e ar

at r

ticl
u
e
fe

Ultimate Costs of the Disaster:

Seven Years After the Deepwater Refereed (Double-Blind
Peer Reviewed)

Horizon Oil Spill

Yong Gyo Lee, Xavier Garza-Gomez, and Rose M. Lee

T
his study
assesses the ulti-
mate costs asso-
ciated with America’s
largest disaster in the
oil and gas industry,
the 2010 Deepwater
Horizon oil spill. On
April 10, 2010, the
Macondo Oil Well—
located 45 miles from
the Louisiana coast
and owned by Trans-
ocean—exploded,
and the subsequent
fire destroyed the
Deepwater Horizon
drilling rig, killed
11 people working
aboard, and spilled
approximately 3.19
million barrels of
crude oil into the
Gulf of Mexico over
the next four months
before finally being
sealed in August
2010. The oil spilled
contaminated about
400 square miles of the sea floor of the Gulf of Mexico. The
and 1,300 miles of shoreline
and coastal wetlands.
Seven years after the Deepwater Horizon oil spill, It also harmed an
this study measures the “ultimate” cost of the unknown number
disaster. This study compiles all the costs to be of birds, sea turtles,
borne by BP, which include charges and expenses marine mammals,
directly related to the spill, the various fines and fishes, oysters, and
penalties to be paid, reimbursements and recover- other sea life. Imme-
ies from other parties, securities-related charges, diately after the
and hidden costs. This study documents an ulti- explosion, BP and
the federal govern-
mate cost to BP of $144.89 billion in the United
ment struggled to
States, which is more than two times larger than contain the spill and
the $62.59 billion BP reported in its income state- coordinate a massive
ment. This study provides details on the computa- response effort to
tion. The sharp increase is due to the inclusion of clean up the coastlines.
other categories of costs related to the oil spill, The costs asso-
including the $19.33 billion committed by BP in ciated with the oil
a global settlement in April 2016; the contingent spill cleaning efforts
liabilities of $700 million, the settlements of $175 started to get larger
million with the Securities and Exchange Commis- and larger as time
sion; legal fees of $680 million, and the hidden progressed. As a
costs of $61.41 billion that was not reportable response to respon-
sibility under the
under the current accounting system. This figure
Oil Pollution Act
will eventually become higher once we learn about (OPA), BP promised
costs related to litigations in Mexico. to pay all the neces-
© 2018 Wiley Periodicals, Inc. sary expenses in May
2010 without seeking
the reimbursement
of payments above the $75 mil-
spill damaged fisheries, beaches, lion limit of liability. In June

