Authored by: Tim Richardson, Managing Member, Terra Nova, LLC

October 22, 2012

Political cycles present the obvious opportunity for prognostication.  Polling is happening daily. Rather than present another poll, let us take this opportunity to make a simple prediction.

There will be no pre-election BP Deepwater Horizon settlement despite an $18 billion deal being on the table last month and a rumored $21 billion settlement this past Friday, October 19.

Before speculating on why this settlement hasn’t happened and why those directly involved are hedging, let’s review what we know with certainty.

Revelation of the $18 billion version of a deal in the offing came in an October 1 Mobile Press Register story by George Talbot citing leaks from U.S. Department of Justice briefings to the five Gulf states.  The story vented Alabama officials’ objections to 1) proposed jurisdictional authority for spending funds; 2) geographic funding distribution pattern likely to result; and 3) allowable uses of the funds.  The objections were driven by the proposed blend of laws under which the BP fines would be paid, namely DOJ’s, and BP’s apparent accord over having more of the payment required under the natural resource damage provision of the Oil Pollution Act instead of the RESTORE Act’s implementation of Clean Water Act penalties.

A higher percentage of Natural Resource Damages (NRD) funds means more federal decision-making power compared to the broad state and local government powers under RESTORE, and it means more environmental focus to the expenditures compared with RESTORE’s ample allowances for economic uses.

BP prefers more of its penalties to come under NRD because they would be tax deductible, enough so that at $18 billion, or even at $21 billion, a high proportion of NRD levies would allow BP to come close to the real cost of $15 billion reported to have BP board approval, as long as that would mean it can close out all Deepwater Horizon state and federal lawsuits.

In contrast to NRD levies, RESTORE Act fines are not tax deductible, hence offer no discount from the real cost of $18 billion or $21 billion for example.

Alabama objections in the Press Register include this volley from U.S. Representative Jo Bonner, R-Mobile, “The idea that the Justice Department would attempt this, less than three months after the law (RESTORE) was passed, is absolutely unacceptable.  It is an arrogant slap to the people of the Gulf Coast and the members of Congress who passed it.”  Alabama attorney general Luther Strange vowed that Alabama’s case against BP would proceed January 14 despite a prospective  federal settlement, “We’re ready to go to trial.  They don’t want to see us in court.  Our motivation is simple: We want the biggest possible judgment or a settlement that makes Alabama whole.”

A follow-up Press Register editorial reinforced the objection to a higher NRD mix compared to RESTORE, “The RESTORE Act passed by Congress this past summer specifies that 80 percent of the penalties paid by BP under the Clean Water Act will be returned to the Gulf states to repair ecological AND ECONOMIC (sic) damage from the spill.  That means that the money can go for environmental as well as economic development.”

The Press Register coverage noted that greater federal power and environmental focus could favor Louisiana “because its coast incurred the greatest  environmental damage” and favor electoral swing state Florida with its extensive coast line, over Alabama, Mississippi and Texas, leading editorial writer Mike Marshall to ask, “Why the big rush?  Isn’t Justice more likely to be blind after November 6?”

But would strident opposition from Alabama, Mississippi and Texas officials be enough to deter Obama Administration Attorney General Eric Holder from striking a deal if BP agreed to $21 billion before the election?

Probably not.

However, the shift toward greater NRD fines from anticipated RESTORE Act proceeds is also opposed by Democratic U.S. Senators Mary Landrieu (LA) and Bill Nelson (FL) who were the principal authors of the RESTORE Act.  The eight Republican senators from the Gulf states co-signed the letter to President Obama thanking him for signing RESTORE and urging him to respect the bi-partisan support forged to pass the landmark legislation.  Despite the attraction of potentially more money for Louisiana and Florida, the loss of local control over NRD fines in favor of federal control doesn’t sit well with Landrieu and Nelson.  It is notable that Nelson is running for reelection this year, and doesn’t need a fire storm from local officials empowered by RESTORE and cut out of the action by a NRD-heavy settlement.  Landrieu’s next election would be 2014 and her understandably traumatized coastal communities have every expectation to be able to wield spending powers over part of the BP settlement.

