BP Plc has agreed to a preliminary deal in which it will pay a record $18.7 billion to settle claims by five Gulf states and the U.S. government for the 2010 Deepwater Horizon oil spill, the worst oil spill in the nation’s history.

About $12.6 billion in payments will go to the federal government while the rest will go to Louisiana, Mississippi, Alabama, Florida and Texas and more than 400 local government entities to cover environmental and economic damage from the spill.

BP will make the payments of about $1 billion a year over 18 years, according to the preliminary agreement, which is still subject to BP reaching definitive agreements with the states and undergoing public comment and acceptance by the court.

The Deepwater Horizon Macondo oil well drilling platform exploded on April 20, 2010. Eleven men were killed.

Carl-Henric Svanberg, BP chairman, said the company “balanced the risks, timing and consequences associated with many years of litigation against its wish for the company to be able to set a clear course for the future” in deciding to settle now.

Bob Dudley, BP’s group chief executive, said the agreement is a “realistic outcome which provides clarity and certainty for all parties.”

BP said that this agreement will resolve all of its largest liabilities remaining from the spill.

The agreements, however, do not cover the remaining costs of certain 2012 class action settlements and also do not cover claims by individuals and businesses that opted out of the 2012 settlements or whose claims were excluded from them. BP will continue to defend those claims vigorously.

Today’s agreements in principle also do not resolve private securities litigation pending (MDL 2185).

At the same time, Dudley said, for the federal government and the Gulf states, the settlement will deliver funds over many years for further restoration of natural resources and for losses related to the spill.

BP has already taken $43.8 billion in pre-tax charges for clean-up and other costs.

Under the terms, the company’s U.S. subsidiary, BP Exploration and Production Inc (BPXP), will make these payments:

  • A $5.5 billion civil penalty to the U.S. government under the Clean Water Act (CWA) – payable over 15 years.
  •  $7.1 billion to the U.S. and the five Gulf states over 15 years for natural resource damages (NRD). This is in addition to the $1 billion already committed for early restoration.
  • $232 million to be added to the NRD interest payment at the end of the payment period to cover any further natural resource damages that are unknown at the time of the agreement.
  • $4.9 billion will be paid over 18 years to settle economic and other claims made by the five Gulf Coast states.
  • Up to $1 billion will be paid to resolve claims made by more than 400 local government entities.

BP’s chief financial officer, Brian Gilvary, said that for BP the agreement will provide certainty with respect to BP’s financial obligations, particularly with the ability to spread payments over many years.

“The impact of the settlement on our balance sheet and cashflow will be manageable and enables BP to continue to invest in and grow its business, underpinned by a resilient and robust financial framework,” Gilvary said.

The settlement comes as U.S. District Court Judge Carl Barbier is deciding what penalties BP should pay under the Clean Waters Act. The settlement amount is more than the $13.7 billion that Barbier could make BP pay but it promises to end years of litigation by states and the federal government over other environmental damages.

Attorney General Loretta Lynch called the settlement historic.

“If approved by the court, this settlement would be the largest settlement with a single entity in American history; it would help repair the damage done to the Gulf economy, fisheries, wetlands and wildlife; and it would bring lasting benefits to the Gulf region for generations to come,” Lynch said.

She said the deal was negotiated over several weeks. Her predecessor, Attorney General Eric Holder, filed a civil lawsuit against BP and its co-defendants in December 2010.

States’ Shares

The breakdown of what the five Gulf states will receive shows:

Mississippi: The settlement will bring approximately $1.5 billion in additional relief to Mississippi. Mississippi will receive approximately $183 million in Natural Resource Damage Assessment payments and approximately $582 million in Clean Water Act penalties. Mississippi will also receive $750 million in economic damages. Combined with $659 million in early funding, Mississippi is receiving a total of nearly $2.2 billion in compensation, state officials said.

Louisiana: $5 billion for natural resource damages (includes $368 million in previously allocated early restoration); a minimum of approximately $787 million for Clean Water Act civil penalties; and $1 billion for state economic damages.

Florida: Florida stands to receive more than $3.25 billion in total: $2 billion for its economic loss claims and $1.25 billion for the natural resource damage claims.

Alabama: $1 billion in economic damages and approximately $1.3 billion in natural resource damages and federal penalty monies.

Texas: $238 million for natural resources damages and $150 million for economic claims.

Mississippi Gov. Phil Bryant noted that 11 men, including four from his state, died in the explosion.  “For months, we battled to protect our shorelines and the unique ecosystems and natural resources of our beautiful Gulf Coast from millions of gallons of oil and chemicals,” Bryant said. “And for years, we have worked diligently to pursue all legal recourse and rightful compensation resulting from this disaster. Today is a victory for Mississippi and a victory for a treasured way of life on the Gulf Coast.”

Louisiana Attorney General Caldwell said the agreement lets his state “focus right away on improving the state without further litigation delays and appeals that could take years.”