© 2018 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com).
DOI 10.1002/jcaf.22306 69
70 The Journal of Corporate Accounting & Finance  /  January 2018
2010, BP promised to set up a
Disaster Relief Fund of $20
billion in earnest money for
cleanup and compensation.
Hundreds of claims and litiga-
tions have been filed against BP
for violations and responsibili-
ties since June 2010, in which
the U.S. Department of Justice
(DoJ) started investigating the
incident for possible violations
of U.S. civil and criminal laws.
Therefore, BP’s ultimate cost of
the oil spill has been a question
of great interest not only to BP
and its partners and contrac-
tors but also to tens of thou-
sands individuals, businesses,
communities, and various levels
of governments affected by the
tragedy. By around April 2016,
most of the claims arising from
the Gulf of Mexico oil spills
had been resolved. Therefore,
it is now feasible to assess and
categorize the total costs of the
oil spill with reasonable preci-
sion. This provides the impetus
for this study.
The objective of this study
is to assess the ultimate costs
of the Gulf of Mexico oil spill
in multiple categories. The
ultimate costs of the oil spill
are defined in this article as
the total costs arising from the
oil spill to be borne ultimately
by BP, whether reported in
its income statements or not.
For instance, BP reported net
costs (loss) before taxation of
$62.59 billion in its 2016 annual
report. It was the sum of all
charges, net of reimbursements
and recoveries from third par-
ties and insurance companies.
However, this figure does not
reflect the true costs of the oil
spill. In addition to the costs
disclosed by BP, this study
compiles other categories of
costs such as legal fees, costs
committed by BP to be paid
in the future, and hidden costs
DOI 10.1002/jcaf © 2018 Wiley Periodicals, Inc.
that cannot be reported under
the current accounting system.
DEEPWATER HORIZON OIL
SPILL: CAUSES, RELATED
PARTIES, AND CONSEQUENCES
Offshore drilling opera-
tions are complex and normally
involve various specialists. At
the time of the explosions, the
fire, and the resulting oil spill,
BP was the designated opera-
tor of the Macondo well. BP
retained a number of contrac-
tors to provide engineering
and operations services, drill-
ing equipment, and personnel.
These contractors typically
operated under their own
management systems, sup-
plying personnel, equipment,
and materials as needed. In
order to determine the causes
of the disaster and the parties
responsible, multiple inves-
tigations were conducted.
They included the BP report
(2010), the Commission Report
(National Commission on the
BP Deepwater Horizon Oil Spill
and Offshore Drillings Final
Report, 2011), and the Joint
Report (BOEMRE/U.S. Coast
Guard Joint Investigation
Team, 2011). Overall, these
reports concluded that the acci-
dent resulted from a sequence
of failures of multiple parties
involved in the operation of
the well. Under the OPA, BP
had the primary responsibil-
ity for ensuring the safety and
protection of personnel, equip-
ment, natural resources, and
the environment. In addition
to BP, nine other companies
were identified as responsible
(BOEMRE/U.S. Coast Guard
Joint Investigation Team,
2011). They include two co-
owners (i.e., Anadarko and
MOEX) and seven contractors
(i.e., Transocean, Halliburton,
Schlumberger, Cameron, Dril-
Quip, Oceaneering, and Weath-
erford). The report claimed that
BP and its contractors’ conduct
in connection with the disaster
violated a number of federal
offshore safety regulations.
While BP was paying all
the spill response costs, the
company sought reimburse-
ment from other owners of the
Macondo well and contrac-
tors BP hired for the drilling
operation. BP started to bill
Anadarko and MOEX from
July 2010, while filing in U.S.
courts for damages of up to
$80 billion, the total cost of the
spill, in December 2010. Con-
sequently, various actions and
claims were filed by BP and
cross-filed by other responsible
parties against BP (see Exhibit 1
for details of legal proceeding
between BP and other related
parties). Besides the operating
majority owner BP (65%), there
were two other co-owners of
the oil well, Anadarko (25%)
and MOEX (10%). Under the
operating agreement between
them, BP was to perform the
drilling of the well in a good
manner and to comply with
all applicable laws and regu-
lations. There were multiple
service providers involved in
the operation. Transocean
owned and operated the
Deepwater Horizon drilling
rig. Halliburton’s subsidiary,
Sperry-Sun, cemented the well
and performed other critical
services. Dril-Quip provided
wellhead equipment used on
the Macondo well, personnel
to supervise the installation of
this equipment, and Oceaneer-
ing had responsibility for trans-
porting, piloting, and main-
taining the remotely operated
vehicle employed to inspect
the wellhead. M-I SWACO, a
subsidiary of Schlumberger,
The Journal of Corporate Accounting & Finance  /  January 2018 71

Exhibit 1

Timeline of Legal Proceedings between BP and Other Related Parties

Date Key News Items

07/31/10 BP started to invoice Anadarko and MOEX
12/31/10 BP filed in US courts for damages of spill against Transocean and Halliburton
02/18/11 Transocean filed a complaint against BP, the US, and other firms in its Limited Liability action
04/04/11 BP initiated contractual out-of-court dispute against Anadarko and MOEX
04/19/11 Anadarko and MOEX separately filed cross claims against BP
04/20/11 BP asserted claims against Cameron, Halliburton, and Transocean in the LL action
04/20/11 Halliburton filed claims in Transocean’s LL action seeking indemnification from BP.
05/20/11 Dril-Quip and MI-SWACO filed claims in Transocean’s LL action.
05/21/11 BP and MOEX announced a settlement of $1,065B for all claims between them
05/30/11 Transocean filed claims against BP in its DoJ Action for breach of contract.
06/20/11 BP and Weatherford reached a settlement agreement of $75M.
06/20/11 BP filed counter claims against Dril-Quip and MI-SWACO asking for contribution.
06/20/11 Cameron filed claims against BP in its DoJ Action for breach of contract.
06/20/11 Cameron and Halliburton moved to dismiss BP’s claims against them in the DoJ Action.
10/17/11 BP and Anadarko announced a final settlement agreement of $4.0B of all claims between
them
12/16/11 BP and Cameron reached a settlement agreement of $250M.
02/19/12 BP and M-I SWACO agreed to dismiss claims against each other.
01/03/13 Transocean agreed to settle $1.4B for US government charges.
09/13/14 Halliburton reached a $1.1B settlement for a majority of claims related to its role in the oil
spill.
09/16/14 BP sought access to $750M Transocean spill insurance.
02/13/15 BP lost bid for $750M Transocean spill insurance for the drilling rig.
05/20/15 BP settled with Halliburton and agreed to contribute $125M legal fee to Transocean.

