BP 2014 Annual Report Download - page 118

2. Significant event – Gulf of Mexico oil spill – continued
Clean Water Act penalties
A provision of $3,510 million was recognized in 2010 for estimated civil penalties under Section 311 of the Clean Water Act. At the time the provision
for the Clean Water Act penalty was made, the number of barrels of oil spilled was determined by using the mid-point (47,500 barrels per day) of the
range of estimates (35,000 to 60,000 barrels per day) from the intra-agency Flow Rate Technical Group created by the National Incident Commander in
charge of the spill response. The initial estimate of 3.2 million barrels was calculated using a total flow of 47,500 barrels per day multiplied by the
85 days from 22 April 2010 to 15 July 2010 less an estimate of the amount captured on the surface (approximately 850,000 barrels). This estimated
discharge volume was then multiplied by $1,100 per barrel – the maximum amount the statute allows in the absence of gross negligence or wilful
misconduct – for the purposes of estimating a potential penalty. This resulted in a provision of $3,510 million for potential penalties under Section 311.
The estimates of cumulative discharge presented by experts testifying in the Phase 2 trial varied significantly. In January 2015, the district court issued
its decision in the Phase 2 trial that 3.19 million barrels of oil were discharged into the Gulf of Mexico and therefore subject to a Clean Water Act
penalty. This amount is consistent with the number of barrels BP has used to calculate the provision. In addition, the district court found that BP was
not grossly negligent in its source control efforts. BP and other parties to the proceedings have filed notices of appeal of the Phase 2 ruling and
therefore the findings from the Phase 2 trial remain subject to uncertainty.
In September 2014, the district court issued its decision in the Phase 1 trial that the discharge of oil was the result of the gross negligence and wilful
misconduct of BP Exploration & Production Inc. (BPXP) and that BPXP is therefore subject to enhanced civil penalties. The statutory maximum penalty
is up to $4,300 per barrel of oil discharged where gross negligence or wilful misconduct is proven. BP does not believe that the evidence at trial
supports a finding of gross negligence and wilful misconduct and in December 2014 filed notice of appeal of the Phase 1 ruling.
As a result of the September 2014 district court ruling that the discharge of oil was the result of BP’s gross negligence and wilful misconduct, the
Clean Water Act penalty obligation is not considered to be reliably measurable and it is therefore no longer possible to determine a best estimate of the
Clean Water Act penalty provision. Under IFRS, a provision is reversed when it is no longer probable that an outflow of resources will be required to
settle the obligation. With regard to the Clean Water Act penalty obligation, it continues to be probable that there will be an outflow of resources and
therefore, in the absence of the ability to identify the best estimate of the liability, the previously recognized provision of $3,510 million has been
maintained. Note 1 – Provisions, contingencies and reimbursement assets identifies the significant accounting estimates and judgements made in
relation to the Clean Water Act provision.
BP continues to believe that a provision of $3,510 million represents a reliable estimate of the amount of the liability if the appeal is successful. If BP is
unsuccessful in its appeal, and the ruling of gross negligence and wilful misconduct is upheld, the maximum penalty that could be imposed is up to
$4,300 per barrel. Based upon this penalty rate and the district court’s ruling on the number of barrels spilled, which, as noted above is also subject to
appeal, the maximum penalty could be up to $13.7 billion.
However, in assessing the amount of the penalty, the court is directed to consider the following statutory penalty factors: ‘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’. The court has wide
discretion in deciding how to apply these factors to determine the penalty and what weighting to ascribe to different factors. BP is therefore unable to
ascribe probabilities to possible outcomes within the range of potential penalties and cannot determine a reliable estimate for any additional penalty
which might apply should the gross negligence finding be upheld. The trial phase to determine the amount of the Clean Water Act penalty commenced
on 20 January 2015.
The amount that may become payable by BP is subject to a very high level of uncertainty since it will depend on the outcome of BP’s appeals as well
as what is determined by the district court with respect to the application of statutory penalty factors as noted above. The court has wide discretion in
the application of statutory penalty factors. The timing of any payment is also uncertain.
Given the significant uncertainty, the very wide range of possible outcomes if BP is unsuccessful in this appeal of the September ruling, and the
inability to ascribe probabilities to possible outcomes within the range, management is not able to estimate reliably any further liability for the Clean
Water Act penalty arising in the event that BP is not successful in its appeal. A contingent liability is therefore disclosed. See Contingent liabilities
below for further information.
Provision movements
The total amount recognized as an increase in provisions during the year was $1,327 million. After deducting amounts utilized during the year totalling
$2,071 million, including payments from the trust fund of $1,681 million and payments made directly by BP of $390 million (2013 $3,777 million,
including payments from the trust fund of $3,051 million and payments made directly by BP of $726 million), and after adjustments for discounting, the
remaining provision as at 31 December 2014 was $8,605 million (2013 $9,346 million).
The total amounts that will ultimately be paid by BP for all obligations relating to the incident are subject to significant uncertainty and the ultimate
exposure and cost to BP will be dependent on many factors. Furthermore, significant uncertainty exists in relation to the amount of claims that will
become payable by BP, the amount of fines that will ultimately be levied on BP, the outcome of litigation and arbitration proceedings, and any costs
arising from any longer-term environmental consequences of the oil spill, which will also impact upon the ultimate cost for BP. The amount and timing
of any amounts payable could also be impacted by any further settlements which may or may not occur. Although the provision recognized is the
current best reliable estimate of expenditures required to settle certain present obligations at the end of the reporting period, there are future
expenditures for which it is not possible to measure the obligation reliably.
Contingent liabilities
BP has provided for its best estimate of amounts expected to be paid that can be measured reliably. It is not possible, at this time, to measure reliably
other obligations arising from the incident, nor is it practicable to estimate their magnitude or possible timing of payment. Therefore, no amounts have
been provided for these obligations as at 31 December 2014.
114 BP Annual Report and Form 20-F 2014