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US bans BP from new govt contracts after oil spill deal

November 28, 2012

In this April 21, 2010 file image provided by the US Coast Guard, fire boat response crews battle the blazing remnants of the off shore oil rig Deepwater Horizon. -AP Photo

WASHINGTON: The US government banned BP Plc from new federal contracts on Wednesday over its “lack of business integrity” in the Deepwater Horizon oil spill in 2010, a move that could imperil the British energy giant's US footing.

The suspension, announced by the US Environmental Protection Agency, comes on the heels of BP's Nov. 15 agreement with the US government to plead guilty to criminal misconduct in the Gulf of Mexico disaster, the worst offshore oil spill in US history.

BP agreed to pay $4.5 billion in penalties, including a record $1.256 billion criminal fine.  BP and its affiliates are barred from new federal contracts until they demonstrate they can meet federal business standards, the EPA said.

The suspension is “standard practice” and BP's existing US government contracts are not affected, it said. The EPA's suspension of contracts could push BP to settle civil litigation brought by the US government and states from the spill.

An EPA official said government-wide suspensions generally don't exceed 18 months, but can continue longer if there are ongoing legal cases.

In a statement, BP said it has been in “regular dialogue” with the EPA, and that the agency has informed BP that it is preparing an agreement that “would effectively resolve and lift this temporary suspension.”

The EPA has notified BP that the draft agreement will be available soon, BP said. The suspension could threaten BP's dominance in the Gulf of Mexico, where it is one of the largest producers of oil and natural gas and the largest lease-holder.

US operations accounted for over 30 per cent of BP's pre-tax profits in the third quarter, and the United States accounts for about a fifth of BP's global oil production.

The suspension could also hamper BP's ability to maintain its position as a top supplier of jet fuel and other refined products to the US military, the largest single buyer of oil in the world.

As recently as September, BP affiliates won two fuel supply contracts with the US military worth as much as $1.37 billion to supply fuel to the US Defense Logistics Agency, the Pentagon's procurement arm, according to a US website that tracks military contracts.

The suspension is a sign that all federal contractors will be held to high standards, said Scott Amey, general counsel for the Project on Government Oversight, a federal watchdog group.

“BP had years to improve its business ethics and is paying the price for its inaction,” Amey said.  However, the suspension will have a “minimal direct financial impact,” and will not impair BP's ability to produce oil and gas from existing US assets, said Pavel Molchanov, an analyst with Raymond James & Associates Inc in Houston.

“BP's supply contract of fuels to the Pentagon might be at risk, but of course BP could supply other customers if this supply contract is not renewed,” Molchanov said in a research note.

BP's Finance Director Brian Gilvary told investors on a Nov. 15 conference call that should a blanket ban be put in place, the company may have to rethink its entire US business.

The suspension could be an attempt by the US government to pressure BP to settle civil charges from Deepwater Horizon, which could top $20 billion if BP is found to be grossly negligent for the spill under the U.S. Clean Water Act.

The Justice Department says it intends to prove in a court case set to get underway in February 2013 that BP was grossly negligent, a claim the company has adamantly refuted.

“The critical question is whether this a shot across BP's bows to get settlement, or a more sustained stance, in which case the importance of the context is underlined” by Gilvary's comments, said Peter Hutton, an analyst with RBC Capital Markets.

BP did not participate in Wednesday's federal auction of 20 million acres of drilling tracts in the Gulf of Mexico, one of BP's biggest oil production regions globally.

If BP had submitted high bids in the sale, they would not have been approved until the suspension was resolved, said Tommy Beaudreau, director of the US Bureau of Ocean Energy Management, which oversees the federal leases.

The EPA statement did not say how long the suspension could last.