BP hit by legal action over Alaska spills, and production growth fears

BP has been sued by the US federal government and the state of Alaska for damages over the two oil spills from its North Slope pipelines in 2006. The Department of Justice said it was seeking “the highest amount of civil penalties possible by law.”

It sounds dramatic, but probably won’t be.

Back in 2007, BP settled the criminal case over the Alaska spills as part of a general resolution of several legal problems in the US, including most seriously the explosion at the Texas City refinery in 2005, which killed 15 people. The proportion of the $380m total payment that related to the Alaska spills was just $20m: a fine for a violation of the Clean Water Act.

The new actions are the separate civil proceedings. The cost to BP is likely to be greater than the fine, but to benchmark the scale of possible damages, it is worth remembering that the Exxon Valdez accident, one of the greatest environmental disasters of modern times, was settled by Exxon for $900m.

The Exxon Valdez spilled 10.8m gallons of oil; the two BP pipeline leaks released about one fiftieth of that amount. For a company with a market capitalisation of about $125bn, the fine is unlikely to be material.

The federal authorities wants the court to order BP to “take all appropriate action to prevent spills in the future.” BP said in a statement it had already spent half a billion dollars to do just that.

It said:

“We have taken significant steps to ensure that our operations are safe and reliable, and protect the environment. Those include building a new $500 million system of oil transit lines at Prudhoe Bay.”

The stance of the authorities in Alaska will be interesting at a time when the state is desperately trying to attract investment. (Sarah Palin, wife of a former BP worker, is still governor, of course.)

BP’s shares have fallen this morning, but that appears to have more to do with a Goldman Sachs downgrade from “hold” to “sell”.

The Goldman note’s key line:

On our analysis, BP is likely to deliver production growth in 2009 due to
the ramp-up of a few large new projects (Thunder Horse in particular).
However our analysis of decline rates and new legacy assets suggests
that might be the last year of growth. BP suffers from high decline rates
in its current E&P portfolio, has few major new projects in the pipeline
with start-up beyond 2010 and most of the new projects that have
come on-stream in 2008/09 have short expected lives (deepwater
fields).
We expect BP production to decline by roughly 2% pa after 2010 and
this is not reflected, in our view, by a premium valuation vs. the rest of
the sector. As a result, we downgrade the shares to Sell from Neutral.

Meanwhile, BP is cutting jobs in its solar businesses in Spain and the US, as it reduces alternative energy investment from $1.4bn last year to about $1bn this year, reflecting its generally tight financial position.

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