© 2018 Wiley Periodicals, Inc. DOI 10.1002/jcaf

72 The Journal of Corporate Accounting & Finance  /  January 2018
provided the mud products,
engineering services, and
mud supervisory personnel.
Cameron manufactured and
delivered a blowout preventer
deployed by the drilling rig
and supplied spare parts and
repair services. Weatherford
provided casing components
for the Deepwater Horizon with
the personnel and equipment to
run the casing.
The disaster resulted in
huge environmental and eco-
nomic damages to the busi-
nesses, communities, and indi-
viduals who lived and worked
alongside the coastlines of
the Gulf of Mexico. BP had
the primary responsibility
for the cleaning, government
response costs, property and
natural resource damages,
and economic losses result-
ing from the oil spill (Barrett,
2013; Fodor & Stowe, 2012;
Johnson & Rudolph, 2010;
Sharkey, 2016). Since the DoJ
started the investigation into
the incident encompassing
possible violations of civil or
criminal laws in June 2010,
hundreds of claims and litiga-
tions were filed against BP for
violations and responsibilities
(see Exhibit 2 for the time-
line of legal proceedings). In
October 2010, five Gulf states
filed civil claims against BP for
recovery of economic losses
and natural resource damages
(NRDs).1 In December 2010,
DoJ filed a civil lawsuit against
BP and other parties for illegal
discharges of pollutants. The
U.S. government chose to pur-
sue Clean Water Act (CWA)
actions, as the CWA imposes
criminal punishment over negli-
gent violations and higher pen-
alties are available for knowing
violations of the act. In Febru-
ary 2012, the court started a
DOI 10.1002/jcaf © 2018 Wiley Periodicals, Inc.
trial to determine the allocable
liability among the parties
involved in the Deepwater Hori-
zon events. In January 2015, a
federal court ruled that BP was
liable for 3.19 million barrels
that leaked into the Gulf, stat-
ing that BP failed to perform
critical safety tests. Finally, in
April 2016, BP agreed to pay
$20.8 billion in settlements for
the oil spill.
MULTIPLE CATEGORIES OF OIL
SPILL COSTS
BP reported $62.59 billion
as the net costs of oil spill in its
annual reports, which identified
multiple cost categories pertain-
ing to the oil spill. Exhibit 3
shows the summary of the
costs in each category from
2010 through 2016.
Disaster Relief Fund
BP dedicated $20 billion
for the Disaster Relief Fund,
which was established to be
used for cleanup and compen-
sation under the OPA. In order
to procure the money needed
for the Fund, BP placed assets
on sale in July 2010 for up to
$30 billion by the end of 2011.
The Fund was initially reported
as provisions (the liabilities of
uncertain timing or amount)
by BP, which adopted Inter-
national Financial Reporting
Standards (IFRS) in its annual
report. BP later reported those
provisions as contingent liabili-
ties, referring to the possible
obligations and present obliga-
tions that are not probable or
not reliably measurable.2 Most
of the Fund-related liabilities
occurred in 2010, but the rec-
ognition of the reimbursement
assets was gradual. By 2014,
BP used up all the $20 billion it
set aside to cover costs for the
oil spill.
Economic and Environmental
Costs
The oil spill resulted in
both economic and environ-
mental damages. For instance,
Johnson and Rudolph (2010)
documented that nearly seven
million businesses that pro-
duced $5.2 trillion sales per
year were affected by the oil
spill. Consequently, hundreds
of thousands of individuals
and businesses filed lawsuits
against BP and other parties.
BP acknowledged that the oil
spill resulted in damage to
natural resources, but it took
several years to reach a final
settlement because BP and fed-
eral and state courts continued
to dispute (Gilbert & Kent,
2015; Gold, 2015; Johnson &
Rudolph, 2015; Sharkey, 2016).
Over six years, BP incurred
$8.53 billion environmental
provisions and $39.13 billion
litigations and claims relating
to the environment.
CWA Criminal Penalties
The CWA carries criminal
penalties for illegal discharges
of pollutants and for negli-
gent violations. Such fines and
penalties imposed by CWA are
based on the amount of oil
spilled and the degree of neg-
ligence. BP incurred a total of
$4.06 billion CWA penalties in
2010 and 2015.3
Other Costs Charged to
Income Statement
BP reported that other
costs of oil spill are $1.40
billion over six years from
2010 to 2016. These costs are
The Journal of Corporate Accounting & Finance  /  January 2018 73

