How Kevin Costner Sold $52M of Centrifuges That BP Never Used in Gulf Cleanup
Why Kevin Costner and Stephen Baldwin are fighting over a "bag of shells."
June 7, 2012 — -- Kevin Costner, the Academy Award winner who starred in "Dances With Wolves" and "Hatfields & McCoys," may testify as early as Thursday in a Louisiana court in response to a suit filed by fellow-actor Stephen Baldwin.
Baldwin, the youngest of the four acting Baldwin brothers, filed a suit in December 2010 against Costner and his business partner, Patrick Smith, over profits from a technology that BP leased for the Deepwater Horizon spill.
The actors' trial proceedings take place daily this week and are expected to last two weeks. Smith, the trial's first witness, testified for two hours on Monday and eight hours on Tuesday.
Costner's device is a 5-ton centrifuge designed to separate water from oil, spit out clean water and save the oil, Smith said in his testimony this week, which they wanted to place on ships.
The timeline of the case goes as far back as the production for Costner's film, "Waterworld." Costner starred and co-directed the science-fiction film, which tanked at the box office when it was released in 1995.
In the early 1990s, Costner financed and oversaw the development of an oil and water separation technology under the auspices of a corporation owned and managed by him called CINC Inc., which stands for "Costner in Nevada Corporation."
After the oil spill in the Gulf of Mexico in April 2010, Costner made headlines again marketing his device and snagging a $52 million deal with BP for 32 of his centrifuges.
"It separates oil and water at incredibly high speeds under very difficult conditions," Costner told "Good Morning America's" Sam Champion in 2010.
The devices weren't used to cap the well but were designed to collect oil on the water's surface.
Joining Baldwin in the lawsuit is Spyridon Contogouris, described as a hedge fund consultant and having "been friends for many years" in a court filing. The two seek more than $21 million in damages against Costner, Smith and their company, WestPac, for duping them into selling their shares in the company, Ocean Therapy Solutions, before making the $52 million deal with BP.
Baldwin says he was bought out of Costner's company for $500,000 while Contogouris was bought out for $1.4 million.
BP reportedly never used the 32 devices it ordered from Costner's company, according to the U.S. Coast Guard. By September 2010, the well was eventually sealed with cement and a relief well.
Daniel O'Connell, senior energy risk management consultant with INTL FCStone Inc., said the $52 million transaction, "for BP, is a bag of shells."
The multi-billion dollar company's profit fell to $4.8 billion in its first quarter ending March 31.
Pavel Molchanov of Raymond James' Energy Group said the purchase of Costner's technology was "not a conventional transaction, but then the Macondo oil spill was not exactly a customary occurrence," he said describing BP's well.
"It was an extraordinary event, and for several months during the emergency, BP was open to trying out virtually any technology, no matter how novel or exotic, that had any chance of success," Molchanov said. "Quite simply, desperate times call for desperate measures."
Stephen Schork, publisher of the oil industry newsletter the Schork Report, said the oil spill was "one of those situations where your house is on fire and you're not going to ask firemen how much to get to your house."
"You have got to attack and reconcile the bill afterwards," Schork said.
The company's proposed $7.8 billion settlement as a result of the biggest oil spill in U.S. history is still pending, though the company said it has paid a total of $8.3 billion to individual, business and government entity claims in impacted Gulf Coast communities.
During his testimony, Smith said one problem with the centrifuge is that it could initially separate water from oil at the rate of 100 parts per million though EPA regulations require a separation of 15 parts per million.
Smith said that at the time of the spill the device was updated but before he could test it, the EPA reduced its standards to 100 parts per million due to the severity of the spill, the Courthouse News Service reported.
Smith's attorney, Roy Cheatwood, said Contogouris helped devise the plan to ask BP for an advance to test the machines and was prepared to ask BP for $51 million. But he became discouraged after the first centrifuge test run was unsuccessful.
While there is a gag order in the actors' case, Costner told the Hollywood Reporter he would not settle out of court and described the suit as "frivolous" and "upsetting." He is counter-suing.
James Cobb, Baldwin's attorney, did not return a request for comment. Wayne Lee, an attorney for Costner, did not return a request for comment.
ABC News' legal analyst Dan Abrams said Baldwin and his lawyers will have to show there was manipulation, deception and that they were excluded from important meetings with BP.
"I think it's going to help Costner when he talks about how much faith he had in this business from day one -- how much time and effort he put into it," Abrams said. "He was basically trying to market it from the late 90s, 2000 and didn't succeed. It only sort of became a viable business again when [the BP spill] occurred."
Contogouris claims he was approached by "persons representing Costner" in the early 2000s to market the technology and the device to various customers, the court claims, and he agreed to receive a commission on his sales. However, Costner's attempts to market the system "proved unsuccessful" and Costner sold all his rights to Bret Shelton, an individual who lived in Nevada, according to the plaintiffs' filing.
Then on April 20, 2010, the Deepwater Horizon drilling rig under charter to BP exploded and caught fire.
Contogouris claims he attempted to contact Costner and BP to discuss the "possible marketing of technology to BP." Baldwin eventually became involved after he came to New Orleans to discuss a possible movie project.
On May 10, 2010, Costner, Smith, Contogouris, Baldwin and other individuals created the limited liability company, Ocean Therapy Solutions (OTS), and agreed to market the technology with CINC Inc.
However, a "difference in business philosophy developed between the members of OTS," a court filing stated.
Contogouris and one business partner "wanted the company to use a business model that would insure recurring business and a possibility of marketing the device to other major oil companies," in which the units could be rented to BP at a "fair price in a long-term arrangement."
Smith and another partner favored a "quick kill" approach "involving a one-time sale of the equipment to BP at a higher price."
