stake in the amount of money the U.S. government can wring out of BP Plc for the 2010 Deepwater Horizon oil spill due to a new law that would divert billions of dollars in potential BP fines to them.

The RESTORE Act, signed by President Barack Obama on July 6, directs that 80 percent of Clean Water Act penalties paid by BP be placed in a new trust fund for restoration efforts in the five coastal states damaged by the worst U.S. offshore oil spill: Louisiana, Alabama, Mississippi, Florida and Texas.

BP faces billions of dollars in civil and criminal penalties from the April 20, 2010, explosion aboard the Deepwater Horizon rig, which killed 11 rig workers and unleashed 4.9 million barrels of oil that soiled the shorelines of four Gulf Coast states.

For Louisiana, the state hardest hit by the spill, the bill’s pay day won’t come until states and the U.S. government conclude a settlement with BP and its partners, or the courts weigh in on the question of whether BP was grossly negligent in the spill. BP has vehemently denied any claims of gross negligence or willful misconduct, either of which could boost Clean Water Act fines considerably.

Without the bill, federal Clean Water Act fines would have gone straight to the US Treasury. Now, anywhere from $4 billion to $16.8 billion could flow into states’ coffers.

Fines arising from Clean Water Act violations could reach $21 billion, assuming that BP is found negligent for the full amount spilled, a high burden of proof for prosecutors, according to some analysts. On top of that, BP could face criminal penalties ranging between $5 billion and $10 billion, according to Thomas Claps, litigation analyst for Susquehanna Financial Group LLP in New York, which makes a market in BP stock. (See FACTBOX at )

But at the lower end of that range, Louisiana’s share might not give much of a kick-start to the $50 billion plans the state has developed for long-range flood protection and coastal restoration.

“In order to trigger this bill, either BP’s going to have to settle this or we’re going to have to get into court to fight this out,” said Garret Graves, senior environmental adviser to Louisiana Governor Bobby Jindal and a key player in moving forward the state’s case against BP.

More than two years after the spill, the U.S. Justice Department and the London-based energy giant remain embroiled in difficult negotiations to resolve massive litigation over the event.

Alabama and Mississippi officials say they are keeping their options open.

“While we would be open to a reasonable settlement, we are continuing to work diligently with the (Alabama) Attorney General in preparing Alabama’s case for trial,” a spokeswoman for Alabama Governor Robert Bentley said.

In Mississippi, Governor Phil Bryant has set up a team to set priorities for funds from potential Clean Water Act fines. “We will not rest until the Gulf Coast is made whole,” Bryant said in a statement.

The spill hit Florida’s tourism industry hard and the state “is committed to ensuring that BP fully compensates Florida for its losses,” said a spokesman for Florida Attorney General Pam Bondi.

For BP to hammer out a global settlement, it must win over the Gulf Coast states. Louisiana, at least, seems prepared to go the distance in court rather than accept a quick payment, with a civil case now scheduled to get under way in New Orleans on Jan. 14, 2013.

“Based upon what we’re seeing, we believe that’s where we need to be focusing our resources, on litigation,” Graves told Reuters in an interview. Graves would not comment on or confirm his participation in settlement talks, which sources say are difficult but ongoing.

Both BP and the U.S. Justice Department have repeatedly declined to discuss settlement progress.

“It’s a matter that is currently in litigation, under investigation,” U.S. Deputy Attorney General James Cole said on Thursday.

Louisiana, which bore the brunt of spill damage with about 650 miles (1,050 km) of oiled coastline, has a high incentive to hold out for a protracted court battle rather than agree to a settlement that might bring a lower payout, experts say.

“You’ve got a defendant who can afford to pay the judgment,” said Blaine LeCesne, law professor at Loyola University in New Orleans, referring to BP. “So why on earth would you settle for half of what that judgment is worth?”

A global settlement resolving all outstanding liabilities among the parties would be a boon for BP and the Obama administration. BP would dispense with a big potential future overhang and a key reason why its stock is still trading at about a third below its pre-spill levels. President Barack Obama could chalk up a big-ticket settlement that he could tout as he campaigns ahead of the November U.S. presidential election.

In March, BP reached a estimated $7.8 billion settlement to resolve economic, property and medical claims by 125,000 individuals and businesses harmed by the spill. A judge has scheduled a fairness hearing on the settlement for November.

Without confirming a June 8 report in the Financial Times that BP is seeking to pay $15 billion to resolve all criminal and civil liability, Graves said such figures “would be considered lead-filled trial balloons in Louisiana.”

“You’re easily looking at tens of billions of dollars,” Graves said. “That’s compatible with the global settlement ranges that we believe are appropriate in this case.”

Most Gulf Coast states took tax revenue hits as offshore drilling slowed to a near halt and businesses in the fishing and tourism sectors declined. Graves said losses from the spill were among the factors that spurred Louisiana to cut budgets in “virtually every state agency” including healthcare and education. “This gets more expensive for the responsible parties every day,” he said.

Beyond the Clean Water Act, Louisiana alone could legitimately claim $10 billion in damages, Loyola University’s LeCesne said.

“BP has a $30 billion problem with the federal government’s claims,” LeCesne said. “I can’t see this settling for $10 billion or $15 billion. If so that’s a steal for BP.”

(Additional reporting by Kathy Finn in New Orleans, Kelli Dugan in Mobile, Alabama, Emily Le Coz in Tupelo, Mississippi, David Ingram in Washington and Kevin Gray in Miami; Editing by Edward Tobin and Steve Orlofsky)