Exhibit 2

Timeline of Legal Proceedings

Date Key News Items

06/01/10 DoJ investigated into the incident for possible violations of US civil or criminal law.
06/16/10 BP established $20B claims fund for Deepwater Horizon spill.
07/27/10 BP set fund to cover Gulf of Mexico costs, with asset sales for up to $30B over the next
18 months
10/10/10 State of Mississippi issues a complaint for violation against BP and others.
12/15/10 DoJ filed a civil complaint against BP and others for NRD and civil penalties under CWA.
03/07/11 SEC and DoJ are investigating securities matters arising from the incident.
04/05/11 State of Yucatan, Mexico, filed a claim alleging damage to its natural resources and
environment.
04/21/11 BP entered a framework agreement with NRD trustees to provide $1B for early restoration.
10/21/11 Hundreds of the lawsuits are consolidated in the MDL 2179 proceeding.
02/17/12 MOEX agreed to pay $90M including $70M CWA civil penalties
11/15/12 BP resolved all criminal claims: $7.85B with DoJ, $525M with SEC for fraudulent public
statement.
01/03/13 Transocean agreed to pay $1.4B to settle US government charges, $400M criminal and
$1B civil.
04/19/13 Mexico’s federal government files a civil action against BP and others
09/03/14 Halliburton agreed to settle $1.1B with businesses, individuals and local governments.
01/23/15 Anadarko agreed to pay $5.15B in a settlement to US governments and others.
01/25/15 A federal judge ruled that BP spilled totaling 3.19M barrels of oil.
05/20/15 Transocean agreed to pay $212M for claims and settled its CWA liability for $1B.
07/02/15 BP agreed to $18.7B tentative settlement for federal, states, and local claims.
10/06/15 BP agreed to pay $20.8B settlement in Gulf oil spill. Five states also agreed to the deal.
12/30/15 Anadarko was ordered to pay $160M for its role as part owner of the Macondo oil well.
04/06/16 Federal judge approved Gulf oil spill settlement reached previously in 2015.
04/14/17 For attorney fees, BP agreed to pay $555M, and Transocean and Halliburton agreed to pay
$124M.
06/03/17 BP agreed to settle $175M for a class of post-explosion ADS purchases in securities
litigation.

© 2018 Wiley Periodicals, Inc. DOI 10.1002/jcaf

 74

DOI 10.1002/jcaf
Exhibit 3

Net Costs of Oil Spill Reported by BP (in $million)

2010 2011 2012 2013 2014 2015 2016 Total

Trust fund liability 19,828 43 19,871
Recognition of reimbursements −12,567 −4,038 −1,191 −1,542 −662 –20,000
Total charge-Trust Fund 7,261 −3,995 −1,191 −1,542 −662 0 0 –129
Spill response costs 13,628 671 118 –113 0 0 0 14,304
Environmental costs 1,004 1,184 801 42 192 5,303 0 8,526
Litigation and claims costs 15,123 3,430 5,164 1,926 1,137 5,758 6,596 39,134
Total charges- CWA penalty 3,510 0 0 0 0 551 0 4,061
Other costs charged to I/S 332 427 248 136 114 97 44 1,398
Settlements credited to I/S 0 –5,517 –145 –19 0 0 0 –5,681
Loss before interest and taxation 40,858 –3,800 4,995 430 781 11,709 6,640 61,613
Less: Finance costs 77 58 19 39 38 247 494 972
Net loss before taxation 40,935 –3,742 5,014 469 819 11,956 7,134 62,585
Source: Adapted from BP’s annual reports from 2010 to 2016
The Journal of Corporate Accounting & Finance  /  January 2018

© 2018 Wiley Periodicals, Inc.

