Washington (Platts)--1Feb2013/337 pm EST/2037 GMT

BP has lost $896 million worth of business with the US military as a consequence of its guilty plea to criminal charges stemming from the 2010 Macondo well blowout and oil spill in the Gulf of Mexico, according to Defense Logistics Agency data.

Two contracts with the DLA expired at a time when BP was under suspension from being awarded any new business with the US because of its conviction on manslaughter and other charges, including violating the Clean Water Act.

The two lost contracts are the first tangible consequences of the suspension that was triggered by BP's guilty plea, which was accepted by a federal court judge on January 29. BP has agreed to pay a $4 billion criminal fine and serve five year's probation, as well as pay a separate $525,000 fine for lying to investors and Congress about the flow rate of oil from its Macondo well.

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The suspension was imposed on November 28 by the Environmental Protection Agency on behalf of the entire US government. BP has said it is working with the EPA to reach an agreement that would lift the suspension, but recently acknowledged that it "may take some time to resolve issues relating to such an agreement."

At stake for BP is millions of dollars of fuel sales to the US, plus its ability to secure leases for new offshore oil and gas exploration. The next US offshore lease sale is scheduled for March 20 in the Central Gulf of Mexico, an area where BP has been very active in the past. If its suspension is not lifted before then, it would be ineligible to be awarded any leases.

In addition to its extensive offshore holdings, BP is a major supplier of jet fuel, gasoline, diesel and other petroleum products for the US military. In the 2011 fiscal year, the DLA awarded 22 contracts to BP or its affiliates worth about $1.4 billion. That represents 10.35% of DLA's energy purchases for 2011, the agency said.

'STANDARD PRACTICE'

The first of the two BP contracts lost was an annual deal to provide various fuels to military and Defense Department installations in the western US as part of a larger fuel procurement arrangement. It was worth $791 million and was performed by BP's affiliate ARCO. The ordering period for the contract expired on December 31, 2012, with a 30-day carryover period for deliveries.

The DLA, which procures fuel for military and other Defense Department-related uses, extended the contract until May 31 of this year. But ARCO was ineligible to participate because of BP's suspension. Its share of the contract is being performed by Chevron, a DLA spokeswoman said.

A second contract, awarded to BP Singapore in 2011, was for the delivery of F-76 diesel fuel and was worth $105 million. It also expired on December 31, with a 30-day carryover period for deliveries.

That contract was let out to bid on May 7, 2012, and was awarded in December to Refinery Associates of Texas and S-Oil Corp., according to the DLA. BP was ineligible for the award. A DLA spokeswoman could not immediately say whether BP bid on the contract.

BP did not immediately respond to a request for comment.

When the EPA issued its suspension last November, the agency noted that the action was "standard practice when a responsibility question is raised by action in a criminal case."

While the suspension process is discretionary, BP's criminal conviction triggered a mandatory statutory disqualification because it included a violation of the Clean Water Act. Under this provision, BP is disqualified from receiving any government contracts, leases, loans or other benefits until it can persuade the EPA that the condition that gave rise to the disqualification has been corrected.

Disqualification applies both to the company and the the specific facility where the Clean Water Act violation took place. In this case, the EPA has designated BP's Houston corporate headquarters as the "facility."

"Discussions between EPA and BP continue in an effort to address BP's existing present responsibility issues, and resolve the November 28, 2012 suspension action and today's disqualification," the EPA said in a statement on Tuesday.

--Gary Gentile, gary_gentile@platts.com
--Edited by Richard Rubin, richard_rubin@platts.com

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