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
    +44

    Comment number 72.

    Deepwater Horizon owned by Transocean (Swiss based/US owned) leased to BP through Triton Asset (Swiss) & operated by Halliburton & Anardarko (both US). At the time of the disaster there were just 7 BP staff onboard, the rest being from H&A. And yet, BP has to pay for all the damages. Halliburton in got away with it (it did the cement), just because it is US and Dick Cheney used to be the CEO.

  • rate this
    +23

    Comment number 71.

    68.
    BP's mistake was trying to "do the right thing" in the aftermath of the spill.

    ---

    I believe you are right there. Let's ignore their mistakes and misdeeds for now. Their immediate response was to do absolutely everything and spare no expense in stopping it, agreeing to compensate beyond the maximum by law.

    Now they are being punished for doing the right thing. Not a good example for others.

  • rate this
    +6

    Comment number 70.

    Problem with US is too many parasitic ambulance lawyers, chasing a fast buck. We were in danger of going the same way under previous 'compensation culture' encouraged by Tony Blair.
    The BP liability is uncapped & eventually the company could run out of cash - chapter 11 looming?

  • rate this
    +3

    Comment number 69.

    What about the American companies BP hired to do the work and were the ones at fault. This is bashing an overseas company. i like Americans but this is becoming very common these days - just look at how they hit banks etc

  • rate this
    +6

    Comment number 68.

    BP's mistake was trying to "do the right thing" in the aftermath of the spill.

    They have massively underestimated a) the way that the unscrupulous within the American legal system would attempt to screw them and b) the extent to which the court system would support those attempts.

  • rate this
    -1

    Comment number 67.

    BP have concentrated more on hiding the oil spill than actually properly cleaning it up. I'm sure the compensation claims will get bigger once more health problem occur due to the use of a highly toxic dispersant called Corexit. Another corporation that maximize profits before anything else instead of taking responsibility for there actions. Just wish the US govt took the same line with US firms.

  • rate this
    0

    Comment number 66.

    If BP think they have a case against certain firms then take them to court it is the only way they can ever solve this conundrum.

    They were hoping to actually save money, and its unfortunately come back to bite them...
    Its a fact that the world we live in has come down to no who is right or wrong its who has the best lawyer.

  • rate this
    0

    Comment number 65.

    62.Socrates Smith

    Also, after Piper, the UK looked at how it had failed to regulate and the environment it had set for the industry to operate in. The results were major changes and a significantly different approach to safety. We've seen none of that from the US.

    As for Occidental, did they even contribute to the memorial to those who lost their lives?

  • rate this
    -1

    Comment number 64.

    Its unbelievable that BP is asking for help. Insurance cover is easily available in the case of explosions to cover costs and ensuing liability payments (other than fines and penalties), but BP chose to save money and not buy it. The insurer would have helped BP formulate terms of compensation. Poor business choices should not require taxpayers funds nor government assistance....

  • rate this
    +1

    Comment number 63.

    The cheats are all fighting to cheat each other to make themselves richer... Has all just and fair behaviour been abandoned?

  • rate this
    +35

    Comment number 62.

    How short are our memories? In 1988 when the North Sea Piper Alpha platform blew up and killed 167 workers the American operator Occidental largely got away with it. The 1.4 Billion Dollar costs where mostly covered by Lloyds of London. Occidental were not hounded out of business and remain very profitable to this day. BP instead are being wound down. So much for the special relationship.

  • rate this
    0

    Comment number 61.

    Close down all US based operations and sack all US employees.

  • rate this
    -1

    Comment number 60.

    It's obviously cheaper for BP to buy British politicians than adequate insurance coverage or safety systems. Yet another corporate stitch-up enabled by our self-serving political class.

  • rate this
    -1

    Comment number 59.

    I have little sympathy for the mega companies that have been fleecing us for years. In fact my only sympathy is for the regular employees tyring to pay the bills.

    As for bogus and inflated claims; could we expect any less from the inventors of the compensation culture? I bet some of them thought xmas had come early.

  • rate this
    +1

    Comment number 58.

    There's a word that comes to mind...Karma.
    BP have exploited thousands of companies, business` and the average person trying to make ends meet. The only reason BP have "enjoyed" the profits they have over the last decade or so is through manipulating the system. Karma always finds a way, enjoy BP.

  • rate this
    +8

    Comment number 57.

    Just split BP into BP US and BP International If the Yanks get too greedy and send BP US bust they get nothing, rather like killing the goose that laid the golden egg.

  • rate this
    +1

    Comment number 56.

    Do you think Mr Cameron would intervene in this honestly...it might be putting more into the UK Pension pot than any other Company but can you seriously see our Government upset the USA....not likely, did we ask for £1300 for every man, woman and child from the USA when they started handing Sub Prime Mortgages to the unemployed, they do what they want, when they want....just get used to it

  • rate this
    +21

    Comment number 55.

    The reality of our society is that most people's pensions have a large amount of investment in BP (it was c5% of the FTSE 100). It is not just a faceless company that would be hit, but millions of individuals. Cameron does not have a responsibility to get BP off the hook, but he should make sure it is treated the same as a US firm.

  • rate this
    +1

    Comment number 54.

    BP does seem to have missed a trick in not ringfencing the liabilities, though it may not have been allowed to do this politically..?

    I'm waiting for the unsolicited text messages "Claim now, You may be owed millions if you were vaguely aware of the BP oil spill in the Gulf of Mexico"

  • rate this
    +10

    Comment number 53.

    Ex BP Chairmen John Ridgeway lost his job stating in an answer to 'what do you think is to blame for this accident'? His reply was "American Men, American Materials and American Safety Systems"

 

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