The $4.5 Billion Criminal Fine for BP Oil Spill: Enough to Prevent Bad Corporate Behavior?
by Katie Greenhaw
Nov 16, 2012
Two years after the massive Deepwater Horizon oil spill killed 11 people and spewed millions of barrels of oil in the Gulf of Mexico, BP has agreed to plead guilty to 14 criminal charges, including manslaughter charges from the deaths. The company will pay $4.5 billion in damages, including $4 billion for the criminal charges and $525 million to securities regulators. BP will face additional civil fines of up to $20 billion as a result of its violations of the Clean Water Act and the Oil Pollution Act.
While at first glance $4.5 billion may seem like a large fine, it is to be paid out over four years; and this represents a tiny portion its profits each year (BP earned $25.7 billion in profits in 2011).
The fact that BP has agreed to its record criminal penalty, and that more large civil fines are likely, seems like a step in the right direction. However, even penalties of this size probably aren’t enough to prevent risk-taking and corner-cutting in the future. The market reaction to the spill extracted a more severe penalty: the April before the incident, BP’s market value was almost $60 a share; it fell to $27 a share right after the spill. Today, its share value has climbed back to $40.
Estimates are that the Deepwater Horizon incident will cost BP over $41 billion to ameliorate the damage – including victim compensation, control of the well, re-drilling, third-party liability, seepage, and pollution control. But these costs will be paid out over time out of those $25-billion-a-year profits, and some of these expenses may be tax-deductible.
Looking back at another major oil spill, after the Exxon Valdez disaster in 1989, a court ordered Exxon to pay $5 billion in damages. But after the company contested the decision for 16 years, the U.S. Supreme Court lowered the damages to $500 million in 2005. Exxon ended up paying only about $300 million in damages after deducting some of the expenses from its tax bill. (In 2005, Exxon’s profits were $36.1 billion). The costs represented a minor business expense. The tens of millions in legal fees Exxon must have paid over the 16-year period yielded a windfall return.
Moving beyond fines and damages, sending people who ignore health and safety rules to jail may make new BP employees less willing to accept bad management decisions and sanction risky shortcuts. But the real perpetrator of deadly crimes like these is a corporate culture that rewards managers who trade safety risks for extra profit. Until that internal culture changes, after-the-fact penalties won’t deter management decisions that undervalue workers’ lives.
UPDATE: One day after the Nov. 15 BP settlement, another oil rig exploded in the Gulf of Mexico. Two workers are missing as of this writing, and 11 others are hospitalized. The company that owns the rig, Black Elk Energy, paid a $300,000 fine in September for not complying with drilling rules.
Image by flickr user[ Mooi ], used under a Creative Commons license.back to Blog