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BP -1.85%, $35 handle: BP May Face $18 Billion In Fines From US

Posted: July 20, 2010 at 6:08 am

The US Clean Water Act has provisions that could allow the American government to charge BP plc (NYSE: BP) up to $4,300 per barrel of oil spilled into the Gulf. According to The New York Times, if the government determines that the spill was the result of gross negligence, the fine jumps to $4,300 a barrel. CNN Money puts the potential total fines as high as $18 billion.

It is not clear whether that sum is on top of the $20 billion escrow account that BP has established for liabilities and clean-up costs or the $3 billion BP has already paid to contain the spill, clean water and beaches, and cover claims of individuals and companies affected by the leak. The calculation explains why BP’s plan to sell $10 billion worth of Prudhoe Bay assets to Apache (NYSE: APA) and raise as much as $10 billion through credit facilities or debt offerings may not be adequate to cover all of BP’s costs arising from the spill. The $18 billion fine combined with the $20 billion escrow may not cover lawsuits by those who claim their livelihoods where destroyed by the leak. It also does not include shareholder suits by those who own shares in BP and have lost 40% or more of the value of their investments.

The US government is face with an odd and difficult situation. An $18 billion fine could cripple BP and undermine its ability to continue to fund the escrow account and weather suits against it by American citizens. The escrow account will be funded over a three-and-a-half year period. BP’s costs may have gone into the tens of billions of dollars by they and its ability to handle the weight of more payments could be broken.

BP could still go into Chapter 11 and the US government could be the major reason for putting it there.

Douglas A. McIntyre

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