The Journal of Corporate Accounting & Finance  /  January 2018 75
charged directly to the income
statement.
Settlement Credited to
Income Statement
BP received contribution of
$5.68 billion from its co-owners
and contractors. In May 2011,
MOEX agreed to pay $1.07
billion to BP Subsequently, in
October 2011, Anadarko also
agreed to pay $4.0 billion to BP
transferring all of its interest
and waiving all relevant claims
against it. In addition, BP
received payments from its con-
tractors even though neither
company was designated as a
responsible party according to
OPA definition. Cameron con-
tributed $250 million proceeds
from its insurance company to
BP in December 2011, while
Weatherford contributed $75
million to BP in June 2011,
which was paid by its insurers.
BP appeared to receive some
payments from other subcon-
tractors, Dril-Quip, Oceaneer-
ing, and Schlumberger-owned
M-I SWACO, though it is not
disclosed explicitly. In contrast,
BP was not able to get any
reimbursements from its main
contractors, Transocean and
Halliburton.
ASSESSING THE ULTIMATE
COSTS OF THE DISASTER
The ultimate costs of the
oil spill are defined as the sum
of all charges ultimately to be
borne by BP. We started our
computation of the ultimate
costs of Deepwater Horizon
oil spill with the $62.59 billion
loss before taxation reported
by BP in its 2016 annual
report. Then, we counted the
global settlement amounts
between BP and federal gov-
ernments and the five Gulf
© 2018 Wiley Periodicals, Inc. DOI 10.1002/jcaf
states to the baseline as they
are payable over 8 to 17 years
rather than being immediate
costs. The settlement amounts
were finalized to be $20.80
billion in April 2016, com-
pared to tentative agreement
of $19.8 billion in July 2015.
The added costs toward the
ultimate costs of disaster con-
sist of the newly committed
settlement costs of $19.33 bil-
lion; the estimated contingent
liabilities of $700 million; the
Securities and Exchange Com-
mission (SEC) settlements of
$175 million; the legal fees
of $680 million; the hidden
costs of $61.41 billion; and the
estimated costs of litigations
in Mexico of $1.04 billion.
Note that the $1.0 billion early
restoration projects included
in the global settlement was
excluded for the computation
of ultimate costs, as it was
already allocated under an
early restoration framework in
April 2011 (see Exhibit 4 for
details).
Costs Committed in the
Final Settlements
The final settlement costs
of $19.33 billion include $5.5
billion CWA civil penalty plus
interest payable over 15 years
commencing in 2017; $4.9 bil-
lion settlement of economic
damages and other claims to
pay to the five Gulf states; $1.0
billion to settle several hun-
dred local governmental bod-
ies for economic damages; and
$8.1 billion in natural resource
damages to the United States
and the five Gulf states
(including $7.1 billion pay-
able over 15 years); $350 mil-
lion for the reimbursement of
assessment costs; $250 million
to cover the full settlement of
outstanding response costs
related to the False Claims
Act and royalties owed for the
Macondo well over nine years;
$232 million that covers the
full settlement of outstanding
response costs and royalties
owed for the Macondo well
over nine years. With this set-
tlement, BP resolved all federal
and state civil claims under
the CWA, natural resources
damage claims, and economic
damage claims of the five Gulf
states and local governments
under the OPA. Most of the
settlement costs are long-term
liabilities in nature that are
payable over multiple years.
Therefore, we added them
toward the ultimate cost of the
oil spill.
Settlement in Progress
There are two categories
of settlement in progress,
Plaintiffs’ Steering Commit-
tee (PSC) settlement and opt-
out and excluded claims. For
instance, BP disclosed in its
annual report that there has
been progress on the remain-
ing economic and property
damage claims relating to the
2012 PSC settlement. Similarly,
there has also been significant
progress in resolving economic
loss and property damage
claims from individuals and
businesses that either opted
out of the PSC settlement and/
or were excluded from that
settlement. In February 2016,
the U.S. federal district court
estimated that there were more
than 85,000 valid opt-outs and
excluded economic loss plain-
tiffs. The majority of these
claims have been either settled
or dismissed. Contingent liabil-
ities related to such settlements
in progress are also counted
in the computation of the
ultimate costs. BP agreed to
76 The Journal of Corporate Accounting & Finance  /  January 2018

Exhibit 4

Ultimate Costs of Oil Spill to be Borne by BP (in $million)

Net costs per Income Statement 62,585

Add: Costs committed with CWA and OPA settlements
  CWA civil penalty payable over 15 years starting from 2017 5,500
  Economic damages for five Gulf States payable over 17 years until 2033 4,900
  Economic damages for 400 local governments payable over 17 years until 2033 1,000
  NRD payment payable to US and 5 States payable over 15 years until 2031 7,100
  Outstanding NRD assessment costs payable over 8 years until 2023 350
  Outstanding balance of response costs and royalties payable over 9 years until 2023 250
  Additional NRD interest to be paid in the last year, 2031 232 19,332
Add: Estimated costs for unknown injuries and adaptive management 700
Add: Settlement with SEC for securities litigation 175
Add: Legal Fees
  BP’s own legal fees BP agreed to pay on 04/14/17 555
  Legal fees BP agreed to pay to Transocean on 04/14/17 125 680
Add: Hidden costs of oil spill (loss in market) 61,413
Ultimate Costs of oil spill – US Only 144,885
Add: Litigations in Mexico 1,040
Ultimate Costs of oil spill – including litigations in Mexico 145,925

