US Defence

BP Wins Most Pentagon Fuel Awards in Year After Gulf Explosion

February 24, 2012, 12:33 PM EST

By Danielle Ivory

Feb. 24 (Bloomberg) -- The scorn heaped upon BP Plc following the biggest offshore oil spill in U.S. history in 2010 wasn’t echoed at the U.S. Defense Department. It stepped up purchases from the London-based company, making it the Pentagon’s biggest fuel supplier.

BP’s contracts with the military surged 33 percent to $1.35 billion in the fiscal year that ended Sept. 30 from $1.02 billion in fiscal 2010, according to data compiled by Bloomberg Government. BP received 49 percent more in defense contracts than the No. 2 fuel supplier, San Antonio-based Valero Energy Corp.

To critics, BP’s favored spot at the Pentagon cash window adds insult to the injury caused by the April 2010 explosion of the Deepwater Horizon oil rig in the Gulf of Mexico. The incident killed 11 workers, sullied hundreds of miles of coastline and crippled the region’s fishing and tourism industries.

“When BP still owes billions of dollars in possible fines and penalties for their spill in the Gulf of Mexico, our military shouldn’t renew lucrative contracts” for the company, said Massachusetts Representative Edward Markey, the top Democrat on the House Natural Resources Committee. It’s time “for our government to stand up to BP,” Markey said in an e- mail.

A trial to determine compensation for businesses and residents victimized by the spill is scheduled to begin Feb. 27 in New Orleans federal court. The company also faces hundreds of other lawsuits, at least 40 filed by survivors or relatives of the 126-member crew that was aboard the rig.

‘Not Right’

“BP still hasn’t fulfilled its commitment to fund the restoration of the Gulf of Mexico, but they pocketed $26 billion of profits last year, thanks in part to these government contracts, and that’s not right,” Jeremy Symons, senior vice president at the National Wildlife Federation in Reston, Virginia, said in an interview.

Most of the contract money awarded to BP by the Defense Department was subject to full and open competition, according to federal procurement data. The company offered the lowest price, said Michelle McCaskill, a spokeswoman for the Defense Logistics Agency, which buys fuel for the Pentagon.

Government agencies are allowed to suspend or disqualify companies from receiving contracts if they have committed or are suspected of committing wrongdoing.

“BP is neither suspended nor debarred and is therefore eligible to offer on and receive U.S. government contracts,” McCaskill said in an e-mail.

Biggest Consumer

The company’s facilities in the Gulf of Mexico don’t play any role in its government work, said Scott Dean, a BP spokesman in Warrenville, Illinois. He declined to comment further on the company’s contracting.

The Pentagon awarded $14.7 billion in fuel contracts in fiscal 2011. Eleven suppliers accounted for half of the total, led by BP, the world’s sixth-biggest oil company by market value.

Also among the top 10 Pentagon fuel suppliers are No. 6 Chevron Corp., the fourth-largest oil company by market value and No. 4 Royal Dutch Shell Plc, which ranks third by the same measure. Exxon Mobil Corp., the world’s biggest publicly traded oil company, was the Pentagon’s 12th-largest supplier last year.

Too Big

The military’s hunger for oil may make it too difficult to eliminate major providers, said Scott Amey, general counsel of the Project on Government Oversight, a watchdog group in Washington. Excluding countries, the Defense Department is the world’s biggest consumer of energy.

“There is a sense that large federal contractors, like BP, are too big to suspend or debar,” Amey said in an e-mail.

“The government’s over-reliance on such companies can make it nearly impossible to hold them accountable, absent a monetary penalty and promises to keep clean,” he said. “Temporarily cutting off millions or billions in taxpayer funds seems like a better way to get a company’s attention and truly alter corporate culture.”

The military’s global reach makes geography an important determinant of the Pentagon’s fuel suppliers. Valero, Chevron and World Fuel Services Corp., a Miami-based marketer of marine and aviation fuel, are the only U.S.-based companies among the top 10. World Fuel ranked No. 5 last year with $858 million in fuel contracts, a notch ahead of San Ramon, California-based Chevron, with $620 million.

Local Purchases

“Almost all of the fuel used by the military services overseas is purchased overseas,” the Defense Logistics Agency’s McCaskill said. “As a result, many of the contract dollars are awarded to foreign-based companies.”

It’s often less costly and easier for the government to buy oil from local suppliers, said Pavel Molchanov, a Houston-based analyst with Raymond James & Associates Inc.

“When I talk about those geographies where U.S. companies have very limited access, I’m thinking of places like Afghanistan, Pakistan, the Horn of Africa,” Molchanov said in an interview. Even in countries like Germany and Japan, where the Defense Department “has a very large presence,” it may be cheaper to use a local supplier, he said.

The Gulf catastrophe may yet cost BP some of its business with the Pentagon, from which the company received $7.06 billion in fuel contracts in the last five years.

EPA Decision

The Environmental Protection Agency “has not yet determined whether to take further debarment action against BP as a result of the Deepwater Horizon oil spill,” Stacey Dey- Foy, director of EPA’s Suspension and Debarment Division, said in an e-mailed statement. Dey-Foy declined to say when the EPA would make a decision or whether debarment was part of continuing negotiations with the company.

BP has been cited with violations of the federal Clean Water Act, which allows the government to seek fines of $1,100 a barrel of oil spilled automatically, a figure that can rise to as much as $4,300 a barrel if a judge finds the company was grossly negligent in allowing the pollution to occur.

The maximum penalty would be $4.51 billion, using the $1,100-a-barrel fine and the government’s estimate of barrels spilled. A finding of gross negligence would boost that figure to $17.6 billion.

Violations of the Clean Water and Clean Air Acts typically result in the barring of specific facilities where the problems occurred, rather than punishing the company as a whole. The EPA has indefinitely disqualified two BP facilities from doing government work due to other violations.

The agency in 2009 barred the company’s refinery in Texas City, Texas, after an explosion that killed 15 workers and injured 170 others, according to EPA data. In 2008, the EPA disqualified BP’s Prudhoe Bay Unit on the North Slope in Alaska after a leak spilled between 200,000 and 270,000 gallons of crude oil into a nearby lake and tundra area.

Valero Too

BP since 2000 has been hit with more than $2.6 billion in fines and settlements for enforcement related to the environment, labor, contract fraud and antitrust, according to the Project on Government Oversight’s database of federal contractor misconduct. The database includes both government and civil actions.

Valero has paid more than $283 million in fines and settlements since 2000 for enforcement related to the environment and labor, according to the same database. That includes a 2007 case in which the company voluntarily agreed to pay $4.25 million in penalties and $232 million for pollution controls to bring refineries purchased in 2005 into compliance with the Clean Air Act, according to an EPA press release.

Military and government awards are a small part of Valero’s total revenue, said Bill Day, a company spokesman. He otherwise declined to comment on the company’s contracts.

“If any company that had an environmental scandal was ruled out as a fuel supplier for the military, the military would very quickly run out of fuel,” said Raymond James’s Molchanov. “That would pretty much rule out every oil company on the planet -- foreign or domestic,” he said.

http://www.businessweek.com/news/2012-02-24/bp-wins-most-pentagon-fuel-awards-in-year-after-gulf-explosion.html