Spillover risk

Last Updated: Fri, Nov 16, 2012 19:50 hrs

A sigh of relief is in order at BP. The embattled UK oil major settled US federal criminal charges and some civil ones for $4.5 billion - less than feared. But BP’s legal troubles stemming from its 2010 Gulf of Mexico oil spill will continue. Its admission of criminal guilt could be used against it in a high-stakes civil trial. No wonder investors aren’t yet cheering. Still, both sides can take some satisfaction in the deal, announced on Thursday. The US Justice Department gets to look tough: BP’s $4.5 billion penalty includes a $1.3 billion criminal fine, the biggest ever levied by Uncle Sam. Meanwhile, for BP the impact is manageable, at about 10 weeks of last year’s cash flow from operations, to be paid in installments over six years.

The company will take a $3.85 billion charge against income, bringing its total provisions for the disaster to $42 billion. In return, it gets out from under two of the big legal cases remaining after its pact with private plaintiffs in March - the other, smaller part of the latest settlement is a deal with the Securities and Exchange Commission. In January, Morgan Stanley estimated that the criminal probe alone could cost BP $5 billion to $15 billion. By that yardstick, the company escaped relatively lightly.

One twist, though, is that BP’s guilty pleas on 14 counts, which are part of the settlement, can be introduced in evidence in a related civil trial beginning in February in New Orleans. The central issue is whether BP was, in legal terms, grossly negligent in the disaster. If so, its fines under the US Clean Water Act could balloon to a maximum $21 billion, versus up to $5.4 billion if BP’s missteps aren’t found to have reached that level.

BP plans a vigorous defense. It says its guilty pleas are consistent with conduct that was merely negligent, not grossly so. The feds will no doubt relish BP having to convince a judge of that, in the light of the criminal admissions. At a minimum, they surely give the U.S. government leverage in negotiating a further, civil settlement. That might help explain why BP’s New York-listed ADRs were up just 0.6 percent in 3 pm trading (Thursday), adding a modest $700 million of market value. The settlement is a step forward, but the Macondo nightmare isn’t over yet.

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