BP to pay out a further $US17.5 billion for the Deepwater Horizon oil spill

A few days ago the US Federal Court endorsed a settlement agreement between the US government and five Gulf Coast States. The multi-national oil giant BP has been ordered to pay a total of $US 17.5 billion in fines and compensation for natural resource damage and economic losses incurred as a consequence of the 2010 Deepwater Horizon oil spill.

The order comprised:

  • $US 5.5 billion civil penalty imposed under the US Federal Clean Waters Act to be paid over 15 years
  • $US 7.1 billion to the US government and Gulf States for natural resource damage to be paid over 15 years
  • $US 4.9 billion for economic loss and other claims by five Gulf States to be paid over 18 years

In addition BP is required to put aside $1 billion to resolve claims by more than 400 local government entities.

This is a landmark settlement designed to compensate for all the damages, both environmental and economic. It is the largest settlement with a single entity in American history and completely dwarfs anything similar in Australia.

To calculate the overall cost to BP of the Deepwater Horizon oil spill I have reviewed BP’s 2014 Annual Report, which included a financial summary of the spill event. Their analysis put the total costs from time of the incident up until time of the report preparation at $US 43.5 billion.

The total costs to BP to date of the Deepwater Horizon explosion and resulting oil spill, including the recently imposed fines and compensation, are in the order of $US 61 billion. This begs the question; how big does a company have to be to be able to respond to a very large oil spill in an environmentally sensitive area?

In the case of BP, the company reported a profit in 2014 of $US 12.6 billion, and this was after paying $US 9.7 billion in dividends to shareholders. Clearly BP is large enough to continue operating despite the Deepwater Horizon disaster and oil spill, and this provides a yard stick by which we can assess the capability of other companies to respond to a very large oil spill in environmentally sensitive areas. The first two years after the Deepwater Horizon event cost BP $US 38 billion (according to their 2012 Financial Statement) which equates to about 26% of BP’s total market capitalisation.

In the Australian context there are no Australian offshore oil and gas companies with the financial reserves to be able to mount a response equivalent to BP’s response to the Deepwater Horizon spill. If they were required to meet the same rate of spend over the first two years, without even taking into account the fines, it is unlikely that any would be able to bear the costs of the response.

Fortunately all of the major offshore oil spill events in Australia have stayed offshore … so far!

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