U.S. bans BP from new government contracts after spill deal

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

The suspension, announced by the U.S. Environmental Protection Agency, comes on the heels of BP's November 15 agreement with the U.S. government to plead guilty to criminal misconduct in the Gulf of Mexico disaster, the worst offshore oil spill in U.S. 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 U.S. government contracts are not affected, it said.

The EPA action could complicate BP's plans to grow its production in the Gulf of Mexico, and came just hours before a government auction of offshore Gulf tracts. The company may also struggle to remain the largest fuel supplier to the U.S. military, the largest single buyer of oil in the world.

The EPA's suspension of contracts could push BP to settle civil litigation brought by the U.S. government and states from the spill. An EPA official said government-wide suspensions generally do not 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 the largest investor and lease-holder of deep-water tracts. U.S. operations accounted for over 30 percent 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 U.S. military has been a reliable customer of BP's jet fuel and other refined products. As recently as September, BP affiliates won two fuel supply contracts with the U.S. military worth as much as $1.37 billion to supply fuel to the U.S. Defense Logistics Agency, the Pentagon's procurement arm, according to a U.S. website that tracks military contracts.

The EPA's action 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.

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

The U.S. government could use the suspension as leverage 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.

However, the suspension will not impair BP's ability to produce oil and gas from existing U.S. 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 and the U.S. government likely worked out a deal on the timing of the suspension before BP agreed to sign off on the November 15 criminal plea deal, said Samuel Buell, a Duke University Law School professor and former federal prosecutor.

"It's just inconceivable to me that BP's lawyers that their board of directors would have entered into that agreement last week without the issue of a suspension or debarment having been addressed," Buell said.

BP did not participate in Wednesday's federal auction of 20 million acres (8 million hectares) 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 U.S. Bureau of Ocean Energy Management, which oversees the federal leases. BP said its decision not to participate was made "prior and independent of" the suspension action.

"Federal executive branch agencies take these actions to ensure the integrity of federal programs by conducting business only with responsible individuals or companies. Suspensions are a standard practice when a responsibility question is raised by action in a criminal case," it said.

One long-time critic of BP applauded the decision.

"After pleading guilty to such reckless behavior that killed men and constituted a crime against the environment, suspending BP's access to contracts with our government is the right thing to do," U.S. Rep. Edward Markey, a Democrat from Massachusetts, said in a statement.

BP's U.S.-traded shares closed flat, while London-traded shares were down less than 1 percent at 427 pence.

(Additional reporting by Andrew Callus in London, Ayesha Rascoe in Washington, Joshua Schneyer in New York and Kristen Hays in Houston; Writing by Chris Baltimore; Editing by John Wallace, Grant McCool, Andrew Hay and Marguerita Choy)