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US, States Mull Extending $16B Oil-Spill Settlement Offer to BP

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Deepwater Horizon Gulf of Mexico Oil Spill

The U.S. Justice Department and Gulf Coast states are mulling offering BP PLC a $16 billion deal to settle civil claims related to the deadly 2010 Deepwater Horizon incident, according to people familiar with the discussions.

The settlement offer would cover potential fines owed by BP under the Clean Water Act and payments under another process known as the Natural Resources Damage Assessment, or NRDA, the people said. The fines stem from the massive Gulf of Mexico oil spill that ensued from the Deepwater Horizon well blowout in April 2010.

BP's potential Clean Water Act fines could run as high as $17.6 billion, but the company has argued they would likely be less than $5 billion. The NRDA payments could also run into the billions, but they are tax deductible for BP. BP must be found to have been grossly negligent in its role leading up to the blowout and spill to receive the highest penalty. The company argues it wasn't grossly negligent and prosecutors and plaintiffs have a very high bar to clear to prove otherwise.

The potential settlement offer helps illustrate the thinking of federal and state governments about the largest penalty BP faces in the wake of the Deepwater Horizon saga, a figure that has been subject to wildly ranging guesses. But it is far from certain that even if the offer is made, it will bring the U.K.-based oil company closer to a deal.

The first of two Deepwater Horizon trials is set to begin Monday before a federal judge in New Orleans.

It isn't clear if the offer has been formally proposed to BP, which declined to comment. BP said previously it was open to negotiations but that it was fully prepared to start trial Monday. The Justice Department, which also stated earlier this week it was prepared to go to trial, declined to comment as well.

Federal and state officials met in Washington, D.C., last week to work on terms of a settlement offer and continued discussions throughout this week, according to the people familiar with the negotiations.

The people said among the disagreements between the governments are how much of the fines will fall under the Clean Water Act and how much will fall under NRDA. A law passed by Congress would give the states control over 80% of Clean Water Act fines, while NRDA fines would go to specific wildlife and natural habitat restoration projects. Louisiana would likely receive the most NRDA funds since that state's coast line and waters were most directly affected by the spill.

Terms of the offer and settlement discussions could continue even through the beginning of the trial, the people said.

Tuesday, a judge agreed with BP and the Justice Department that 810,000 gallons of the estimated 4.9 million gallons the government has said leaked from the well were successfully captured by spill-response vessels and shouldn't count against any future fines. That ruling effectively reduced the maximum possible Clean Water Act fines by $3.48 billion.

BP previously agreed to a $4 billion settlement of criminal charges related to the blowout on the Deepwater Horizon drilling rig and the ensuing spill, as well as a $525 million civil settlement with the Securities and Exchange Commission. Transocean Ltd. (RIG, RIGN.VX), the owner of the rig, agreed to a $400 million criminal settlement and $1 billion civil settlement for violations of the Clean Water Act.

BP says it is eager to fight it out in court, believing past settlement offers didn't adequately reflect the company's legal position. In an interview with The Wall Street Journal this week, BP General Counsel Rupert Bondy said of the few Clean Water Act cases that go to trial, the per-barrel penalties are significantly less than the maximum allowed. He also noted judges take into account several other factors when determining penalties, such as a company's efforts to address the environmental impacts of the spill.

BP has spent more than $14 billion on spill response and cleanup, paid out more than $9 billion to Gulf Coast businesses and individuals impacted by the spill, and committed billions more to environmental restoration and research.

"Facing demands that we believe are excessive, not anchored in reality or the merits of the case, we are preparing ourselves to start the trial in one week's time," Mr. Bondy had said Monday.

Copyright (c) 2012 Dow Jones & Company, Inc.

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