BP ( BP ) has finally settled the federal civil suit against it for the 2 oil spills in its Prudhoe Bay oil transit line in March and August 2006. The company reached an agreement with the U.S. Department of Justice to pay a civil penalty of $25 million, which brings the total expenses for the company relating to the oil spill to $85 million. The settlement has triggered fresh concerns over the actual expenses that BP will have to bear in relation to its Gulf of Mexico oil spill.
The third largest of the six oil & gas 'supermajors' after Exxon Mobil ( XOM ) and Royal Dutch Shell (NYSE:RDS.B), BP was held responsible for the Deepwater Horizon oil well explosion and spill in the Gulf of Mexico in early 2010. BP also competes with Chesapeake ( CHK ), Anadarko ( APC ) and Chevron ( CVX ).
We maintain a price estimate of $53.67 for BP stock , a premium of about 20% to its market price.
BP faces the largest per-barrel penalty for any oil spill..
The $25 million penalty for the 5,078 barrels of crude oil that spilled in the Alaskan North Slope represents more than $4,900 per barrel in fines for BP, well above the maximum $4,300 per barrel fine applicable under the Clean Water Act. The fine will be paid as $20.05 million to the Oil Spill Liability Trust Fund established under the Clean Water Act, and the remaining $4.95 million to the U.S. Treasury.
As a part of the settlement, BP has agreed to comply with a set of requirements while operating its Prudhoe Bay pipeline in Alaska. This includes a $60 million spend by BP to improve safety. The company will also have an independent contractor monitor and report its operations.
… and this indicates a grim outcome for BP from the Gulf of Mexico oil spill
BP has pegged the estimated costs from the Gulf of Mexico oil spill at around $41.3 billion in its latest earnings release. But the recent settlement could be an indicator of much larger expenses for BP due to the oil spill, the world's biggest to date.
Assuming that BP faces a similar per barrel penalty of $4,900 for the Gulf of Mexico oil spill, this signifies a penalty of nearly $25 billion for the more than 5 million barrels of oil spilled in this accident. The penalty in itself is more than the $20 billion amount BP set aside for its trust fund to settle all claims and liabilities related to the accident. BP's actual costs could shoot up to easily cross $50 billion.