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BP Suspension 'Likely to be Short-Lived'

December 3, 2012
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The U.S. Environmental Protection Agency (EPA) last week temporarily suspended BP Exploration and Production Inc., BP plc and named affiliated companies from new contracts with the federal government, but energy analysts believe the suspension may not be in place long enough to affect its U.S. operations.

"The BP suspension will temporarily prevent the company and the named affiliates from getting new federal government contracts, grants or other covered transactions until the company can provide sufficient evidence to EPA demonstrating that it meets federal business standards," EPA said. "The suspension does not affect existing agreements BP may have with the government."

EPA officials said they were "taking this action due to BP's lack of business integrity as demonstrated by the company's conduct with regard to the Deepwater Horizon blowout, explosion, oil spill and response, as reflected by the filing of a criminal information."

BP in mid-November agreed to pay more than $4.5 billion in fines to the federal government to settle criminal claims related to the Macondo well blowout in April 2010, which destroyed the Deepwater Horizon platform and killed 11 men (see NGI, Nov. 19).

BP agreed to plead guilty to 11 felony counts of misconduct or neglect of ships' officers relating to the deaths of the 11 men on the drilling rig, which caught fire and sank when Macondo blew out. It also agreed to plead guilty to one misdemeanor count under the Clean Water Act; one misdemeanor count under the Migratory Bird Treaty Act; and one felony count of obstruction of Congress.

According to EPA, which was designated the lead agency for suspension and debarment actions, the London-based oil major has to satisfy the terms of its plea agreement with the Department of Justice before government officials would consider lifting the suspension.

Under the terms laid out by EPA, BP would be required to hire a safety monitor to oversee its deepwater operations; retain an ethics monitor to ensure that its employees do not skirt federal laws and regulations again; conduct safety and environmental audits for each drilling rig; and ensure that all equipment and workers meet federal safety and training standards. Some of these things were put in place by Group CEO Bob Dudley when the company restructured after the Macondo blowout.

"Federal executive branch agencies take these actions to ensure the integrity of federal programs by conducting business only with responsible individuals or companies," EPA officials said. "Suspensions are a standard practice when a responsibility question is raised by action in a criminal case."

When BP was charged, company officials noted that the charges were based on the "negligent misinterpretation of the negative pressure test conducted on board the Deepwater Horizon. BP acknowledged this misinterpretation more than two years ago when it released its internal investigation report" (see NGI, Sept. 13, 2010).

BP is the largest deepwater oil and gas leaseholder in the Gulf of Mexico (GOM), where it controls more than 650 blocks in water more than 1,250 deep. The Macondo well that exploded in April 2010 was in more than 5,000 feet of water. BP also is one of the biggest leaseholders in North America's onshore.

Following the announcement of a temporary suspension, BP noted that it related only to "future potential contracts" with the U.S. government and didn't affect any existing contracts, including those related to current and ongoing drilling and production in the GOM.

"The EPA's action is pursuant to administrative procedures providing for discretionary suspension until a company can demonstrate 'present responsibility' to conduct business with the U.S. government," said BP. The company "has been in regular dialogue with the EPA and has already provided both a present responsibility statement of more than 100 pages and supplemental answers to the EPA's questions based on that submission.

"Moreover, in support of BP's efforts to establish present responsibility, the U.S. Department of Justice agreed, in the plea agreement, that it will advise any appropriate suspension or debarment authority that in the department's view, BP has accepted criminal responsibility for its conduct relating to the Deepwater Horizon blowout, explosion, oil spill and response. The EPA has informed BP that it is preparing a proposed administrative agreement that, if agreed upon, would effectively resolve and lift this temporary suspension. The EPA notified BP that such a draft agreement would be available soon."

As its submissions to EPA "have made clear, the company has made significant enhancements since the accident," the company said. It said it launched an internal investigation "immediately after the accident, publicly released the results, and has been implementing all 26 of the investigation's recommendations. BP has also, among other things, made key leadership changes, reorganized its upstream business, created a centralized safety and operational risk organization, and adopted voluntary deepwater drilling standards in the Gulf of Mexico that exceed current regulatory requirements. BP has shared what it has learned with industry and regulators around the world."

Since the Macondo well blowout, federal officials have granted BP more than 50 new leases in the GOM, and it now has "more than 700 gross blocks and seven rigs currently conducting drilling operations."

BP officials also noted that in the past five years the company has invested $52 billion in the United States, more than in any other country. It employs about 23,000 in the United States. Its U.S. oil and natural gas production represented about 28% of its global output, excluding Russia, in the third quarter. U.S. output brings in about one-quarter of BP's exploration and production profits.

According to the General Services Administration, BP is the 45th largest U.S. government contractor and it did $1.47 billion in federal business in 2011. The company's largest customer is the U.S. Department of Defense, to which it provides an estimated $1 billion a year in oil and gas.

The ban on BP winning new government contracts "is likely to be relatively short-lived," according to Fitch Ratings. "The ban would have to continue for several years for it to affect the group's rating. This is highly unlikely because of the importance of the U.S market to the oil group and its significant investment in safety since the Macondo disaster."

EPA's action, noted Fitch, "is standard practice in a case like this. We believe BP has made significant progress in improving safety globally, including installing more advanced blow-out preventers that exceed industry standards. These improvements, combined with BP's statement that the EPA is preparing an administrative agreement that would lift the ban, suggest it will not last long enough to affect the group's credit profile."

New E&P licenses "are made available regularly and BP may therefore miss out on some opportunities while the ban is in place. But we do not believe this would have a significant impact on the company's presence in the region unless it continued for several years."

Massachusetts Democratic Rep. Ed Markey had called for a contracting ban on BP.

"After pleading guilty to such reckless behavior that killed men and constituted a crime against the environment, suspending BP's access to contracts with our government is the right thing to do," Markey said Wednesday. "The wreckage of BP's recklessness is still sitting at the bottom of the ocean, and this kind of time out is an appropriate element of the suite of criminal, civil and economic punishments that BP should pay for their disaster."

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