pay additional $700 million at securities-related violations. in the Multi-District Litigation

a maximum for any potential
NRDs to be discovered in the
future and to assist in adaptive
management needs. Thus, we
assumed that $700 million pay-
able by 2019 would cover both
PSC settlements and the opt-
out and excluded claims.
Settlement With SEC for
Securities Litigations
BP was also exposed to
multiple litigations arising from
In March 2011, the SEC and
DoJ started an investigation on
BP’s securities matters arising
from the oil spill. In Novem-
ber 2012, BP resolved criminal
litigations with SEC to pay
$525 million for a fraudulent
public statement about the
magnitude of the oil spill. In
June 2017, BP also announced
a $175 million settlement of
claims from a class of post-
explosion purchases of Ameri-
can Depositary Shares (ADS)
(MDL) 2185 securities litiga-
tion, which is separate from
the $525 million resolution in
November 2012. These share-
holder derivative lawsuits have
been filed in U.S. federal and
state courts against various cur-
rent and former officers and
directors of BP. Many of the
lawsuits in federal and state
courts related to the securi-
ties, derivative, and Employee
Retirement Income Security
Act cases were consolidated as

DOI 10.1002/jcaf © 2018 Wiley Periodicals, Inc.

The Journal of Corporate Accounting & Finance  /  January 2018 77
MDL 2185. The $175 million
is included as a component of
the ultimate costs because it is
payable in 2017 or thereafter,
but $525 milion is not included,
as it has already been counted
toward income computation in
previous years.
Legal Fees
A total of $680 million is
included in the computation.
It consists of $555 million paid
or to be paid by BP and $125
million BP agreed to contribute
to Transocean’s legal costs as
a part of a resolution made in
May 2015, where BP agreed to
pay Transocean $125 million to
reimburse it for legal fees and
dropped all further claims.
Hidden Costs of the Oil Spill
(Loss in Market)
Our estimation of the ulti-
mate costs of the spill includes
hidden costs arising from the
revenue lost, profit not earned,
or reputation damaged due to
the disaster. Such hidden costs
are not recognizable under the
current financial reporting sys-
tem. For instance, loss in rev-
enue and damages to its reputa-
tion are not reported as costs
(or expenses) caused by the
disaster. Noting that the con-
ventional accounting system
inaccurately reports the true
costs of poor quality, Kristh-
nan (2006) provided examples
of hidden costs, including the
loss of sales because of the
product recalls or bad pub-
licity, the damage to social
acceptance due to toxic waste,
and the quality failures associ-
ated with products containing
hazardous materials. It is often
used interchangeably with
the “intangible cost” (Kristh-
nan, 2006; Srivastava, 2008).
© 2018 Wiley Periodicals, Inc. DOI 10.1002/jcaf
Srivastava (2008) defined the
intangible costs as the costs due
to lost current sales, lost future
sales, and loss to society. To
approximate such hidden costs,
we used the loss in market
capitalization as a proxy. BP
lost about one-half of its mar-
ket capitalization in the weeks
after the incident and about
one-third after the spill ended
around three months after the
incident. We assumed that the
market is efficient and the loss
in stock value reflects the hid-
den costs of the oil spill. Extant
literature documented that BP’s
stock market value was $187.46
billion a day before the oil
spill, but dropped by approxi-
mately one-third a few months
after the incident (Fodor &
Stowe, 2012; Lee & Garza-
Gomez, 2012). For instance,
Lee and Garza-Gomez (2012)
came up with a loss in market
capitalization of $61.41 billion
(market-adjusted) or $68.90
billion (raw) after the spill was
contained and $83.33 billion
(market-adjusted) or $99.86 bil-
lion (raw) at the worst time of
the crisis. Thus, we used $61.41
billion as a conservative figure
of hidden cost to be included
in our computation of the ulti-
mate costs.
Ultimate Costs of the Oil
Spill—United States Only
By tallying all the costs
ultimately borne by BP, except
for the litigations by foreign
countries, we estimated ulti-
mate costs of $144.89 billion,
a figure much higher than the
$62.59 billion BP reported in
its 2016 annual report. Such
incremental cost items consist
of $19.33 billion committed
by BP in a global settlement;
$700 million in contingent
liabilities, $175 million in SEC
settlements, legal fees of $680
million, and $61.41 billion in
hidden costs not reportable in
the current accounting system.
Ultimate Costs of the Oil
Spill—Including Litigations
in Mexico
We believe that the costs
associated with the multiple
unsettled lawsuits made by
other countries should also
be counted in, though the
amount of the costs cannot
be determined, as the litiga-
tions are currently pending
or unresolved. Examples of
non-U.S. litigations are a claim
submitted by the Mexican state
of Yucatan in April 2011 for
potential damage to its natural
resources and environment,
and a civil action filed by the
Mexican federal government in
April 2013 seeking compensa-
tion for response costs, damage
to property, economic loss, and
penalties. Considering that BP
has not been formally served
with the action by Mexican fed-
eral and state governments, we
estimate that the costs related
to litigations in Mexico will
be around $1.04 billion, which
is 5% of BP’s final settlement
with the U.S. government.
Should we add the costs related
to the litigations in Mexico,
our estimate for ultimate costs
becomes $145.93 billion.
DISCUSSIONS
This study attempts to
assess the ultimate costs of the
2010 Deepwater Horizon oil
spill, which is defined in this
study as the sum of the costs of
the oil spill to BP, net of credit
