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.

Start Quote

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”

End Quote

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

How Labour pays for student fee cut

Labour would reduce tax relief for those earning £150,000 or more a year, shrink maximum pension pots to £1m and cut maximum annual pension contributions to £30,000 to pay for a cut to £6,000 in student fees.

Read full article

More on This Story

More from Robert

Comments

This entry is now closed for comments

Jump to comments pagination
 
  • rate this
    -11

    Comment number 172.

    Stop whining and Pay up.

    More than likely the amount coughed up by BP will be significantly less than what the US tax payer gives in aid for your tiny island to keep operating.

    The English may have be able to worm out of paying for the destruction and rape of other less important countries, but America is no India or Africa. Uncle Sam ALWAYS gets his guy in the end.

  • rate this
    +5

    Comment number 171.

    It's time for Cameron to show some cojones. British prime ministers act like they want their tummy tickled.

    Obama has a win win. He can buy off the left by crucifying a big oil co. He can mollify the right because the oil co is conveniently foreign. Cameron should deploy some serious leverage and be prepared to get tough...possibly by prosecuting Google or suchlike for egregious tax evasion!

  • rate this
    +7

    Comment number 170.

    The initial reaction from the U.S. was interesting. The company responsible for the cement problem was American. Reaction "Accident. They're doing the best they can to stop the leak" The contractors operating the rig were American. Same reaction. Then it was announced the rig was actually owned by B.P. Reaction "What! Sue those incompetent limeys for everything they've got".

  • rate this
    +1

    Comment number 169.

    This is not good as I own BP shares.

    Still, share price seems to be holding up.

  • rate this
    +1

    Comment number 168.

    167.Pranab
    "... The Americans sure want everything for free."
    =
    Luckily, the UK public aren't like that at all.

  • rate this
    +3

    Comment number 167.

    Not a supporter of big corporations, but this is sure ridiculous. Well who can blame the culture of suing. The Americans sure want everything for free.

  • rate this
    -2

    Comment number 166.

    156.
    sw

    “The US government had been threatening to take them to the cleaners unless they signed.”

    Yes they were under pressure but: -

    The BP board have a duty of care. A multi-billion £ international operation such as theirs should have known better.

    I’d call it gross misconduct – the board must go.

  • rate this
    +1

    Comment number 165.

    164.alan
    Pfft, stay on topic.
    Those companies provide 1000s of jobs world wide, and allow you to enjoy cheap products. The money you save by choosing to use their cheap and superior services, is then spent in other areas of our economy creating more jobs there. Those companies do enough without you wanting your "cut" of the fruits of their labour. Stop being envious, and set up your own business.

  • rate this
    +4

    Comment number 164.

    Whilst BP is hit in this way, many US corporations get away scot free or almost. How about changing the finance law so that Amazon and Goggle and others pay at least some tax. How about disallowing interest on debts caused by leveraged buyouts. How about hitting some US banks for their role in selling worthless junk subprime paper.

  • rate this
    -6

    Comment number 163.

    I hope they stick to their guns, and force this company to pay appropriate restitution to the victims of its negligence.

    The message must be clear and consistent: "if you damage other people's property, you will pay fair restitution to them".

    *Let's hope that law-makers don't cave in to a huge corporate benefactor, again. I'm not holding my breath...

  • rate this
    -3

    Comment number 162.

    Further to my posting No. 106.
    Reactivate the COMMONWEALTH then the UK can tell both the EU and the USA to get lost.

    No need to pay for Computer Operating Systems from the USA (Microsoft / Apple) use LINUX.

  • rate this
    -2

    Comment number 161.

    WHO CARES IF BP GET TAKEN OVER?
    hopefully whoever buys them out will have 100 times more respect for the environment & humanity in general _
    the upside to a buyout_ we don't have to see the word 'British' attached to a multinational company with such an appalling reputation_ a ceaseless litany of human rights and environmental violations EVERYWHERE! >: (

    just 1 example _
    http://bit.ly/10tPxxw

  • rate this
    -2

    Comment number 160.

    if BP was run by engineers rather than spooks and govt place men maybe they might of made right decisions? Their continuous folly is at least consistent and in keeping with their management? BP should be thankful they still in business. its called moral hazard. any thing without moral hazard is not free trade nor free market.

  • rate this
    -1

    Comment number 159.

    @153. Argent Pur. The only way they can be fixing prices is through collusion and that means that it will be more than just BP involved. If its just BP that's called price setting and is what any business does, that is how a Free market economy works.

    "I don't want them fined, I wan't them jailed and proceeds of their crimes clawed back."

    Does that even make sense? Its called a fine!

  • rate this
    +8

    Comment number 158.

    BP can sue its lawyers for badly advising it to sign up to the compensation scheme. The lawyers can then sue their law schools for not teaching them to spot a dodgy agreement when they saw one. The law schools can sue the US government for passing ambulance chasing legislation and the government can sue ........ You really couldn't make it up. Gawd Bless America!!

  • rate this
    -1

    Comment number 157.

    How very, very, topically tropical with Hayward shuffled into Glencore Xstrata's ongoing 'business' adventures as the chairman is coup dis graced. I bet he's fuming.

    You know, they arbitrage oil and it may noy be oil co's that should be investigated

    Meanwhile America's finest sharpens knitting implements, http://www.motherjones.com/mojo/2013/05/elizabeth-warren-obama-put-bad-banks-trial

  • rate this
    +9

    Comment number 156.

    154.UnionRep
    2 Minutes ago
    Well it’s BP that made the compensation agreement
    ///

    It was made under considerable duress. The US government had been threatening to take them to the cleaners unless they signed.
    With friends like these....

  • rate this
    +9

    Comment number 155.

    If I recall Exxon (an American Company) invoked US legislation to limit the damages payable to less than 500million dollars after the Exxon Valdes spill. Whilst BP (a UK company) either did not or were not able to do so. Unless something is done US lawyers will destroy BP, much as they destroyed the light a/c industry. Cameron should stand up for BP for the good all UK companies in the US.

  • rate this
    -3

    Comment number 154.

    Well it’s BP that made the compensation agreement. It’s too late now to start alleging abuse especially when it’s your incompetence in drawing up the documentation with so many holes.

    The entire board of BP should be removed, they’re incompetent.

  • rate this
    -3

    Comment number 153.

    @144.matthueycamo
    @141. Argent Pur. If the Americans take all BP's money Cameron can't fine them can he.

    I don't want them fined, I wan't them jailed and proceeds of their crimes clawed back.

    Fines are always a small % of the illegal profits & usually passed on to the customer. As the illegal profits are also used for political donations don't expect any justice.

 

Page 7 of 15

 

Features

  • Mukesh SinghNo remorse

    Delhi bus rapist says victim shouldn't have fought back


  • Aimen DeanI spied

    The founder member of al-Qaeda who worked for MI6


  • Before and after shotsPerfect body

    Just how reliable are 'before and after' photos?


  • Woman with closed eyeStrange light show

    What do you see when you close your eyes?


  • Sony WalkmanLost ideas

    What has happened to Japan's inventors?


Copyright © 2015 BBC. The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.