NEW ORLEANS (CN) - A new court order could force BP to make "substantially higher" payments than the initially projected $7.8 billion, the oil giant told shareholders.
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In its annual report, BP highlighted a March 5 order from U.S. District Judge Carl Barbier that may have it paying billions more than previously anticipated.
Barbier's order on "Matching of Revenue and Expenses" concerns a dispute between BP and plaintiff counsel about how BP must interpret and pay oil spill claims under their "Economic and Property Damages" settlement.
BP previously estimated the settlement payments all told would come to roughly $7.8 billion, but the actual amount is uncapped.
Barbier's six-page ruling upholds the claims administrator's interpretation of the settlement agreement and says that, "notably," this is "the exact interpretation BP advocated while the parties negotiated the settlement agreement."
In creating the settlement agreement, "the parties agreed to give claimants flexibility in choosing the most favorable compensation and benchmark periods," Barbier wrote.
"Indeed, the settlement agreement provides that if a claimant fails to select the period that generates the greatest recovery, the program will choose the period for him," he added. "Objective formulas, the possibility of 'false positives,' and giving claimants flexibility to choose the most favorable time periods are all consequences BP accepted when it decided to buy peace through a global, class-wide resolution. In light of this, to the extent that the claims administrator's interpretation produced 'false positives,' or, as BP claims, 'absurd' results, it appears that the settlement agreement anticipates that such results would sometimes occur.
"The overarching theme of the settlement is a transparent, uniform application of an objective quantitative data-based test which can be fairly and efficiently administered by the claims administrator. Notably, the settlement agreement itself defines those businesses that lost profits, income, and/or earnings 'as a result of' the spill as those businesses that meet the objective causation requirements.
"Once the settlement's causation formula is met, then all losses calculated under exhibit 4C are presumed to be attributable to the oil spill. BP's interpretation injects a subjective notion of alternative causation and a degree of complexity that are contrary to the settlement's terms."
BP was frank about the ruling in its statement to investors last week.
"Business economic loss claims received by the DHCSSP [Deepwater Horizon Claims Supervised Settlement Program] to date are being paid at a significantly higher average amount than previously assumed by BP in formulating the original estimate of the cost of the PSC settlement," BP said.
"Further, the settlement agreement has been interpreted by the claims administrator in a way that BP believes is incorrect resulting in a higher number and amount of claims being determined."
BP said it "strongly disagrees with the ruling of 5 March 2013 and the current implementation of the agreement by the claims administrator. BP intends to pursue all available legal options including rights of appeal, to challenge this ruling."
The oil company added: "If BP is successful in its challenge to the court's ruling, the total estimated cost of the settlement agreement will, nevertheless, be significantly higher than the current estimate of $7.7 billion, because business economic loss claims not yet received or processed are not reflected in the current estimate and the average payments per claim determined so far are higher than anticipated. If BP is not successful in its challenge to the court's ruling, a further significant increase to the total estimated cost of the settlement will be required. However, there can be no certainty as to how the dispute will ultimately be resolved or determined. To the extent that there are insufficient funds available in the Trust fund, payments under the PSC settlement will be made by BP directly and charged to the income statement."
BP reached its Economic and Property Damages with plaintiff attorneys in March 2012 hours before BP was to head to court to face litigation on hundreds of thousands of consolidated economic and property loss claims from Gulf Coast residents and businesses. The April 20, 2010, explosion of the Deepwater Horizon killed 11 people and set off the worst unintentional oil spill in history.
A trial is under way in Barbier's court to apportion blame for oil spill damages not covered in BP's settlement agreement.
This trial will apportion responsibility for the disaster and determine its cause. The United States and five Gulf states are seeking billions of dollars for Clean Water Act violations and damages to natural resources.
Clean Water Act fines alone could range from $1,100 to $4,300 per barrel of oil spilled, with the high figure applicable if BP is found to have been grossly negligent. Most estimates put the spill around 4.9 million barrels, though BP will not be fined for the 800,000 barrels it managed to confine.
If BP is found to have been "grossly negligent" it could face up to $17 billion in fines.
As the trial began, the Wall Street Journal reported that the Department of Justice was prepared to offer BP a $16 billion settlement. It is unclear whether that settlement was offered.
Sabrina Canfield can be reached at [email protected]
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