items such as reimbursements
from other related parties and
insurance recovery. Our esti-
mated ultimate cost of the oil
78 The Journal of Corporate Accounting & Finance  /  January 2018
spill to BP is $144.89 billion (or
$145.93 billion including non-
U.S.), which is more than twice
the $62.59 billion reported
by BP. Thus, this article sug-
gests the costs of the oil spill
reported in the company’s
financial statements can easily
be misunderstood or misinter-
preted, as there are categories
of costs not explicitly reported.
For instance, the loss in revenue
and the damages to the compa-
ny’s reputation are not report-
able and thus ignored in BP’s
computation of the costs of
the disaster. This study reminds
users of financial information
to be cautious when interpret-
ing financial data, particularly
the short-term income recog-
nized in a certain accounting
period, as it does not fairly rep-
resent the true costs of a disas-
ter like the 2010 BP oil spill.
Another contribution this
study makes to cost account-
ing and business strategy is that
it documents the detrimental
effects of the cost-cutting drive
by BP management. It con-
tributed to the accident and
consequently resulted in a tre-
mendous amount of the costs
of failed quality. For instance,
Fowler (2013) suggested that
former BP executives had cost
pressures before the oil spill that
led to the loosened implementa-
tion of safety measures. Simi-
larly, the Commission report
(National Commission on the
BP Deepwater Horizon Oil Spill
and Offshore Drilling, 2011)
stated that BP was already over
budget by $50 million when
the accident occurred and had
great amount of pressure to
cut the costs by approximately
$1.0 billion per year starting in
2010. One lesson learned from
this study is that the costs of
nonconformance (or failures)
to safety and quality standards
DOI 10.1002/jcaf © 2018 Wiley Periodicals, Inc.
are much greater than what
managers normally anticipate.
Suggesting that an accident
was waiting to happen in firms
in which managers did not
pay attention to the measures
for preventing and predicting
failures, Elkind, Whitford, and
Burke (2011) confirmed that
the Deepwater Horizon disaster
could be traced to a series of
mistakes and systematic failure
in risk management, which
prevailed in the entire offshore
drilling industry.
One implication of this
study is that previous near-miss
failures should be carefully
evaluated for risk manage-
ment, considering the trade-off
between the conformance costs
(prevention and appraisal)
and nonconformance (Obrien,
2013; Tinsey, Dillion, & Mad-
sen, 2011). For instance, Tinsey,
Dillion, and Madsen (2011)
pointed out that most business
failures are preceded by near
misses, which are close calls
where actual failures or disas-
ter would be possible any time
if the favorable chance factor
did not come with it. If latent
errors and mistakes persist for a
long time, it will only take some
enabling conditions to convert
these errors into a disaster.
NOTES
1. In October 2011, to speed up the
handling of complex cases, more than
2,700 of the lawsuits were consolidated
in the MDL 2179 proceeding in Re: Oil
Spill by the Oil Rig “Deepwater Hori-
zon” in the Gulf of Mexico.
2. Such provisions and contingent liabili-
ties are defined according to Interna-
tional Accounting Standard (IAS) 37
(Provisions, Contingent Liabilities and
Contingent Assets) and International
Financial Reporting Interpretations
Committee (IFRIC) 5 (Rights to Inter-
est Arising from Decommissioning,
Restoration and Environmental Reha-
bilitation Funds).
3. The amount of civil penalties under the
CWA is between $1,100 and $4,300 per
barrel of oil discharged.
REFERENCES
Barrett, P. (2013, June 27). Spillapalooza:
How BP got screwed in the Gulf.
­Business Week.
BOEMRE/U.S. Coast Guard Joint Investi-
gation Team. (2011). Final investigative
report on Deepwater Horizon e­ xplosion.
Retrieved from http://www.boemre.gov/
ooc/press/2011/press0914.htm
BP. (2010). Deepwater Horizon accident
investigation report. Retrieved from
http://www.bp.com/liveassets/bp_inter-
net/globalbp/globalbp_uk_english/inci-
dent_response/STAGING/local_assets/
downloads_pdfs/Deepwater_Horizon_
Accident_Investigation_Report.pdf
Calkins, L., & Fisk, M. (2015, November
30). Anadarko’s $160 million fine for
2010 Gulf oil spill falls well below what
U.S. sought. Insurance Journal.
Cessna, M. (2010, May 17). Insurance
implications of the Deepwater
Horizon disaster. LexisNexis Legal
Newsroom, Insurance Law Blog.
Retrieved from https://www.lexisnexis
.com/legalnewsroom/insurance/b/
insurance-law-blog/archive/2010/05/17/
insurance-implications-of-the-­
deepwater-horizon-disaster-by-michael-
cessna-of-counsel-lathrop-amp-gage-llp
.aspx#sthash.c0aKGjt7.dpuf
Elkind, P., Whitford, D., & Burke, D.
(2011). An accident waiting to happen.
Fortune, 163(2), 105–132.
Fodor, A., & Stowe, J. (2012). Financial
market reactions to a company disas-
ter: The BP case. Journal of Applied
Finance, 22(1), 88–103.
Fowler, T. (2013, February 27). Former
BP executive cites cost pressures before
spill. Wall Street Journal (Online).
Gilbert, D. (2015, January 20). Corporate
news: Anadarko to fight Gulf-spill fine.
Wall Street Journal, B.7.
Gilbert, D., & Kent, S. (2015, July 3). BP
to pay out $18.7 billion to settle spill.
Wall Street Journal, A1.
Gold, R. (2015, May 20). BP settles Deep-
water Horizon claims with Transocean,
Halliburton; companies end dispute
over claims stemming from 2010 dis-
aster in Gulf of Mexico. Wall Street
Journal.
Hartwig, R. (2010, April 30). Insurance
catastrophe loss review: Oil spills.
Insurance Information Institute.
Retrieved from http://www.iii.org/sites/
default/files/docs/pdf/OilSpills-0430102
.pdf
The Journal of Corporate Accounting & Finance  /  January 2018 79

