BP 2013 Annual Report Download - page 146

2. Significant event – Gulf of Mexico oil spill – continued
In addition to the proceedings in relation to the interpretation of the EPD Settlement Agreement, following the District Court’s final order and judgment
approving the EPD Settlement in January 2013, groups of purported members of the Economic and Property Damages Settlement Class (the Appellants)
appealed from the District Court’s approval of that settlement to a different panel of the Fifth Circuit. On 10 January 2014, that other panel
of the Fifth Circuit affirmed the District Court’s approval of the EPD Settlement but left to the business economic loss panel of the Fifth Circuit the question
of how to interpret the EPD Settlement Agreement, including the meaning of the causation requirements of that agreement (see above). BP and several
Appellants have filed petitions requesting that all the active judges of the Fifth Circuit review the decision to uphold approval of the EPD Settlement.
See Legal proceedings on page 257 for further details on the settlements with the PSC and related matters.
Until the uncertainties described below are resolved, management is unable to estimate reliably the value and volume of future business economic
loss claims and whether and to what extent received or processed but unpaid business economic loss claims will be paid. Firstly, the inherent
uncertainty as to the interpretation of the EPD Settlement Agreement in respect of matching and causation issues will continue until the more detailed
matching requirements are finalized by the claims administrator and are implemented by the DHCSSP; the issue of causation and the requirements for
class membership under the EPD Settlement Agreement are resolved on appeal; and the impact of any new policies and procedures in response to
these issues on the value and volume of business economic loss claims becomes clear. Furthermore, the Fifth Circuit has yet to decide whether to
grant the petitions seeking review of its decision affirming approval of the EPD Settlement and, if granted, whether to alter its decision in that appeal.
Secondly, uncertainty arises from the lack of sufficient claims data under the DHCSSP from which to extrapolate any reliable trends – the number of
business economic loss claims received and the average amounts paid in respect of such claims prior to the District Court’s injunction were higher
than previously assumed by BP. This inability to extrapolate any reliable trends may or may not continue once the uncertainties concerning the
interpretation of the EPD Settlement Agreement described above have been resolved. Thirdly, there is uncertainty as to the ultimate deadline for filing
business economic loss claims, which is dependent on the date on which all relevant appeals are concluded. Management believes, therefore, that no
reliable estimate can currently be made of any business economic loss claims not yet received, processed and paid by the DHCSSP. A provision for
business economic loss claims will be established when a reliable estimate can be made of the liability.
The total cost of the PSC settlement is likely to be significantly higher than the amount recognized to date of $9.2 billion because the current estimate
does not reflect business economic loss claims not yet received, processed and paid. The DHCSSP has issued eligibility notices, disputed by BP, in
respect of business economic loss claims of $1,019 million which have not yet been paid. Furthermore, a significant number of business economic
loss claims have been received but have not yet been processed, and further claims are likely to be received.
The provision recognized for litigation and claims includes an estimate for State and Local Claims. Although the provision recognized is BP’s current reliable
best estimate of the amount required to settle these obligations, significant uncertainty exists in relation to the outcome of any litigation proceedings and
the amount of claims that will become payable by BP. See Legal proceedings on page 257 and Contingent liabilities below for further details.
Clean Water Act penalties
A charge for potential Clean Water Act Section 311 penalties was first included in BP’s second-quarter 2010 interim financial statements. At the time
that charge was taken, the latest estimate from the intra-agency Flow Rate Technical Group created by the National Incident Commander in charge of
the spill response was between 35,000 and 60,000 barrels per day. The mid-point of that range, 47,500 barrels per day, was used for the purposes of
calculating the charge. For the purposes of calculating the amount of the oil flow that was discharged into the Gulf of Mexico, the amount of oil that
had been or was projected to be captured in vessels on the surface was subtracted from the total estimated flow up until when the well was capped
on 15 July 2010. The result of this calculation was an estimate that approximately 3.2 million barrels of oil had been discharged into the Gulf. This
estimate of 3.2 million barrels was calculated using a total flow of 47,500 barrels per day multiplied by the 85 days from 22 April 2010 to 15 July 2010
less an estimate of the amount captured on the surface (approximately 850,000 barrels).
