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Economic Damages Factors from the BP Deepwater Horizon Explosion and Oil Discharge into the Gulf of Mexico


     By Don Coker Banking Consultant & Banking Industry Standard Procedures, et al., Expert Witness

PhoneCall Banking, Economic, and Damages Expert Witness Don Coker at (770) 852-2286


Expert Witness: Don Coker
How to establish and effectively demonstrate for litigation the various elements of Economic Damages that resulted from the BP Deepwater Horizon Explosion & Oil Discharge is explained by renowned nationwide Banking & Economic Damages Expert Witness Don Coker who was chosen to serve as the economic damages expert witness for the 900 business owners in New Orleans’ Lower Ninth Ward and St. Bernard Parish and that were damaged by the Ingram Barge’s Industrial Canal breach during Hurricane Katrina.
This article is in response to the many inquiries I have received from attorneys and journalists seeking my thoughts on the damages from the April 20, 2010, BP Deepwater Horizon oil disaster in the Gulf of Mexico. Formally known as the Macondo prospect, the well is/was located on Mississippi Canyon Block 252 in the Gulf of Mexico in a water depth of approximately 5,000 feet. The remains of the platform and rig sank on April 22, 2010, two days after the explosion.

This article in not intended to be a backgrounder on the Deepwater Horizon incident, since the facts are generally known and available elsewhere in the media; but rather this article summarizes how the establishment of damages from this disaster will take place.

The Major Parties Involved

● BP, plc – Worldwide UK-based integrated oil producer, refiner, and marketer. As of December 31, 2009: Assets = $235 billion, Stockholders’ Equity = $101 billion, Income = $16.7 billion to $20 billion. Leased the Deepwater Horizon from Transocean, Ltd. Operator of the project, and owner of a 65% interest in the leasehold.

● Anadarko Petroleum Corporation, The Woodlands (Houston), Texas – Owner of a 25% interest in the leasehold.

● Mitsui Oil Exploration, Ltd., Houston, Texas - Owner of the remaining 10 percent interest in the leasehold, held in a subsidiary named MOEX Offshore 2007. Mitsui’s home office is in Tokyo, Japan.

● Transocean, Ltd., based in Geneva, Switzerland – Owner of the Deepwater Horizon, a semi-submersible dynamically-positioned drilling platform that was designed by Reading & Bates and build in 2001 by Hyundai Heavy Industries in South Korea.

● Halliburton Energy Services – Contractor Halliburton had just completed a cementing process at the Deepwater Horizon twenty hours prior to the blowout incident. The cementing process is a standard method for sealing any gaps that may exist between the hole drilled into the ocean floor and the pipe that carries the oil to the surface. If gaps exist, product – such as methane gas – can escape and shoot up to the surface – basically a blowout.

● Cameron International Corporation, based in Houston, Texas – Manufactured and sold to Transocean in 2001 the blowout preventer used on the Deepwater Horizon.

Insurance Companies

Naturally, many insurance companies are involved:

● BP reportedly was self-insured through a subsidiary insurance company named Jupiter Insurance, LTD; and they had not reinsured any of the risk. (I assume that the “Jupiter” name came from the place that their brains were when they made that decision.)

● AIG – AIG initially paid out $20 million over the Deepwater Horizon disaster, and stands to pay more as the situation develops.

● TransAtlantic Holdings, Inc. – They estimated at one point that they would have to pay no more than $15 million.

● Lloyd's of London insurers Catlin Group Ltd. estimated claims at $40 million and Chaucer Holdings PLC estimated their claims at $25 million.

● Lancashire Holdings Ltd., headquartered in Bermuda, announced that it expects to pay claims or approximately $25 million net after reinsurance proceeds.

Classifications of Economic Damages

It is very likely that there are as many different types of economic damages resulting from this disaster as there are people and entities that are damaged. That situation will have to be sorted out after the disaster ends. However, here is an overview of the various categories of damages that can be expected to come out of this disaster:

Loss of Life – Let’s start by remembering that 11 people lost their lives in the initial explosion, and at least seventeen others were injured. There are established standard methodologies for calculating loss of life values as well as impairment values due to injury that are acceptable in court. No amount of funds can adequately compensate a family for the lost life of a loved one, but there are generally accepted procedures, primarily income-based, for quantifying these unfortunate occurrences.

Lost Business Income – This is income that reasonably could be expected to be earned but for the interruption by the oil discharge.

Lost Personal Income – This is basically the same as the lost business income as just described but on an individual level.

Property Damages – Actual property damaged or destroyed as a result of the discharge.

Other Issues in Determining Who is Liable for What

Proximate Cause – Which element of the well’s failure was responsible for the disaster and the damages will be determined by engineers and other technical professionals, and this may have a bearing on how the blame and damages are apportioned among the various parties.

