Oil giant BP(NYSE:BP) was the biggest faller on Britain's blue-chip board on Thursday, as investors fretted that a U.S. government lawsuit may mean the cost of its oil spill will be far higher than predicted.
Legal experts have said that BP's $40 billion estimate for the total cost of the oil spill -- hitherto largely accepted by financial analysts -- could double if the U.S. government took a hard line and convinced a court that BP had been was grossly negligent.
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BP and analysts had dismissed this possibility so far, but the harshly-worded lawsuit filed on Wednesday by the Department of Justice spooked investors.
"Clearly it is a negative development. It creates some fears concerning the ultimate decision on gross negligence or not," said Societe Generale analyst Irene Himona.
"There is ongoing legal uncertainty," Himona added.
BP was down 1.7% at 1137 GMT (6:37a.m.), underperforming a 0.07% lower STOXX Europe 600 Oil and Gas index.
BP has not divulged what its strategy will be in fighting the myriad of lawsuits against it, except to say that its $40 billion estimate reflects its belief that it was not grossly negligent.
The company also disputes the government's 4.9 million barrel estimate of the amount of oil that spilled and said it hoped to receive some credit for recovering some spilled oil.
All this suggests it could expect a fine of under $2 billion.
However, if the company is found to have been grossly negligent, it could face fines of $21 billion, and such a finding could open the door to bigger awards against BP in civil lawsuits.
This could put pressure on BP's plans to reinstate its dividend early in 2011, or force it to increase its planned $25 billion to $30 billion asset disposal program, Manoj Ladwa, senior trader at ETX Capital said.
Analysts currently expect BP to announce a 7 to 10 cents dividend, down from 14 cents previously, for the fourth quarter.
Some London-based analysts and investors downplayed the significance of the U.S. move."This action from the US government has been completely expected," a top ten investor said.
"We don't perceive this as any kind of setback as we don't really think it changes things."
However, even those who remained confident in BP's cost estimates said the U.S. lawsuit -- which runs alongside a criminal investigation into BP -- could yet have significance.
"The degree to which the government suing for losses/damages increases BP's liabilities is a little unclear," said analysts at Evolution Securities.
Peter Hitchens, oil analyst at Panmure Gordon said the decision of the Obama administration to sue seemed "a little perverse."
The mainly UK-based analyst community which covers BP has often struggled to estimate legal costs and penalties that can be incurred in the United States.
After a fatal blast at BP's Texas City refinery in 2005 that killed 15 workers, analysts predicted the disaster would cost BP of $300 million to $400 million.
By 2008, though, BP had paid over $2 billion in compensation claims related to Texas City, while lost profits and repairs had cost another $1 billion at least.
The U.S. lawsuit seeks damages from the well owners BP, Anadarko Petroleum Corp and Mitsui & Co Ltd unit MOEX, and well driller Transocean Ltd and its insurer QBE Underwriting/Lloyd's Syndicate 1036, part of Lloyds of London, for their roles in the Gulf of Mexico disaster.
Shares in Swiss-based Transocean, the world's largest offshore rig contractor, dropped 4.0% on Thursday and Anadarko shares in Frankfurt lost 3.2%.
Reuters reported earlier in December that BP's oil spill costs could double from the company's $40 billion estimate if the Department of Justice find BP was "grossly negligent" in the run-up to the disaster.
Adding to the negative press on BP's safety record, leaked U.S. diplomatic cables reveal BP suffered a blowout on an Azerbaijan gas platform in September 2008 and was fortunate to evacuate workers safely after a blast that preceded the one that killed 11 workers in the Gulf of Mexico in April, Britain's Guardian newspaper reported.
BP said it had a gas leak, not a blowout and that this was reported at the time.