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BP agrees to settlement with the federal and state governments

Jesse Reiblich


  • On July 2, 2015, British Petroleum announced that it had agreed in principle to settle the civil claims arising out of the Deepwater Horizon Gulf Oil Spill disaster.
  • Provides background on the Deepwater Horizon Gulf Oil Spill.
  • Discussion on the historic settlement.
BP agrees to settlement with the federal and state governments
Ed Lallo via Getty Images

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On July 2, 2015, British Petroleum (BP) announced that it had agreed in principle to settle the civil claims arising out of the Deepwater Horizon Gulf Oil Spill disaster. If the U.S. District Court for the Eastern District of Louisiana approves this settlement agreement, it will be the largest environmental settlement in U.S. history, as well as the largest settlement between the U.S. government and a single entity.

Background: The Deepwater Horizon Gulf Oil Spill

On April 20, 2010, an explosion aboard the Deepwater Horizon drilling rig in the Gulf of Mexico initiated what would become the largest accidental marine oil spill ever and one of the worst environmental disasters the world has ever seen. The explosion killed 11 people and injured 16 more. Between 2.5 and 4.9 million barrels (1 barrel = 42 U.S. gallons) of oil spilled into the Gulf. In November 2012, BP pleaded guilty to criminal charges stemming from the event, including 11 counts of manslaughter, one count of felony obstruction of Congress, and violations of the Clean Water and Migratory Bird Treaty Acts.

The settlement

The historic settlement in principle between BP and federal and state governments is valued at over $18.7 billion. This total includes a $5.5 billion Clean Water Act penalty, $8.1 billion for natural resource damages, $5.9 billion to settle claims by state and local governments for economic damages, and $600 million for other claims. While a huge number, the settlement represents significant savings for BP. Before the parties finalized their agreement in principle, a U.S. district court found BP liable for gross negligence and willful misconduct. It also determined that, for the purposes of calculating civil fines under the Clean Water Act, BP was liable for 3.19 million barrels of oil that had been released into the Gulf. Each barrel of oil spilled carried a fine of up to $4,300—an elevated fine due to BP’s gross negligence. By these figures, BP faced a total maximum fine of $13.7 billion just for its Clean Water Act violations. On appeal, the Fifth Circuit Court of Appeals affirmed the district court’s findings that BP was automatically liable for violations of the Clean Water Act as owner of the Deepwater Horizon oil rig. The U.S. Supreme Court denied BP’s petition for writ of certiorari just days before the parties settled.

Past oil spills: Lawsuits and settlements

The size and extent of the Deepwater Horizon oil spill and the settlement in principle invites comparison to the Exxon Valdez oil spill 26 years ago, and others. In 1979, for example, a blowout occurred at the Ixtoc I Oil Well in the Gulf of Mexico’s Bay of Campeche. The resulting spill gushed an estimated 3.5 million barrels of oil into the Gulf. Businesses, the U.S. government, and the state of Texas filed lawsuits for more than $360 million against Mexican companies Permargo and Pemex as well as the American company Sedco for their roles in the spill. Because of the spill’s location and the actors involved, jurisdiction was a major hurdle to holding the Mexican companies liable. Furthermore, Permargo and Pemex largely avoided paying damages by raising sovereign immunity defenses under the Foreign Sovereign Immunities Act. However, Pemex spent an estimated $100 million cleaning up the spill. Sedco limited its liability under application of the Shipowners Limitation of Liability Act of 1851. The eventual settlements from these lawsuits only netted $4.14 million, around 1 percent of the damages claimed in the suits.

Ten years after the Ixtoc spill, on March 24, 1989, the Exxon Valdez oil tanker ran aground on Bligh Reef in Prince William Sound, Alaska. The tanker spilled approximately 11 million gallons of oil into the sound. Exxon settled civil claims related to this spill for $900 million, paid over ten years. The settlement included a reopener clause, which allowed the government to bring additional claims for further environmental damage after a ten-year period. A lawsuit brought by fishermen who sustained economic damages because of the spill languished in court for many years. These lawsuits finally concluded in 2008 when the U.S. Supreme Court reduced the $2.5 billion punitive damages award to $507.5 million. The Ninth Circuit Court of Appeals ordered Exxon to pay an additional $470 million in interest in 2009.

The BP settlement in principle: The good and the bad

The good news is that the BP settlement provides funding to restore the Gulf. The settlement is also preferable to past failures to collect from companies liable for causing oil spills. For instance, the BP settlement contrasts with the U.S. government’s inability to recover from the foreign companies responsible for the Ixtoc spill. Furthermore, while the BP settlement does not include a reopener clause like the Exxon Valdez settlement did, it does include a $232 million reserve to cover any further natural resource damages that are presently unknown. On the one hand, this reserve money is preferable to a reopener clause because it sets aside money for future environmental damage from the spill (the federal and state governments that filed a claim for $92 million under the Exxon Valdez reopener clause are still waiting for Exxon to pay). On the other hand, the lack of a reopener clause could result in BP avoiding financial liability for unforeseen costs to restore the Gulf.

For BP, the settlement represents a discount against what might have been a much higher price tag. BP had claimed that paying a hefty civil fine would lead to its financial ruin. But commentators note that the settlement lifts a proverbial weight off of BP’s shoulders. Bolstering this claim is the fact that BP’s stock went up several percentage points after news of the settlement broke. The settlement eliminates what had been a looming uncertainty about how much money BP will spend to clean up the spill.

Commentators have already pointed out that the structure of the settlement will likely work in BP’s favor. For instance, BP would have 18 years to pay off the settlement amount. Furthermore, BP would pay lower than market interest rates while it pays for the settlement. These factors mean that by the time it finishes paying off the settlement, BP would most likely end up paying less than the 2015 value of $18.7 billion. Inflation will likely outstrip the interest rate. Finally, BP might be able to write off its payments toward the settlement—less the money it pays toward the Clean Water Act fines—in the form of tax breaks and other write-offs. Taken together, these tax breaks and other reductions could cause the settlement to have less of a deterrent effect on potential bad actors than the high price tag would otherwise suggest.

Conclusions and remaining questions

The efficacy of the settlement remains to be seen, but its record-setting amount represents a large step toward restoring the Gulf. One remaining issue is exactly how much of the settlement money will actually go to restoring the Gulf. Congress enacted the Resources and Ecosystems Sustainability, Tourist Opportunities, and Revived Economies of the Gulf Coast States Act (RESTORE Act) to ensure that 80 percent of the monies collected under the settlement go into a trust fund to restore and protect the Gulf region. Only time will tell whether the monies paid by BP under the settlement and funneled to Gulf restoration by the RESTORE Act will be sufficient to repair the damage caused by the oil spill, or whether the governments that were parties to the settlement will wish they had included a reopener clause or held out for more money.