President Obama says the $20 billion figure is not a cap on BP's potential liability, write ED CROOKSin London and STEPHANIE KIRCHGAESSNERin Washington
BP’s $20 billion political settlement with the US administration could protect it from the most extreme costs of its oil spill in the Gulf of Mexico, but the company is still a long way from knowing the final bill.
As US president Barack Obama made clear this week the $20 billion (€16 billion) figure is not a cap on BP’s potential liability, so individuals and states will still have the right to sue the company.
The funds set up after the September 11th attacks are a model for how the BP-backed fund for the gulf will work. Kenneth Feinberg, a Washington lawyer who ran one of those funds, will administer the gulf fund.
The lesson from those funds, which are still the subject of litigation and new legislation more than eight years later, is that the costs arising from a disaster can be disputed for a very long time.
The bill for BP could end up being considerably greater than $20 billion. The new fund will pay for damages to the fishing and tourist industries, which have revenues of about $30 billion a year in the affected region of the gulf.
On top of that, there is the clean-up, which last week was using 3,600 vessels and 20,000 workers. There are also huge potential costs in civil penalties, which will not be covered by the fund. Under the Clean Water Act, BP can be fined $4,300 for every barrel of oil spilt if it is deemed guilty of “gross negligence”.
With perhaps three million barrels spilt so far, and maybe another two million yet to escape before the leak is stopped, that could mean penalties of about $20 billion. Analysts at Credit Suisse have suggested the total bill could reach $49 billion, but large as those costs are, BP could probably meet them.
The fear for BP has been that the administration could pile on burdens without limit. In particular, it has been alarmed by suggestions it could be forced to pay the wages of rig workers laid off because of the administration’s ban on deep-water drilling and for restoring the gulf shoreline to a better condition than it was in before the spill.
The prospect that BP could be facing a huge up-front commitment of cash and long-term liabilities limited only by the administration’s restraint had alarmed investors, driving up its cost of borrowing.
BP’s bonds and its credit default swaps – the cost of insuring its debt against default – were trading at prices suggesting the company was seen as a much worse risk than its formal credit rating from Moody’s and Standard Poor’s, the rating agencies.
In Wednesday’s deal, BP has secured agreement that the fund for the rig workers’ wages would be just $100 million, a trivial amount in this context.
It has also persuaded the administration to allow it to put cash into the fund over time, rather than stumping up the whole $20 billion up front. It will pay $5 billion in the second half of the year, and a further $1.25 billion a quarter until the $20 billion is reached, giving it 3½ years to pay.
Mr Obama also gave an assurance that it was in the interests of everyone for BP to remain “strong and viable”.
The deal has put BP under severe financial pressure, forcing $10 billion of asset sales and cuts in its capital spending, but that pressure could still grow even worse.
This type of political deal can be challenged in the courts, or by future lawmakers. – Copyright The Financial Times Limited 2010
