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Oil Spill Settlement: BP Could Face Higher Penalties

 January 07, 2013 01:02 AM

(By Mani) The $1.4 billion settlement by Transocean Ltd. (NYSE: RIG) suggests that the oil spill proceedings is moving to a pragmatic solution while BP's ultimate liabilities could be higher.

Transocean, the owner of the Deepwater Horizon rig operated by BP Plc (NYSE: BP) (LSE:BP) at the time of the Macondo explosion in April 2010 has settled with the US Department of Justice (DoJ) for a sum of $1.4 billion.

The settlement is slightly below the $1.5 billion which Transocean had disclosed in a filing to the Securities and Exchange Commission it was discussing with DoJ, and below the $2.0 billion taken as provision including settlement with other parties.

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Meanwhile, the settlement indicates that DoJ is in the mood to settle and can be pragmatic. Following Transocean, BP will also seek to settle ahead of the trial scheduled for Feb.25.

"Although Transocean was named for repeated errors in the Coast Guard report on Macondo, we expect BP to face deferentially higher penalties," RBC Capital Markets analyst Peter Hutton said in a client note.

The Transocean agreement may also act as a basis for Halliburton Co. (NYSE:HAL) to move to settle with DoJ, which could be a further indicator that the process is moving to completion.

London-based BP is addressing its priorities of reaching a final settlement in connection with the oil spill, stabilizing and growing its production and reserves, and restructuring and rebuilding its assets portfolio with a focus on value creation.

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BP is eager to settle all oil spill financial liabilities for which it has paid and reserved $38 billion. The bulk of the remaining liabilities involving federal, state and local governments, including environmental penalty, for which BP reserved $3 billion. Each additional $1 billion payment would impact earnings by 50 cents per ADR.

"Our estimates for BP's liabilities are $55.1bn in total liabilities; $16.5bn RBC assumption for CWA," Hutton said.

If BP settles the estimated $16.5 billion under the Clean Water Act (CWA), it would be about 16 times the settlement reported by Transocean. Note that, in addition, $4.4 billion was available at the third quarter within the Trust Fund for payment of claims, and it is possible that the $1.4 billion from the Transocean settlement could be added directly or indirectly to this pool.

On April 20, 2010, while stationed at the Macondo well site in the Gulf of Mexico, the Deepwater Horizon rig experienced an uncontrolled blow-out and related explosions and fire, which resulted in the deaths of 11 rig workers and the largest oil spill in U.S. history.

Following the Macondo oil spill tragedy, BP embarked on an aggressive divestment program, revised the company's strategic direction, and overhauled the senior management team.

BP has established a $20 billion trust fund and initiated a $30 billion target divestment program of non-core assets ($22 billion of which was announced in 2010). BP's new strategy places an increased focus on safety and operational risk management, rebuilding trust with its global stakeholders, investing for growth in its upstream business, and reshaping its downstream portfolio.



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