Whose Decision - It is possible that the entire relationship between BP and Transocean (the owner of the well) should be examined to determine how the decision was made to proceed and drill a well a mile below the surface of the Gulf of Mexico with a drilling platform that was susceptible to such a disaster.

Overview of the Process for Establishing Economic Damages

Establishing the Economic Damages to property are fairly straightforward since they are basically the cost of restoring the property to its condition prior to the damaging event, and some additional compensation to cover the work required to arrange and oversee the restoration work, and possibly some compensation for the loss of the use of the property, if that occurred, for some time while restoration or repair work is being carried out.

For other Economic Damages categories such as Lost Business Income or Personal Income, the acceptable industry standard process for estimating and demonstrating Economic Damages in a litigation setting requires the following steps:

Step 1. Establishing the Economic Situation Before the Explosion and Discharge Events.

Step 2. Demonstrating the Most Likely Future Economic Situation Without the Explosion and Discharge Events.

Step 3. Defining the Precise Proximate Causal Event and Tying it to the Damages It Caused.

Step 4. Establishing the Most Likely Future Economic Situation After the Explosion and Discharge Events.

Step 5. Demonstrating the Difference Between the Most Likely Future Situation Without the Explosion and Discharge Events and the Most Likely Future Situation After the Explosion and Discharge Events.

Step 6. Calculating the Net Present-Value of the Difference in the Two Projections.

Now, let’s take a closer look at each of these Steps:

Step 1. Establishing the Economic Situation Before the Explosion and Discharge Events.

The best way to do this is to establish a financial “snapshot” of the person’s or entity’s financial situation as it was immediately prior to the Explosion and Discharge Events. This should be easy enough to accomplish by using past financial statements and tax returns.

Trends need to be established so as to reflect how the financial condition has changed year over year to arrive at the present “snapshot,” and that can be accomplished by looking at historical financial statements and tax returns for the three to five previous years before the Explosion and Discharge Events.

Step 2. Demonstrating the Most Likely Future Economic Situation Without the Explosion and Discharge Events.

Having established the past trend that brought the person or entity to the position that it was in immediately prior to the proximate causal event, you should then project that same trend into the future so as to establish a realistic and reliable estimate of future financial performance.

The projection should be carried out for as many years as it is felt the projection can be accurately made. That projection may be five years, and it may be twenty-five years depending on how reliable you feel a projection can be made.

In addition, if there was any known unusual factor, or factors, present that could positively or negatively impact future financial performance, then that factor, or factors, should be included in the analysis.

Note that the factors had to be known before the Explosion and Discharge Events because the damages calculation will be as of the date of the proximate causal event. Otherwise, the factors should be thrown out.

Step 3. Defining the Precise Proximate Causal Event and Tying it to the Damages It Caused.

Clearly, the Explosion and Discharge Events are the proximate causal events that negatively impacted a person’s or entity’s ability to generate as much income as they would have been able to generate but for the Explosion and Discharge Events.

Step 4. Establishing the Most Likely Future Economic Situation After the Explosion and Discharge Events.

This is the same process as described above in Step 2 except that it includes the negative influence of the Explosion and Discharge Events. The number of years projected into the future should be the same as used in Step 2 above. In some cases, you will have financial statements that clearly reflect the impaired financial performance of the person or entity. In other cases, the person’s or entity’s ability to generate income may go away completely, for example, if a person is incapacitated and unable to work, or if a business is forced into bankruptcy or otherwise fails. In those cases, the loss is the net present-value of the entire income stream projected in Step 2 above.

Step 5. Demonstrating the Difference Between the Most Likely Future Situation Without the Explosion and Discharge Events and the Most Likely Future Situation After the Explosion and Discharge Events.

Once you have established the most likely future income projections before (Step 2) and after the Explosion and Discharge Events (Step 4), the difference in these two projections is the gross amount of the loss for the projection period, not taking time into consideration. That is your base number that you carry forward into the next step.

Step 6. Calculating the Net Present-Value of the Difference in the Two Projections.

This is a mathematical exercise that involves net present-valuing the difference in the two projections (Steps 2 and 4) in order to arrive at an Economic Damages value as of the date of the Explosion and Discharge Events.

Other Categories of Economic Damages

In addition to this present value process, there are other damages categories that have to be added in, such as:

● Permits for additional wells in the Gulf were suspended as a direct result of the Deepwater Horizon incident. As a specific example, it is known that McMoRan received a notice from the Minerals Management Service (U.S. government) that a pending drilling permit would be delayed.

● Remediation costs, such as to remove oil from a beach, dock, pier, boat, ship, or other public or private property.

● The value of lost productive capacity, such as subsequent years’ crops of sea life that will not be there due to the death of the 2010 sea life as a result of the disaster.

● Second-level damages that result from lost personal and business income, such as a business that had to close down permanently due to a lack of cash flow that would have been there but for the explosion and discharge disaster.

