BP's Gulf of Mexico compensation costs 'jeopardising' the company

 
Oil burning on sea after Gulf disaster Smoke rises from a controlled burning of oil on the sea around the rig site

BP's financial recovery from the disaster of the Deepwater Horizon oil spill in 2010 is being put in jeopardy by the escalating amounts being paid to businesses in the Gulf of Mexico region to compensate them for economic harm.

The UK oil giant complains that the interpretation of rules for assessing "business economic loss" are being systematically abused such that colossal sums are being handed to enterprises that suffered no detriment from the oil spill in the Gulf of Mexico.

According to an appeal document recently filed in the US courts by BP against the legally agreed settlement procedure, the company has "been ordered to pay hundreds of millions of dollars - soon likely to be billions - for fictitious and inflated losses".

BP is so worried by the potential magnitude of alleged undeserved payments it is making to companies that it is planning to ask the British prime minister and chancellor for help in persuading the US government to intervene. It is hopeful that David Cameron will raise the issue at the G8 meeting of the government of the world's richest countries, which the UK is hosting next month.

The court filing warns that BP will be "irreparably harmed" unless the compensation system is reformed fast. According to BP sources, the rate at which cash is leaking from the company could turn into a serious new financial crisis for the company, putting at risk its dividend and making it vulnerable to a takeover by another oil company.

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Lawyers in the affected region are urging any business which can show a fall in cash flow since the oil spill to make a claim”

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In a little-noticed note attached to BP's first-quarter results, published last month, the company warned that the $8.2bn it has set aside to cover compensation payments will be "significantly" too little, even if its appeal against the settlement procedures is successful. And if it loses the appeal, there will be "a further significant increase to the total estimated cost".

BP also warned in its results that this settlement "is uncapped except for economic loss claims related to the Gulf Seafood industry".

The massive compensation payments stem from the comprehensive settlement agreement BP reached with damaged entities and people in April 2012, whose point was to compensate them for profits lost as a consequence of the spill. The US courts granted final approval to this settlement on 21 December last year.

Licence to claim

Under the agreement, claimants could ask for "loss of income, earnings or profits suffered" as a result of the Deepwater Horizon disaster.

What has become of deep concern to BP is the way that this loss of income or profits is calculated by businesses and approved by a court-appointed Claims Administrator.

In practice, according to BP, companies don't have to show a fall in profits as measured on normal accounting practices. All they have to show, says the court filing, is that cash flow in a specified month or months is lower than cash flow in the same month or months before the oil spill.

The fundamental flaw, according to BP, is that neither the claimants or the Claims Administrator are under an obligation to match costs in a particular period with the revenues that they generate. So that if there is a timing difference between a company incurring expenses and subsequently receiving associated income, the claimant can ask for recompense based merely on presentation of the expenses as a notional loss.

Protesters against BP outside a Texas court Critics of BP say the company ruined lives and livelihoods

This is in effect a licence, according to BP, for businesses to claim vast amounts of money to which they are not entitled. And what's worse, according to BP, this practice of detaching revenues and losses was formalised by a court ruling earlier this year.

One consequence is that lawyers in the affected region of Louisiana and adjacent states are urging any business which can show a fall in cash flow since the oil spill to make a claim. BP claims that "plaintiffs lawyers across the Gulf region are now openly advertising that the settlement is a way for claimants to collect payouts even if they have no losses at all".

'Travesty'

BP gives many examples of businesses which have received huge compensation payments when they have suffered no harm from the oil spill. Here are some choice ones:

1) "The Claims Administrator awarded more than $3m in base compensation to a rice farmer based on a 'simple one month delay in the receipt of 91% of the claimant's revenues,' because the bulk of the claimant's 2009 revenue was recorded in November while the bulk of its 2010 revenues was recorded in December".

2) "A construction company located in Zone D - the farthest area from the spill - was awarded $4.8m by the Claims Administrator despite 'negative revenue and other obvious revenue mis-statements' and even after the claimant had admitted its monthly records 'over-stated benchmark year profits by over $1m".

3) "An advertising firm was awarded almost $3m as a result of a $2.1m bulk purchase of advertising time in August 2010. Because this advertising purchase was not matched with the revenue to which it corresponded… the firm appeared to have an artificial monthly loss in August, followed by artificially high profits when the advertising time was used".

4) "$3.3m [was awarded] to a law office in central Louisiana, even though its profit in the year of the spill exceeded its benchmark profits by 10%".

BP says that the way its settlement is being implemented by the Courts Administrator, with the support of the Louisiana district court, is "poised to become a black mark on the American justice system", when it could have become a positive landmark because of "its ambitious size, its innovative nature and the speed with which it was negotiated to compensate injured parties".

It continues: "If this travesty is allowed to continue, BP will be irreparably harmed and future defendants will be reluctant to settle because they cannot be confident that settlement agreements will be construed textually and fairly".

 
Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this
    0

    Comment number 32.

    alchemy,something for nothing,gold from base metal.that's why we are in this mess.don't work,buy houses & be a landlord.want that new car?remortgage your house.short on income?treat the equity in your house as another salary.back bumper tapped at the lights?claim whiplash.we,as a nation,do exactly the same.if we had another torrey canyon tomorrow,do you think we would do the same?of course

  • rate this
    +23

    Comment number 31.

