by Karl Coplan

EPA today sued BP and four other partners in the Deepwater Horizion drilling rig in federal District Court in New Orleans. A link to the Bloomberg News report is here. The action seeks penalties under Clean Water Act section 311, as well as response costs and natural resource damages under the Oil Pollution Act.

Significantly, the complaint alleges that BP and its partners were guilty of “gross negligence” as well as regulatory violations. These allegations — which based on published reports seem likely to be proven — would remove the liability caps of the Oil Pollution Act, and increases BP et al.’s per-barrel penalty exposure to $4,300 (adjusted for inflation). With 4.9 million barrels of oil spilled, that puts BP’s liability for fines alone at a staggering $21 billion. This is in addition to natural resource damages, economic damages, and cleanup costs recoverable under the Oil Pollution Act.

Clean Water Act section 311 tells the court to consider “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.” There is a strong case for the maximum penalty here, as the violation was “serious” in that it resulted in extreme environmental and economic harm and BP’s efforts the cap the spill had limited success until four months after the blowout.

The economic benefit inquiry will be an interesting issue — clearly BP derived no direct economic benefit from spilling nearly 5 million barrels of oil into the Gulf. On the other hand, BP did benefit from the cost cutting measures and shortcuts that lead to the spill. In considering the total economic benefit to BP and its partners, it would make sense for the court to consider not just the economic benefit of cost cutting at this one well, but to consider the combined benefits of adopting a Gulf-wide practice of cutting costs. If the theory of assessing economic benefits to the violator is to make sure that it never pays to violate the Clean Water Act, then the polluter should not get the benefit of cutting corners in all the cases where they “get away with it” and only disgorge their savings for the one well where the catastrophe occurs. If the latter approach prevails, than it would still make economic sense to cut corners and take the risk of paying a modest penalty when things go wrong.

On the other hand, the liability and cleanup compensation bill under the Oil Pollution Act may be large enough in this case to eliminate whatever economic incentives BP and their Deepwater friends might have had to cut corners.

In any event, the $40 billion that BP set aside for its liabilities may vanish quickly.

A copy of the complaint is here.