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 correspondedā€¦ 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, economics editor Article written by Robert Peston Robert Peston Economics editor

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  • rate this
    +10

    Comment number 92.

    Could it be that Big Oil in the USA see this as a very convenient way of bankrupting a non US competitor? Meanwhile the blood sucking lawyers will rake up every case that they can remotely link to this disaster in the hope of rich rewards. Had it been a US company then this level of compensation demand would not have occurred.

  • rate this
    +4

    Comment number 91.

    Maybe we should counter with mass UK public litigation against USA credit rating agencies who fraudulently sold worthless sub primes as AAA gold plated investments & created the financia/economicl crisis.

    UK has lost around Ā£1.5 TRILLION so far, economic & property prices & also individual personal losses which are still mounting.
    UK government does nothing, take advise from Nike - JUST DO IT

  • Comment number 90.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this
    +6

    Comment number 89.

    BP need to change the way they operate in the US. Never believe the US government especially when some of the companies are owned by US politicians. Charge the Yanks a tax for working in the gulf and show them what it is like to pay $7 a gallon, everyone in the UK props up their corrupt system. It's time we told them the facts instead of complying with their bogus demands.

  • rate this
    +1

    Comment number 88.

    Before people start handing down the normal "occupy movement" BS to BP, it's worth remembering that most pension funds in the UK hold BP stock. If BP goes under a fair smattering of pensions will be hit, then if pensioners run out of money early it will be muggings taxpayer that has to pick up the pieces. We've all got a stake in that "greedy polluter" I'm afraid.

  • rate this
    +1

    Comment number 87.

    oh deary me we cant have that can we? Enormous sums of money going to people who've done nothing to deserve it.

    The banks must be gutted they missed out on this scam.

  • rate this
    +2

    Comment number 86.

    Well if the people in Nigeria were as savvy as the Americans you would not have the huge ecological damage which is being done to their country by the oil companies that being said anyone who has done business in America knows that after shaking hands on a deal it's not only wise to look for your rings but to count your fingers

  • rate this
    +3

    Comment number 85.

    This is the American way. They spot an opportunity to destroy a British company and they will do so with ruthless vengeance. This is why we as a nation end up with no industry because the Americans have disarmed us at every turn. It is time for Cameron to grow a spine and say "Enough is enough to uncle Joe."

  • Comment number 84.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this
    -2

    Comment number 83.

    On the surface this appears to be one of the world's worst polluters and alleged price fixers asking our government to help it to carry on with the aforementioned activities, in the event they may be bought out by bigger polluters and fixers.

  • rate this
    +2

    Comment number 82.

    You don't think Obama is going to do anything to help us do you? He regards us with utter contempt. Mind you, Obama never does anything about anything anyway.

  • rate this
    -3

    Comment number 81.

    It is not in US interests for BP to go bust - 25% of BP's workforce is american

  • rate this
    +2

    Comment number 80.

    Completely agree that BP should pay for errors, but there's a fine line between responsibility and being abused. The other truth that's closer to home is that we as people are by nature greedy. We are quick to point the blame but how many of us, if we were BP execs or those pursuing compensation would be so different? We're quick to judge but the underlying issue is the selfishness of humanity!

  • rate this
    +15

    Comment number 79.

    BP sub contracted out to other companies, who failed to meet the requirements, and are forced to pay the price. BP met every safety and environmental criteria set out by law and hired an experienced company who failed in their responsibilities and were the cause of the spill. BP should be passing everything on to Halliburton. Unfortunately they're American and this was settled in America.

  • rate this
    +18

    Comment number 78.

    It was obvious to anyone who had eyes a couple of years ago that this was the the long awaited opportunity for the US to get its hands on BP, as it covets anything big and successful that it doesn't already own.
    Richard@72 is perfectly correct. Halliburton was never going to be touched-it never is.
    This, sadly, is the real face of hard-nosed American corporate greed.
    'Special relationship'?

  • rate this
    -23

    Comment number 77.

    The people of Louisiana should take BP to the cleaners and sue them for as much as they possibly can. For what BP did, they deserve to go under. God Bless America.

  • rate this
    +21

    Comment number 76.

    Why isn`t BP pursuing the American contractors who were responsible for this mess?

  • rate this
    +9

    Comment number 75.

    I think it is time we significantly altered our diplomatic, security and economic relationship with the US.

    Cameron should grow a pair and side with Russia on Syria, serving as both a message to the US and a bargaining chip on issues such as the disgrace reported on here. How much are Halliburton and Transocean paying?

  • rate this
    +18

    Comment number 74.

    Americans should take a long hard look at themselves and stop being such a pathetic litigious culture. Take some responsibility and stop blaming everybody else. In the UK, we now suffer from this American disease. BP has been reasonably moral in how they have worked through this disaster with all affected. It's not right for parasites to tag along for a quick buck. US courts need to sort this out.

  • rate this
    0

    Comment number 73.

    8.Dolomede


    If you are going to make such claims the least you could do is make a "declaration of interest" and admit your interest in this story is your pension and not any other.....ergo that you are being purely selfish in your interest, ergo somewhat bias.....

 

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