Johnson, L., & Rudolph, H. (2010). When
oil spills, cash flows. Journal of Corpo-
rate Accounting & Finance, 22(1), 17–25.
Johnson, L., & Rudolph, H. (2015).
Unsettling business: The BP settle-
ment agreement. Journal of Corporate
Accounting & Finance, 26, 41–48.
Kristhnan, S. (2006). Increasing the visibil-
ity of hidden failure costs. Measuring
Business Excellence, 10(4), 77–101.
Lee, Y., & Garza-Gomez, X. (2012).
Market-based approximation of the
cost of nonconformance the cost of
non-conformance associated with the
2010 Gulf of Mexico oil spill. Total
Quality Management & Business Excel-
lence, 23(2), 221–236.
National Commission on the BP Deep-
water Horizon Oil Spill and Offshore
Drilling. (2011). Final report. Retrieved
from http://www.oilspillcommission
.gov/sites/default/files/documents/
DEEPWATER_ReporttothePresident_
FINAL.pdf
Sharkey, C. (2016). The BP oil spill set-
tlements, classwide punitive damages,
and societal deterrence. DePaul Law
Review, 64, 681–710.
Srivastava, S. (2008). Towards estimat-
ing cost of quality in supply chains.
Total Quality Management & Business
­Excellence, 19(3), 193–208.
Tinsey, C., Dillon, R., & Madsen, P.
(2011, April). How to avoid catastro-
phe? Harvard Business Review, 89(4),
90–97.

Yong Gyo Lee, PhD, is an associate professor of accounting at the University of Houston–Victoria. He has
published articles on topics relating to disclosures and valuation, costs of quality, and business education.
Xavier Garza-Gomez, PhD, is a professor of finance at the University of Houston–Victoria. His publica-
tions are in the areas of asset pricing, earnings management, and market efficiency. Rose M. Lee, MPH,
is a consultant in Grant Thornton LLP’s Business Consulting & Technology Services. She is an accounting/
finance professional with a master’s degree focused in Public Health from Columbia University.

© 2018 Wiley Periodicals, Inc. DOI 10.1002/jcaf