● Second-level damages such as deferring college or job training that someone would have pursued but for the effects of the discharge.

● Failure to advance in a career that was cut short or interrupted by the disaster.

● Medical, psychological, and psychiatric expenses that result from the economic effects of the disaster.

And there are other real damages that are difficult if not impossible to quantify, such as:

● Emotional distress, which varies in its manifestation from simple mental and physical stress, sleeplessness, and general hand-wringing, to divorce and violence.

Environmental Damages

And finally, there are the catastrophic environmental damages. This is a strange conundrum even for an economic damages expert since there is no accepted methodology for determining a damages amount for operating your business so poorly that you allow oil to cover beaches, wetlands, sea life, birdlife, unimproved and improved coastal properties, and anything else in its path at least three states away from the state where it happened. Certainly, these damages are huge; and it is certain that they should include a sizable punitive damages component in order to discourage future reckless behavior.

By comparison, consider that the Exxon Valdez incident occurred on March 24, 1989; and
a court awarded $5 billion (equivalent to $8,858,800 in 2010 dollars) for punitive damages (And as we all know, were subsequently drastically reduced.), which was equal to a then-current year's profit of Exxon.

As an interesting side-note, in order to protect itself in case the court’s judgment was affirmed on appeal, Exxon obtained a $4.8 billion credit line from JPMorgan & Company which gave JPMorgan the bright idea to create the first ever credit default swap (in 1994) so that JPMorgan would not have to maintain the 8% reserves required by banking regulations at the time - the Basel I Accord - against the risk that they would have to fund the $4.8 billion in case Exxon lost their appeal and defaulted. Credit default swaps later headlined the subprime mortgage and securitized loan fiascos of 2007 to who knows when, and we have the Exxon Valdez disaster to thank for that.

Two important differences in the Exxon Valdez and the Deepwater Horizon events are:

● The Exxon Valdez contained a finite amount of crude oil, albeit a huge amount of crude oil; whereas the BP Deepwater Horizon was an uncapped well that contained the contents of an entire underwater oil field.

● The Exxon Valdez’s damages were somewhat confined to the Prince William Sound in Alaska whereas the damages that emanated from the Deepwater Horizon affected a wide geographical area encompassing parts of several states.

Based upon these two criteria, the BP Deepwater Horizon disaster is much greater than was the Exxon Valdez disaster.

By the way, the Exxon Valdez oil tanker has been renamed several times in order to try to build a Chinese wall between the problem that happened in 1989 and the subsequent usage of the same ship. At various times the old Exxon Valdez has been known as the Exxon Mediterranean, SeaRiver Mediterranean, S/R Mediterranean, and Mediterranean, and presently sails as the Dong Fang Ocean. That would fool me. By this writing – and almost certainly after – it may be traveling under another name; so you’ve been warned.

Range of Values

It is acceptable to produce an Economic Damages value that is a range of values. Due to the level of judgment and speculation that is involved in estimating Economic Damages, it is sometimes appropriate to recognize that a particular factor could just as easily be one figure as another figure. In a case like this, it is acceptable to calculate the future financial performance using both factors, and then state the Economic Damages estimate as a range.

Expert Strategy

If you are involved in litigation that involves Economic Damages, then hire a professional that is familiar with Economic Damages calculation techniques, and that is highly experienced in providing supporting testimony at deposition and at trial. You can be assured that the expert will be questioned thoroughly regarding every step and factor of their methodology.

This methodology of calculating an estimation of Economic Damages is Daubert compliant since it assists the trier of fact to understand the evidence or to determine a fact issue, is widely published and peer reviewed, is generally accepted as an accurate procedure, and is capable of being replicated by another competent professional.

It is extremely valuable for both sides to engage an Economic Damages expert since usually the Plaintiff’s expert will provide an Economic Damages opinion and the Defendant’s expert will either provide an alternate Economic Damages estimate or a critical review of the estimate provided by the Plaintiff’s expert.

ABOUT THE AUTHOR: Banking, Economic, and Damages Expert Witness Don Coker
Expert witness and consulting services. Over 500 cases for plaintiffs & defendants nationwide, 120 testimonies, 12 courthouse settlements, all areas of banking and finance. Listed in the databases of recommended expert witnesses of both DRI and AAJ.

Clients have included numerous individuals, 75 banks, and governmental clients such as the IRS, FDIC. Employment experience includes Citicorp, Ford Credit, and entities that are now JPMorgan Chase Bank, BofA, Regions Financial, and a two-year term as a high-level governmental banking regulator.

BA degree from the University of Alabama. Postgraduate and executive education work at Alabama, the University of Houston, SMU, Spring Hill College, and the Harvard Business School.

Called on by clients in 31 countries for work involving 61 countries. Widely published, often called on by the media.

Copyright Don Coker

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While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.
For specific technical or legal advice on the information provided and related topics, please contact the author.

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