BP: Where the liability ends

By Steve Hargreaves, Senior writer


NEW YORK (CNNMoney.com) -- Everyone wants to know how much money BP is on the hook for.

By law, the company is responsible for paying all the costs to stop the leak and clean the oil off the shore. That's likely to be the small bill - in the single-digit billions.

A far bigger concern is how much economic damage BP will be liable for -fishermen, hoteliers, and the like who have been put out of work. BP has said it will pay "all reasonable claims," but has been suspiciously vague on just what "reasonable" means.

The Obama administration recently turned up the rhetoric on BP, claiming earlier this week that the company may even be responsible for financial losses to fellow oil firms resulting from the government's deepwater drilling moratorium.

That could be a really big bill, which would be really bad for BP. While fishing accounts for just a billion or two of the Gulf's regional economy, tourism and oil are big business. Oil generated some $124 billion in revenues in 2007, according to one study. Tourism was not far behind.

Not all oil drilling will be affected by the spill - only about a third of the Gulf's drilling rigs are deepwater and so far all oil production remains intact.

But fears over just how big BP's liability tab will be, along with talk of dividend suspensions and even bankruptcy, have sent the stock tumbling. Earlier this week the shares hit a multi-year low, losing over half their pre-spill value and sinking to under $30, although they've bounced back a bit since then.

So amid all this uncertainty, what exactly will BP be held liable for?

To many, making the company pay for a government-imposed drilling moratorium is just ridiculous. It was not just BP that fostered a cozy relationship with government regulators that led to the lax oversight and drilling rules that are now under investigation.

"Who called the drilling moratorium," asked Richard Griffith, an oil and gas analyst at London-based Evolution Securities.

"I don't see the legal basis for this," said Carl Nelson, a Tampa-based maritime lawyer. "The oil spill has not put them out of work, the government has."

Other legal experts say the tab for BP will be large, and the government does have every right to go after the company for all losses, including those related to the drilling moratorium.

Those damages could even extend beyond the oil workers themselves, to supermarkets or movie theaters that see a drop in business because people are out of work.

"I don't think those people would consider that to be tangential," said Richard Shore, a partner at the Washington, DC-based law firm Gilbert LLP who has been in talks with people impacted by the spill. "The language of the law is broad. If the damages someone suffers is related to the spill, they are covered."

But Nelson said it will be hard to determine just what a reasonable claim is.

For starters, he said a reasonable claim will have to be something that an accountant can verify.

If you're a fisherman, you'd have to show receipts for the fish you caught this time of year last year, and provide proof that you can't fish this year. Then you'd have to document the money you are saving by not paying your crew, fuel, and other assorted expenses. The difference might be what you are eligible for.

"You can't just say 'I have a shrimp boat, send me a hundred grand,'" he said.

They gray area comes when it gets to business once or twice removed. Take a Gulf Coast campground for example. The campground can probably demonstrate a loss in business, said Nelson, which BP will likely pay.

But what about the gas station next to the campground that's lost money because fewer people came to visit? What about the gas station in Michigan that lost money from people that would have filled up to make the trip to the Gulf?

"If a claim is going to look reasonable to a jury, BP will pay it," said Nelson.

That's an awfully subjective measurement. As Griffith, the security analyst pointed out, "How can you say people not vacationing in the Gulf is a result of the spill and not the lousy economy in Europe?"

If all this sounds like so much uncertainty, it is. And that's precisely what's roiling BP's stock.

"Everyone thinks it's massively oversold," said Griffith. "But with all the mud slinging going on, who wants to buy it?"  To top of page

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