Would a Defunct BP Make Good On Its Liabilities?

The BP deathwatch has begun. It’s not trial lawyers or environmental activists who pose an immediate threat to the continued existence of the oil giant, but rather the market. BP’s stock price is down about 50 percent since the beginning of the Gulf of Mexico disaster — a loss of more than $80 billion in capitalization — and there is rising speculation about a takeover by another petroleum behemoth such as Shell or Exxon Mobil.

The demise of a company with a track record as sullied as that of BP is no cause for mourning, but there is a serious risk that its dismantling would be done in a way that limits the resources available for cleanup and compensation in the gulf. Mainstream analysts such as those at Credit Suisse now estimate the company’s total liability at more than $35 billion. As the damaged underwater well continues to spew oil — and more indications of BP’s negligence come to light — the final dimensions of the financial blowout are likely to be much larger. BP’s current or future owners are not likely to part with that kind of money without a fight.

One maneuver they might consider is to break up the company. The New York Times is reporting that investment bankers are already working on scenarios in which BP would submit a prepackaged bankruptcy filing and split off a separate entity that would be saddled with the liabilities and given limited assets to make good on them.

Such attempts to shield assets from massive environmental liabilities are not unprecedented. In the 1980s Johns-Manville, the world’s leading producer of asbestos, restructured itself, changed its name, and then filed for bankruptcy in the face of more than 16,000 lawsuits brought by victims of asbestos disease. Mining company Asarco was accused of using a 2005 Chapter 11 filing to reduce its financial responsibility for cleaning up nearly 100 Superfund toxic waste sites.

There are also troublesome precedents that don’t involve bankruptcy filings. After taking over Union Carbide, the company responsible for the 1984 industrial accident in Bhopal, India that killed thousands, Dow Chemical disavowed any liability. After being hit with $5 billion in punitive damages in connection with the Exxon Valdez oil spill, Exxon resisted paying for more than a decade and was finally rewarded when the U.S. Supreme Court slashed the judgment.

What, then, needs to be done to prevent BP from evading its full obligations related to the present disaster? The ideal course of action would be for the federal government to seize enough of the company’s assets in the United States to cover its expected obligations. This is what the Seize BP movement is already demanding.

Such an aggressive action would probably run afoul of Supreme Court rulings such as the 1952 decision regarding President Truman’s seizure of steel mills during a strike by steelworkers. On the other hand, the government could use the fact that BP is on probation in connection with criminal charges relating to workplace safety and environmental violations in Texas and Alaska to justify a seizure. The likelihood that BP has violated laws in connection with the gulf disaster is quite high, meaning that it is technically in violation of its probation. A seizure of its property would be the equivalent of arresting an individual who violates probation.

Another alternative would be not to seize assets but to force the company to pledge enough of them to cover likely liabilities. If BP was later unable or unwilling to pay what the courts or government agencies mandate — a possibility that is more likely in light of the fact that the company is self-insured — those assets could then be taken.

It turns out that BP and other companies drilling for oil on U.S. public lands or offshore already have to make a commitment of the sort by posting bonds with the Interior Department. The bonds are meant to cover reclamation of the site after the drilling is completed; i.e., returning it to some approximation of its original condition, which in the case of offshore wells includes the removal of the drilling platform. According to a GAO report published earlier this year, the bond requirements are quite low and in some cases have not changed in decades. A company such as BP is required to post only $3 million for all of its drilling activities in the Gulf of Mexico.

The Oil Pollution Act of 1990 also requires that companies provide proof — whether in the form of insurance coverage or a bond — that they can meet their financial obligations relating to a spill, but as has been widely discussed, the liability limits mandated by the act are grossly inadequate.

The current catastrophe in the gulf demonstrates that the potential liabilities from an offshore drilling accident, especially the deepwater variety, are enormous. At the very least, the federal government should vastly increase the bonding requirements — or other ways of reserving assets — beginning immediately and including BP. Knowing that a substantial portion of their resources are immediately at risk might make oil companies think twice about employing reckless drilling practices.