This estimated discharge volume was then multiplied by $1,100 per barrel – the maximum amount the statute allows in the absence of gross negligence or
wilful misconduct – for the purposes of estimating a potential penalty. This resulted in a provision of $3,510 million for potential penalties under Section 311.
BP intends to argue for a penalty lower than $1,100 per barrel. The actual penalty a court may impose could be lower than $1,100 per barrel if it were
determined that such a lower penalty was appropriate based on the factors a court is directed to consider in assessing a penalty. In particular, in
determining the amount of a civil penalty, Section 311 directs a court to consider a number of enumerated factors, including “the seriousness of the
violation or violations, the economic benefit to the violator, if any, resulting from the violation, the degree of culpability involved, any other penalty for
the same incident, any history of prior violations, the nature, extent, and degree of success of any efforts of the violator to minimize or mitigate the
effects of the discharge, the economic impact of the penalty on the violator, and any other matters as justice may require”. Civil penalties above
$1,100 per barrel up to a statutory maximum of $4,300 per barrel of oil discharged would only be imposed if alleged gross negligence or wilful
misconduct were proven. The $1,100 per-barrel rate has been utilized for the purposes of calculating the provision after considering and weighing all
possible outcomes and in light of: (i) the company’s conclusion that it did not act with gross negligence or engage in wilful misconduct; and (ii) the
uncertainty as to whether a court would assess a penalty below the $1,100 statutory maximum.
On 2 August 2010, the United States Department of Energy and the Flow Rate Technical Group had issued an estimate that 4.9 million barrels of oil
had flowed from the Macondo well, and 4.05 million barrels had been discharged into the Gulf (the difference being the amount of oil captured by
vessels on the surface as part of BP’s well containment efforts).
It was and remains BP’s view, based on the analysis of available data by its experts, that the 2 August 2010 Government estimate is not reliable. BP
believes that the 2 August 2010 discharge estimate is overstated by at least 20%. If the flow rate were 20% lower than the 2 August 2010 estimate,
then the amount of oil that flowed from the Macondo well would be approximately 3.9 million barrels and the amount discharged into the Gulf would
be approximately 3.1 million barrels (using a current estimate of barrels captured by vessels on the surface of 810,000 in line with the stipulation
entered with the US government – see Legal proceedings), which is not materially different from the amount we used for our original estimate at the
end of the second quarter 2010.
For the purposes of calculating a provision for fines and penalties under Section 311 of the Clean Water Act, BP has continued to use an estimate of
3.2 million barrels of oil discharged to the Gulf of Mexico and a penalty of $1,100 per barrel, as its current best estimate, as defined in paragraphs 36-40
of IAS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’, of the amounts which may be used in calculating the penalty under Section 311 of
the Clean Water Act and as a result, the provision at the end of the year was $3,510 million.
The amount and timing of the amount to be paid ultimately is subject to significant uncertainty since it will depend on what is determined by the court
in the federal multi-district litigation proceedings in New Orleans (MDL 2179) as to negligence, gross negligence or wilful misconduct, the volume ofoil
spilled and the application of statutory penalty factors. The trial court could issue its decision on the first two phases of the trial (which considered the
issues of negligence or gross negligence in phase one, and source control efforts and the volume of oil spilled in phase two) at any time and has not
yet scheduled a hearing on the subsequent phase regarding the application of statutory penalty factors. The court has wide discretion in its
determination as to whether a defendant’s conduct involved negligence or gross negligence as well as in its determinations on the volume of oil spilled
and the application of statutory penalty factors.
142 BP Annual Report and Form 20-F 2013