BP fights state lawsuit

Vol. 14, No. 22 Week of May 31, 2009
Providing coverage of Alaska and northern Canada’s oil and gas industry

Says state overreaching as it seeks to collect huge damages over 2006 spills

Wesley Loy

For Petroleum News

Lawyers for BP say the state is “overreaching” with its lawsuit seeking to collect potentially huge fines, back taxes and other damages in connection with disruptive oil spills in the Prudhoe Bay field in 2006.

In papers filed May 26 in state Superior Court in Anchorage, BP asked the judge to toss out some of the state’s claims and defer part of the case — the issue of how much oil “waste” resulted from the spill — to the judgment of the Alaska Oil and Gas Conservation Commission.

The filings stand as BP’s first public comment on the legal merits of the state’s lawsuit. And they leave little doubt that BP’s lawyers intend to defend the case vigorously.

On the question of back taxes and royalties, which state lawyers say are due because of a partial field shutdown and other outages in the wake of the spills, lawyers for BP including Anchorage attorney Jeff Feldman argued the state doesn’t deserve such collections.

The company’s lawyers assered that the partial field shutdown wasn’t the result of the spills. Rather, BP “chose to conduct additional maintenance to ensure the integrity of critical infrastructure, reduce the risks of future spills, and extend the operating life of the field.”

Amount could reach $1 billion
A state attorney has said the back tax and other collections potentially could approach $1 billion.

“The State seeks damages based on a theoretical 35,000,000 barrels of oil that it alleges were ‘lost’ due to the shutdown,” BP’s attorneys write in support of their motion to dismiss part of the state’s case. “These claims are not supportable because no oil was lost as a result of the partial shutdown for maintenance and because the applicable law does not permit recovery of such damages. Oil not produced in 2006 remained in the reservoirs; its production was deferred, not lost. To allow the State to collect ‘damages’ based on royalties and taxes it claims it did not receive because of the partial, temporary shutdown would result in the State collecting those sums twice — both upon production of the oil and as damages in this litigation.”

Saying it wants to “narrow this case,” BP is asking the court to dismiss three of the nine counts in the state’s lawsuit.

One count accuses BP of “negligence” with respect to monitoring and controlling corrosion in Prudhoe pipelines. The second count argues BP, because of its negligence and the resulting “extensive production shut-ins,” is liable for oil waste harmful to the state’s interests. The third count seeks punitive damages.

BP’s lawyers argue the company, through its oil leases and unit agreements, has a contract with the state, and violations of that contract subject the company to a “comprehensive system of statutes and regulations” meant to discourage oil spills, punish offenders and deter future spills.

BP says waste claims should be heard by AOGCC, not court
With its negligence and punitive damages claims, the state is improperly pursuing “tort claims,” BP’s lawyers argue. A tort generally is defined as a wrongful act, not including a breach of contract, that results in injury to a person or property.

The court also should dismiss any waste claims, or defer them to the AOGCC to investigate, BP’s lawyers say.

“Waste of oil is a highly technical subject, better suited for initial resolution by the AOGCC than by a lay jury,” BP’s court filing says.

BP and the state’s lawyers do agree on one thing: BP owes a fine of at least $1.7 million for the largest of the two pipeline spills to occur in 2006 in the Prudhoe Bay field — a release of 212,252 gallons that covered about two acres of tundra and the edge of a frozen lake. State statutes clearly spill out a penalty of $8 per gallon.

But state lawyers are seeking four times the base penalty, or almost $6.8 million, because the spill was “caused by gross negligence” or because BP didn’t follow its oil spill prevention and cleanup plan.

Steve Mulder, the assistant attorney general leading the state’s case, said May 28 he didn’t have any immediate comment on BP’s court filing.

Civil suits filed in March
The state and federal governments each filed civil lawsuits against BP Exploration (Alaska) Inc. on March 31, part of continuing fallout over spills from corroded oil transit pipelines in 2006. The major spill was discovered in March of that year, while the second spill in August forced a partial shutdown of the nation’s largest oil field and subsequent replacement of miles of transit pipelines.

The transit lines are major trunk lines that carry processed, sales-grade crude oil out of the vast Prudhoe field and feed it into the 800-mile trans-Alaska pipeline to the tanker port at Valdez.

The spills drew intense scrutiny of BP from federal pipeline regulators as well as Congress. In late 2007, BP Exploration pleaded guilty to a federal pollution misdemeanor, and a judge put the company on probation for three years and ordered more than $20 million in penalties.

That took care of the criminal aspect of the corrosion scandal and spills. The state and federal lawsuits address the civil side.

The federal suit, which the Department of Justice filed in the district court in Anchorage on behalf of the U.S. Environmental Protection Agency and pipeline regulators, alleges violations of the Clean Water Act and the Clean Air Act. As of May 27, no activity had occurred in that case.

In an annual report filed in March with the U.S. Securities and Exchange Commission, BP disclosed that it had been “engaged in discussions” with government officials. But those talks evidently weren’t enough to reach a settlement and head off the civil suits.

~ by fredfelleman on May 31, 2009.

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