BP and the Oil Spill: A Big Misconception and 3 Big Questions

Prof. Noah Hall teaches environmental and water-rights law at Wayne State University Law School. He and I recently talked about BP (NYSE: BP  ) and the tragedy in the Gulf of Mexico. In this second part of a four-part interview, Professor Hall shares some of the big questions and big misconceptions about BP and the oil spill.

Mac Greer: What's the biggest misconception about BP's liability?

Noah Hall: That's a great question. On the one hand, I think some folks are completely overestimating BP's liability and expecting them to go bankrupt any day now. But while $40 billion or $50 billion would be an unprecedented amount of liability for an environmental disaster, BP has unprecedented wealth, revenue, and cash reserves. And that $40 or $50 billion that I would call "back of the napkin" estimates is going to be paid out over five to 10 years. So you're really only talking maybe $5 billion or $10 billion per year in liability, which a company the size of BP actually can absorb and pay out and probably remain solvent and profitable.

On the other hand, there seems to be a misconception, especially among some of the more anti-corporate circles, that BP is going to get out of this scot-free, without having to pay a dime or maybe just $75 million or something. And that's total nonsense as well. BP is going to pay a massive bill for this. I guess the truth is really just somewhere in between. I don't think that this disaster on its own would bankrupt BP. And I don't think BP is going to get out of paying for all the damage they have caused.

I think actually, legally, this case is going to be fairly straightforward in that BP is going to be liable for the damage. They are going to be writing checks for the damage. There will be litigation over the extent of the economic losses and the damages by the businesses and the property owners and the local governments in the Gulf area. But really I think BP is going to be responsible, they're going to pay it out, and they'll have enough money to pay it out.

Greer: And Noah, when you're talking about this with your law students, what are the big questions to ask as we try to get a sense of how this is going in terms of BP's liability?

Hall: Sure. A couple of things. One, is BP going to be able to bring in other responsible parties to share the liability burden? Transocean (NYSE: RIG  ) and Halliburton (NYSE: HAL  ) would be two of the companies that I think of first and foremost. Let's say BP is on the hook for $40 billion. They might try to say Transocean is responsible for 10% of that and Halliburton is responsible for 10% of that. So I think you'll see some fighting between responsible parties. My hunch, though, actually, is that's not going to be a particularly successful strategy for BP. Transocean owned the rig. We haven't seen much evidence that Transocean did anything wrong nor that they had any incentive to cut corners or rush the drilling and safety procedures, because Transocean gets paid by the day as they are leasing that rig to BP. So Transocean would have been fine if BP took an extra month to do the job right. Halliburton had a pretty minimal role as well, and a lot of it was even maybe after the mistakes were already made. So I think BP is not going to get a lot of help from other responsible parties in paying this out.

The second issue will be whether BP is grossly negligent or did anything that would warrant punitive damages. We know that BP is responsible, and with most of the laws that claims will be brought under, it doesn't even really matter if they did anything wrong. It doesn't matter if they did everything by the book or took the best precautions available, they're strictly liable. Basically, the oil is in the water. BP is responsible. They have to pay out the claim. But you are going to see claims for things like punitive damages, and that's when we're really going to find out how egregious BP's conduct was and if they really did anything wrong or whether they were just responsible the party when this disaster happened.

The third thing I would be watching for is the extent of the economic-loss claims, because those are the ones that can really spiral out of control. Right now, most of the economic-loss claims that are being filed are pretty straightforward. There are things like Gulf fisherman whose boats are grounded during the oil spill and can't go out and make a living --- so you pay them $5,000 a month or $10,000 a month, very straightforward. But what's going to happen five years from now, when the tourism industry in Florida is still down 20% or 30% and they're going to claim that's the result of the BP oil spill? BP is of course going to say no, it's the result of a recession, bad marketing, consumer preference, or all of the other factors that go into whether or not an industry is doing well or an economy is doing well.

And that's going to be a big question -- how much of the economic impact in the Gulf region is going to be pinned on BP? And will BP be legally responsible for it? And that's really just going to come down to a battle of economic experts.

Mac Greer doesn't own any of the stocks discussed. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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  • Report this Comment On June 16, 2010, at 10:53 AM, MyDonkey wrote:

    Noah Hall doesn't indicate how he arrived at a figure of $40-50 billion, but he came up with that number before the flow rate estimate was almost doubled yesterday (15 June) to 35,000-60,000 barrels a day, so his figure may need to be revised already. I also assume he expects -- like almost everyone else -- that the spill will be stopped some time in August when relief wells are due to be completed. If that doesn't happen, and the spill continues for the same period as the Ixtoc example, which was more than 9 months, then his numbers may need to be revised again. If the spill goes beyond 9 months, it's a whole new ballgame.

    And if the oil gets around the tip of Florida and is blown by a hurricane onto the eastern seaboard, how much additional damage might that do?

    It's too early for anyone to estimate even a ballpark figure of the total cost of the spill because nobody knows when it will end and nobody knows how much damage the spill will eventually cause to marine life, the environment, and the economy. At this point, Hall's dollar figures are meaningless.

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