Thirdly, the prospects for harshly negative media stories about the value of tax deductions offered to BP via a NRD-heavy settlement are daunting in an election atmosphere amid stories of new oil sheen showing up in the Gulf of Mexico traced to the Deepwater Horizon.  The public unease that large tax deductions for BP could arouse would be palpable during this election count down.  And this expected reaction is notwithstanding the impressive and ubiquitous television and print ads BP is sponsoring to tell their commitment to restore the Gulf.

While it is impossible for The Horinko Group’s readers not to have seen the BP advertisements many times, students and practitioners of the art of persuasion owe themselves a thorough look at BP’s messaging effort explaining all they are doing to restore the Gulf.  Discounting the initial atrocious handling of the spill disaster including the performance of former BP president Tony Hayworth, can you recall a more effective corporate media and public relations campaign than BP’s “” effort?

Finally, if Gulf state opposition, Democratic Senate RESTORE Act sponsors’ opposition and prospects for media backlash to tax breaks for BP are not troubling enough to the Obama Administration, the coup de grace against a pre-November election BP settlement in the range of $18 to $21 billion comes from the environmental sector, most pointedly from the National Wildlife Federation (NWF).

On October 10, NWF president and CEO Larry Schweiger wrote a letter to Attorney General Eric Holder opposing the rumored $18 billion settlement, because the fine is too low regardless of how heavily it is weighted to environmentally focused NRD fines.  The letter itemizes concerns over several points, including:

• BP is proposing to settle for less than half of what it could face at trial under existing federal law;
• The spill isn’t over as oil continues to coat wetlands and beaches in an extremely rich ecosystem;
• Don’t go light on BP because Congress enacted laws aimed at compensating the public for harm caused by unreasonably risky shortcuts by industry;
• If liability were to match the Exxon Valdez tanker accident, Exxon’s equivalent payment of $152 per gallon in 2012 dollars would equate to a BP fine of over $31 billion;
• Criminal penalties should go on top of the compensatory natural resource fines;
• Several other laws were violated besides the Oil Pollution Act and Clean Water Act including the Marine Mammal Protection Act, the Migratory Bird Treaty Act, the Endangered Species Act, and the Outer Continental Shelf Lands Act;
• BP should be fined for the discharge of methane gas in addition to oil and dispersants; and,
• Natural resource damages from Deepwater Horizon are almost certainly going to be long term and far-reaching.

In concluding the letter, Schweiger wrote, “Offshore drilling in deep waters continues, and is expected to move into deeper and more dangerous waters.  If BP is allowed to avoid the civil and criminal fines it is responsible for, the federal government will have failed to achieve justice for injured parties and will have failed to deter future recklessness that puts our environment at risk.

“In summary, any settlement of the Deepwater Horizon litigation must take into account both the letter and intent of our environmental laws; the extent of the recklessness of the defendants; and the extent of the damage they caused.  To accept anything less would shortchange the many communities that rely on a healthy Gulf ecosystem.”

A thorough legal review of BP’s environmental penalty exposure appeared in a last February by NWF’s Vice President for Conservation John Kostyack, and is still highly pertinent for those wanting an attorney’s overview of the BP case.

Future implications of the BP settlement loom large for the environment and how natural resources are treated and viewed by society.  Should BP and its partners receive what is perceived to be a minor penalty for a massive accident, wouldn’t a slippery slope of declining future penalties ensue?  Moreover, if U.S. standards for environmental disasters were viewed as shoddy by other nations, wouldn’t it have tragic global natural resource ramifications in a world undertaking more extreme measures in remote areas to exploit natural resources?  Simply put, the BP Deepwater Horizon stakes pose a “must win” perception event for the green movement given the certainty of future accidents and debates about pollution fines.

In conclusion, the four most compelling reasons why there will be no BP settlement before the election are:

• Strident and organized opposition by Gulf states and local governments;
• Opposition to shortchanging the RESTORE Act by bill sponsors Senators Landrieu and Nelson;
• Risk of public outcry over large tax breaks to BP prior to the election; and,
• The urgent necessity environmental groups feel about making the BP fine appropriate so as to both respond to the Deepwater Horizon impacts and to keep U.S. environmental penalty standards from eroding.

So, as anxious as many are on all sides for a settlement, this author is confident that the “when” part of the equation looks to be after November 6.  But hopefully, not too much after.