What You Need to Know About the Oil Spill and BP's Bottom Line

Professor Noah Hall teaches environmental and water rights law at Wayne State University Law School in Detroit. He and I recently talked about BP (NYSE: BP  ) and the tragedy in the Gulf, beginning with how much the spill could cost the British oil giant.

Noah Hall:  If I had to ballpark, the ultimate tab for BP could be somewhere in the order of 20 to 30 times what we saw in the Exxon (NYSE: XOM  ) Valdez. So you could be talking up to $40 billion to $50 billion dollars.

Mac Greer: I hear a lot about the $75 million … cap, but I also read that under U.S. law, BP must pay for all the clean-up costs.

Hall: The $75 million cap is basically a non-issue. First of all, the $75 million cap was created under the Oil Pollution Act of 1990; the law that was created after the Exxon Valdez spill. The $75 million cap does not apply to the actual cleanup and response costs, which are going to probably be ballpark at around $10 billion when all is said and done, perhaps more.

Secondly, the $75 million cap was intended to only limit BP's liability, not for the damages for the actual cleanup and response, but for claims for business loses and economic damages and personal injuries. But the $75 million cap does not apply if BP is found to be grossly negligent or having violated any health or safety regulations, both of which are quite likely. So the $75 million cap won't apply anyway.

And furthermore, the $75 million cap, since that was created under the Oil Pollution Act ... only applies to claims under the Oil Pollution Act. And I think where BP is going to face the most significant liability by dollars is in state and federal courts for claims for property damage and business [losses] and lost revenues. I don't think the $75 million cap is going to give BP any protection, and so far we haven't seen BP even attempting to rely on it. And that's not BP being a bunch of benevolent altruists, that's BP recognizing that they're probably not going to get the benefit of the $75 million cap anyway, given what we already know about violation of federal safety regulations. So they're not even attempting to use it as a defense.

Greer: And Noah, when you think about BP's liability and the potential cost, what can we learn from the Exxon Valdez?

Hall: The Exxon Valdez is the closest thing we have to historical example. A couple of things: Exxon got hit with criminal charges. But in terms of money, those weren't really a big deal. It was $150 million in criminal penalties, and the court later even forgave $125 million of it. So while the public is very focused on criminal charges, and you see all these politicians demanding criminal investigation against BP, from investors' prospective or from the economic vitality of the company, that's not really going to be a big deal. There's not that much that BP would be on the hook from criminally. They might have to pay restitution under those criminal laws, but that's going to be for the same damages they pay under civil laws.

The second thing is the federal government civil enforcement under environmental laws. Again, that really wasn't a big deal to Exxon monetarily. Where the action was with Exxon monetarily were the actual economic damages in federal court, and more significantly, the punitive damages. And the big difference there really between the two disasters is that in Exxon and in Alaska, the economic damages were actually modest compared to what you're going to see in the Gulf, because economically, Alaska is just not as big a region as the Gulf when you're talking about dollars and cents. There's just not as much money at stake on the shoreline of Alaska as there is along the Gulf shoreline. So, the economic damages in the Gulf are going to be far more significant.

On the flip side, in Exxon, the captain was drunk and the company, Exxon, knew that he had a drinking problem and wasn't adequately monitoring it. And there's all kinds of other really grossly negligent behavior that gave rise to punitive damages. But here, despite eight weeks of people digging and working --- yes we've seen BP cut a bunch of corners and [it] was less than enthusiastic about complying with safety regulations and things like that --- I don't know if we've really seen yet enough that would rise to the level of punitive damages. And besides, after the Exxon case, we know the punitive damages would be limited to the economic damages as well.

I think Exxon gives us a pretty good roadmap, but you just have to keep in mind a couple of those key distinctions; that the Gulf region, there is far more at stake economically than there was in Alaska, the fisheries, the tourism, even the property values. And on the flip side, in Alaska and Exxon, you had Captain Hazleton, who was drunk, and we haven't seen that with BP. And folks have been looking, but so far we haven't found kind of that "smoking gun" of some grossly negligent officer of BP who caused this accident. In fact, most of the failures to take precautions that we know about so far with regard to BP were either approved or at least known by the federal government as a regulator.

Check back with Fool.com for more from Mac's interview with Prof. Hall.

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


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 15, 2010, at 4:32 PM, mikecart1 wrote:

    BP will be $60+ by the end of 2011.

  • Report this Comment On June 16, 2010, at 9:55 AM, voelkels wrote:

    mikecart1 wrote: “BP will be $60+ by the end of 2011.”

    If I was a betting man (which I’m not, no), I would give 8 to 3 odds that BP would be closer to $25 than $60+ by the end of 2011, me. If you look at the stock price of Exxon in the 6 or 5 years after the Valdez spill and compare it to the other oil companies prices at that time, I think you will find that it lagged that of them.

    Besides the direct cost to BP for the cost of the cleanup of the Gulf, which will be tens of billions, and the liability for lost wages, profits, etc., etc in Louisiana, Mississippi, Alabama and Florida (if they are lucky and the oil doesn’t reach the east coast), there will also be the lost business due to the spill. I know of a number of people that refused to buy Exxon’s gas for many years after the Valdez spill, even if it was cheaper than the other gas station across the street.

    Just my $0.02

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