The agreement comes on top of the $43.8 billion that BP has already set aside for criminal and civil penalties and cleanup costs.
BP shares jumped more than 5 percent in New York trading as investors said the British company, often mentioned as a potential acquisition target, could now turn the page on one of the darkest chapters in its century-long history.
Under the agreement with the U.S. Department of Justice and the states, BP will pay at least $12.8 billion for Clean Water Act fines and natural resource damages, plus $4.9 billion to states. The payouts will be staggered over as many as 18 years. The preliminary settlement, subject to all sorts of variables, avoids a substantial amount of further litigation.
The rig explosion on April 20, 2010, the worst offshore oil disaster in U.S. history, killed 11 workers and spewed millions of barrels of oil onto the shorelines of several states for nearly three months.
The agreement, which still needs to be approved by courts, covers Clean Water Act fines and natural resources damages, along with claims by Alabama, Florida, Louisiana, Mississippi and Texas as well as 400 local government entities.
"This is a realistic outcome which provides clarity and certainty for all parties," BP Chief Executive Officer Bob Dudley said in a statement. "For BP, this agreement will resolve the largest liabilities remaining from the tragic accident."
The size of the settlement was slightly more than the $17.6 billion that investors had initially feared BP would be fined for gross negligence under the Clean Water Act alone.
U.S. District Court Judge Carl Barbier, who has overseen the case, was expected to rule on that issue later this year. Even then, BP would have faced years of lawsuits to address claims by states and by the federal government under a natural resource damage assessment.
The settlement announced Thursday closes off those remaining liabilities.
"This agreement will not only restore the damage inflicted on our coastal resources by the Deepwater Horizon oil spill, it will also allow Louisiana to continue aggressively fighting coastal erosion," said Governor Bobby Jindal of Louisiana, the hardest hit state.
It was not immediately clear how BP will fund the settlement. BP has shed billions in assets to pay for the spill, eroding about one-fifth of the earnings base it had before 2010.
BP's smaller size among the bigger oil majors has made it vulnerable to potential takeovers, especially with the sharp drop in oil prices.
"Companies have been slightly hesitant to make a bid while this has been hanging over it, so I think it does clear the way for a potential bid," said Joe Rundle, head of trading at U.K.-based ETX Capital.
BP said the government and the states could jointly demand an acceleration of payments if the company were acquired.
Previous settlements also included an uncapped fund originally set at $7.8 billion to compensate individuals claiming economic harm from the spill.
BP also settled with Transocean Ltd, which owned the Deepwater Horizon drilling rig, and Halliburton Co, which worked on the Macondo well.
"Now Gulf Coast restoration can begin in earnest. It's time to heal the wounds that BP tore in Gulf Coast ecosystems and communities," said David Yarnold, CEO of the National Audubon Society.