    I have little sympathy for BP and for once it looks like they may learn a lesson. No doubt if it had happened in UK waters they'd be walking away leaving tax payers to foot the bill with the full support of the government.

    However there is definite hypocrisy on the part of the US here. Bhopal anyone? Union Carbide? But as a foreign company they're being used to subsidise the gulf coast economy.

  • rate this
    -1

    Comment number 30.

    Lets be honest, if its not the banks playing casino and doing dodgy deals at our expense and taking huge bonus for failure, its huge corporates not paying the correct tax & getting huge subsidy at the same time and then (following banks) investigated for rate fixing ... WHY ???? because politicians allow it and dont/wont change the law. THEY ARE TO BLAME AND YOU VOTED THEM IN !!

  • rate this
    0

    Comment number 29.

    Why ask the UK government for help? Let''s not forget 'Beyond Petroleum' are to all intents and purposes a US company.

  • rate this
    +8

    Comment number 28.

    BP have been running away from their British routes for years - the marketing boys even coined "Beyond Petroleum" for a while.

    Now they are in deep **** they want the British PM to help them out of a legal mess they & their lawyers put themselves in.

    Sorry boys, clean up your own mess.

  • rate this
    +24

    Comment number 27.

    @18.Knut Largerson
    The American Dream.

    Find someone rich then Sue them.

    ---

    Should read

    Find someone rich and foreign then sue them.

  • rate this
    -1

    Comment number 26.

    Who cares? No doubt they'll get a sympathetic hearing.....Unlike the majority of us great unwashed.

  • rate this
    +3

    Comment number 25.

    Wasn' this the multinational company that tried so hard to distance itself from its British roots? They even got an American CEO in this time! Of course Cameron will pander to them, it is big business afterall.

  • rate this
    +2

    Comment number 24.

    Let's be serious!! 5bn pounds is no compensation for such a disaster. It's an insult! Several offshore rigs in the world operate in poor maintenance conditions because nobody ever wants to stop the plants. As harsh as it may sound, the survival of BP as a company is no priority right now. Real priority is sending a clear message that from now on no one shall get away with crimes like this.

  • rate this
    +8

    Comment number 23.

    If it wasn't for this I would take BP's claim seriously...

    "Oil giants including BP and Shell are facing claims they have been fixing prices for more than a decade."

    They want us to bail them out so they can continue to rip us off?

    Get real!

  • rate this
    +6

    Comment number 22.

    The answer is obvious: stop writing the damn checks and let them litigate if they feel they have a valid claim.

  • rate this
    +7

    Comment number 21.

    How is it that society itself never wants to take its share of the blame, but always wants more than its share of the compensation?

  • rate this
    0

    Comment number 20.

    BP is not British and surely capitalism means that if BP goes, another company grows - Why would Cameron intervene?

    As for pensions, can't fund managers change where they put their investments?

  • rate this
    +3

    Comment number 19.

    The danger here is that the US courts will continue to rip chunks out of BP to such a state that it is then easy pickings for ExxonMobil or Chevron to buy it. Boom - the US has then quite openly reduced the value of the company taken ownership & with it a huge stake in the major oil fields around the world. Who has the power then, certainly not the UK, alongside walking out EU. Smart.

  • rate this
    +49

    Comment number 18.

    The American Dream.

    Find someone rich then Sue them.

  • rate this
    +7

    Comment number 17.

    "putting at risk its dividend & making it vulnerable to a takeover"

    This could be one motive another being to wring every last drop out of a foreign company. I bet the American company's who were involved with the disaster don't get such a rough ride over compensation despite their culpability.
    Still perhaps BP can use some of the profit from fuel price rigging in Britain to pay the claims.

  • rate this
    +19

    Comment number 16.

    It is about time the real culprits, that is Transocean and Halliburton were made to pay. As anyone working in the North Sea knows a company REP has very little power over the day to day management of a drilling rig crew. And when a mud logger does not log the mud? Time this US economic warfare was recognized for what it is!

  • rate this
    +1

    Comment number 15.

    Surely they can recoup most of the costs as it wasn't them that built the actual dodgy well cap that gave way?

    Haliburton took that job on.....sue them......unless of course BP specified standards below those required for the job.......

  • rate this
    +33

    Comment number 14.

    I understand the criticism of BP, albeit from my limited knowledge of the case they were not the only culprits.
    Now, lets look at the greed, and dishonesty of the US citizens, lawyers, claimants etc, who by any definition are engaged in theft. Yes this is theft, because someone somewhere (in this case shareholders) is losing.
    Americans..you couldn't make it up.

  • rate this
    +11

    Comment number 13.

    This is a real problem. It's important that BP pay their dues but the way this has been spun in the US is pretty shocking - evil foreign company, let's screw them for all they're worth. Claims just get created out of nowhere with no ability to challenge. I can't help but think that PPI - which has also cost billions - is much the same.

 

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