BP could be on the hook for millions if not billions of dollars in cleanup costs and even punitive damages. But while BP is a large and successful oil company, its pockets are only so deep. Could the mounting amount of liability related to this oil disaster sink BP into a Chapter 11 bankruptcy? You bet it could.
It's not like it hasn't happened before. In 1987, Texaco was forced in Chapter 11 bankruptcy because it could not afford to pay a jury award of $1 billion to Pennzoil after the company successfully sued it for "jumping" its planned merger with Getty Oil. The original award to Pennzoil was a whooping $10 billion before it was reduced. And according to some analysts, the amount of debt BP could incur directly related to this oil disaster could top even $10 billion. And that's despite the Oil Pollution Act of 1990 which would cap BP's liability for economic devastation to no more than $75 million; but that is only if the company did not violate safety regulations. It is currently becoming clear that BP probably did violate some safety regulations which would make the $75 million cap completely irrelevant. After all is said and done, BP could be facing well over $20 billion in damages related to this oil spill which could force it to seek Chapter 11 bankruptcy protection.
BP's costs for the cleanup could run as high as $23 billion, according to Credit Suisse. On top of that, BP could face an additional $14 billion in claims from gulf fisherman and the tourism industry. So while conservative estimates put the bill at $15 billion, something approaching $40 billion is not out of the question. After all, little about this spill has turned out as expected.
With only $12 billion in cash and short-term investments, without the protection of Chapter 11 bankruptcy, BP could run out of money fast if it faced the projected liability related to the oil disaster. With a Chapter 11 bankruptcy, BP could restructure much of the oil disaster related liabilities while simultaneously protecting its company's value and assets. We could also see BP fighting to reduce damage and punitive awards before filing bankruptcy much like Exxon did when they fought for 20 years to reduce a $5 billion punitive damage award to a mere $500 million.