Last week, oil and gas giant BP agreed to a $18.7 billion settlement with the U.S. government for damages to the Gulf Coast caused by its 2010 Deepwater Horizon oil spill. Since 2010, BP has made concerted efforts to repair the damage caused by the disaster. This agreement, if accepted by a federal judge, will settle the remaining state and federal claims against the company. This settlement will help facilitate the continued Gulf recovery efforts and sends a strong messages to other oil companies: if you cause damage, you will pay to fix it. But while $18.7 billion does seem like a large amount–it’s the largest settlement ever reached for environmental damage–the question remains: is it enough?
In April 2010, BP’s Deepwater Horizon drilling rig exploded and sank, causing a sea-floor oil leak that took 87 days to control. During that period, an estimated 200 million gallons of crude oil leaked into the Gulf of Mexico, damaging approximately 68,000 square miles of water and almost 500 miles of U.S. coastline. To put these numbers in context, the Deepwater Horizon spill leaked 19 times more oil than the Exxon Valdez incident in 1989. Some of the environmental impacts may not be fully understood for decades, and while the Gulf economy has experienced a revival, there are still lingering effects from the disaster.
Within weeks of the disaster, BP announced that it pledged billions of dollars to aid the cleanup and recovery effort. While these efforts marked a show of good faith, it is also important to note that the company faced intense public outrage, not to mention potential backlash from the Justice Department to penalize BP. This move ensured that investors did not flee the company and helped keep the Justice Department at bay. In 2012, BP agreed to a class action settlement with attorneys representing thousands of individuals and organizations affected by the spill. In the wake of this agreement, many Gulf Coast residents came forward to claim damages, including some whose claims were dubious at best. This was controversial–a deal once celebrated by BP became an agreement which from the company’s perspective took advantage of its good intentions. In November 2012, BP pleaded guilty to 12 felonies, settling another component of its liability, and paid the government $4.5 billion in fines.
It would appear that BP is being heavily penalized for the 2010 spill–spending $25 billion directly afterwards, $4.5 billion in government penalties, and agreeing to this $18.7 billion settlement–but these repercussions are not as severe as they seem. While BP made considerable efforts to clean up the Gulf and pay for damages, the company has also kept its own interests in mind. BP spent $500 million on a campaign to rebrand its image after the spill, and in 2013 it launched a PR push to complain about fraudulent damage claims. Although the company protested fraudulent claims, the federal government also cracked down harshly on those who made false claims, making these concerns largely invalid.
The incident hasn’t really damaged BP’s financial situation. The company reported profits of $5.3 billion just a year after the Gulf spill, and until the recent decline in oil prices, continued to thrive. Instead of the $54 billion that BP will likely end up spending overall, Louisiana’s top aide for coastal affairs, Garret Graves, argues that its true liability should be much larger. Graves extrapolated from settlements of other large oil spills to estimate what the company’s true liability is. According to his calculations it ought to exceed $125 billion.
While some celebrate this settlement, BP likely received a less severe penalty than it deserved. Since this settlement will resolve all of the government’s remaining claims, it is unlikely that BP will be held legally responsible for any long term damage that may be discovered in the future. Despite its issues with the claims process, BP agreed to the terms and must accept the consequences. Any extra payouts that BP claims are almost certainly outweighed by the potential negative effects if BP were to put up a stronger fight. Public outrage would have remained fierce and this would likely have led to a federal campaign to give BP a harsher punishment.
Interestingly, BP’s stock rose sharply after the settlement was announced, likely due to investor confidence that this will end the company’s issues. All that is left now is for the courts to approve of the deal and it will officially become the largest settlement with a single entity in American history. Despite this, BP should thank its lucky stars that it managed to avoid more severe consequences for this spill.