Special Report - Civil fine in Gulf spill could be $4,300 barrel

NEW YORK (Reuters) - Just how many barrels of oil are gushing into the Gulf of Mexico from the Deepwater Horizon spill is a billion dollar question with implications that go beyond the environment. It could also help determine how much BP and others end up paying for the disaster.

A clause buried deep in the U.S. Clean Water Act may expose BP and others to civil fines that aren't limited to any finite cap -- unlike a $75 million (52 million pound) limit on compensation for economic damages. The Act allows the government to seek civil penalties in court for every drop of oil that spills into U.S. navigable waters, including the area of BP's leaking well.

As a result, the U.S. government could seek to fine BP or others up to $4,300 for every barrel leaked into the U.S. Gulf, according to legal experts and official documents.

So far, analysts and experts calculating potential oil spill liabilities have mostly concentrated on the cost of the clean-up and compensation for economic damages to affected parties. Some have also discussed criminal liabilities.

But the potential for civil fines has received scant attention -- and they could add up very quickly, depending on how aggressive the U.S. government is in pursuing them.

The threat of hefty fines underscores the importance of quantifying how much oil is pouring into the Gulf. As BP seeks to staunch the leak that has now been gushing for at least 33 days, it has estimated a spill rate of 5,000 barrels per day. But some experts say the volume -- and hence the fines -- could be more than 10 times higher.

The little-known, seldom applied clause in the Clean Water Act was added in 1990 after the Exxon Valdez disaster in Alaska, and was intended to beef up the arsenal of penalties the government can apply to oil spillers to deter future disasters.

"These civil penalties could be staggeringly high, possibly running into the billions," said Professor David Uhlmann, director of the Environmental Law program at University of Michigan.

Total liability -- including civil fines as well as the cost of clean-up, economic damages and potential criminal liability -- "will run into the billions and may be in the tens of billions," Uhlmann said.

Under the Clean Water Act, the Environmental Protection Agency can seek in federal court to fine any party whose negligence results in an oil spill in U.S. federal waters.

Other companies involved at the Horizon platform and the oilfield could share liability with BP, experts said. They include rig-owner Transocean Ltd, cementing contractor Halliburton Co., blowout preventer manufacturer Cameron, and Anadarko and Mitsui, which also hold stakes in the oilfield.

SHARP RISE IN FINES

The basic fine, according to the act, is $1,100 per barrel spilt. But the penalty can rise to $4,300 a barrel if a federal court rules the spill resulted from gross negligence. The fines were originally set at $1,000 to $3,000 but that was raised in 2004 to keep up with inflation, according to Tracy Hester, head of the Environmental Law and Policy program at the University of Houston.

(To see an EPA memo on 2004 revisions to penalties outlined in the Clean Water Act, click here: http://static.reuters.com/resources/media/editorial/20100525/penaltymod-memo.pdf )

It is unclear, however, that the EPA would try to apply the fines, or seek maximum penalty levels. EPA officials did not respond to several calls and e-mails requesting comment.

If the agency does act, the per-barrel fines could push oil companies' liability well beyond the cost of cleaning up the spill and paying legitimate claims for economic damages it causes, experts told Reuters.

"There are civil fines that could be quite substantial. I think BP's exposure to this is far greater than people initially thought," said Harvard Law School professor Jody Freeman, who recently served in the White House as Counselor for Energy and Climate Change.

BP has already said it will voluntarily exceed a $75 million cap on liability for economic damages, pledging to pay any "legitimate claim" it receives. But the civil fines are another wild card.

BP spokesman Mark Salt said the company had nothing further to add to what it has said about the costs of the oil spill response.

Cash raised from such fines would be funnelled to government pollution funds, which provide economic aid for hazardous material spills.

BP or other parties facing fines could appeal them, or try to settle with the government for a lesser amount. Another option would be for BP or other responsible parties to seek a far-ranging settlement covering various areas of liability.

"The amount of barrels being released from the well is going to be critical," said Hester of the University of Houston.

Under pressure over the government's response to the disaster, President Barack Obama last Friday created a bi-partisan commission on the spill, and the administration has pledged to independently verify the volume of oil leaking into the Gulf. "We're not depending on what BP is telling us," Interior Secretary Ken Salazar told CNN last week.

OVER A BARREL

After past oil spills, experts said, civil fines have comprised a modest proportion of total liability, but they said the magnitude of the Gulf spill may lead the government to seek unprecedented penalties.

It is common for the government to wait until an oil spill clean-up is well underway before pursuing civil penalties, experts said. Authorities would also need an accurate accounting of the spill volume before seeking the fines.

Bernstein Research estimated in late April that BP's liability could reach $8 billion, but that figure didn't include any potential penalties.

BP's stock price has plunged by around 30 percent since deadly explosions rocked the Transocean Deepwater Horizon rig on April 20, setting off an oil leak that may become the biggest environmental disaster in U.S. history.

An EPA legal document leaked online and viewed by Reuters shows the agency evaluated applying per barrel civil fines on BP for a 5,000-barrel oil spill in Alaska's Prudhoe Bay in 2006. The EPA and U.S. attorneys declined to confirm or deny the contents of the document, which was found on a whistleblower website called peer.org.

When the penalty clause was introduced into the Clean Water Act by Senator Joseph Lieberman 16 years earlier, he argued that caps on spill liability might lead oil companies to take undue risk.

"Large civil penalties ... are also especially important because, in certain cases, the liability of the spiller for clean-up costs under federal law is limited," Lieberman told Congress in 1990, according to congressional records. "Aggressive penalties may need to compensate for this limited liability," he told Congress at the time.

If BP's estimated spill rate of 5,000 barrels per day is accurate, responsible parties could face civil fines between $5.5 million and $21.5 million per day, depending on levels of negligence.

BP's net profits in the first quarter of 2010 were around $6.7 million per day. Other companies may share responsibility and face a portion of the civil fines, lawyers said.

"I would expect the government to go after BP and other parties for the maximum civil fines," said William Bode, managing partner at the Bode & Grenier law firm in Washington. "The case could be brought in a Louisiana court where it would most likely succeed, although it might be settled for less than the maximum."

Any gross negligence ruling against BP or others could depend on whether the companies knew they were taking undue risks in the Gulf, lawyers said.

"If a driller like BP knew or should have known about a condition that could lead to a disaster, it might face gross negligence," said a lawyer and insurance underwriter who does business with BP and asked not to be named.

If the government pursues civil fines based on the volume of oil spilt, it would take into consideration whether companies have made their best effort to mitigate the spill, their prior history of offences, if any, and whether they can bear the cost of fines, among other factors, experts said.

BP received the third-largest criminal penalty, of $50 million, for an environmental offence in U.S. history for a Texas City refinery fire in 2005. BP subsidiaries remain under federal probation for prior offences in Texas and Alaska.

"There's only so much blood you can get from a stone," Uhlmann said. "I don't think bankrupting BP will be the goal."

(Additional reporting by Rebekah Kebede in New York, editing by Jim Impoco, Claudia Parsons and Philip Barbara)

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