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
    +3

    Comment number 212.

    204. DynamicEntrance

    You do little for foreigners general impression of Americans to be ingorant, insular and wholly self interested. Fortunately, I have met many americans who are not and do the country proud.

    Just incase FYI - The Name "British Petroleum" (BP) is a legacy.

    As a % American companies and individuals own the largest share of any nation, far ahead of similar UK interests.

  • rate this
    0

    Comment number 211.

    159. matthueycamo
    @153. Argent Pur...e fixing prices is through collusion

    I am fully aware how collusion works, I was just keeping this topic to BP.

    Free market economy. Not any more, Libor, ISDAfix, Oil etc

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

    Does that even make sense?

    Yes, Jail & confiscate their assets bought with illegal profits.

  • rate this
    +1

    Comment number 210.

    It's interesting to note that in the minutes to a local retailers meeting it was accepted that businesses would go bust before completing the process to get money from United Utilites for loss of profit during works that have over run by a year in the north of England. Whilst in the Good old US of A their claims culture has gone into overdrive. BP are right to ask DC to step in and he should.

  • rate this
    +2

    Comment number 209.

    The Americans always set out to screw foreigners, even as in this case the drill rig was American operated. Ironic really when BP has more US shareholders than British.

  • rate this
    0

    Comment number 208.

    Ref. My posting No. 162.

    Clearly some sheeple are happy being subservient to either the USA or the EU.

  • rate this
    0

    Comment number 207.

    Those affected should be fairly compensated for proven losses. Nothing more, nothing less. If BP is deemed further culpable then it's up to the US courts to apply punitive damages according to the law. BP cannot escape it's legal responsibilities and neither should claimants operate outside the applicable legal framework. If all parties do the right thing, that cannot be wrong.

  • rate this
    +7

    Comment number 206.

    Why doesn’t the UK government wake up and start levying windfall taxes of the USA multinationals that are dodging tax i.e. Microsoft, Google, Amazon, eBay, Starbucks etc.

    See how long it takes for the Yanks to start whining about that.

  • rate this
    +2

    Comment number 205.

    The UK-ers (& BP management) seem not to have realized that the US is not like western Europe. It's more like South America, with plenty of hustling, greedy lawyers & polticians lining their (& their friends') pockets.

    This a country that lets people die because they cannot afford medical treatment, in which immigrant labour is abused (no need to to Bangladesh): simply, it's a risky place.

  • rate this
    -9

    Comment number 204.

    To all these cry-baby Brits in the comments,
    Yeah, you're right; we did do this to ourselves, we gave some slimy foreign company the okay to drill, i accept that and next time an all American company gets such a juicy contract. but you guys need to get your head from wherever it's stuck & realise that this is BP's fault and they've gotta pay for the damages. Grow Up! We're not your colony anymore!

  • rate this
    +1

    Comment number 203.

    172. DynamicEntrance
    .... the US tax payer gives in aid for your tiny island to keep operating.

    The United States gives precisely $0 to this 'tiny island'. If you really think Britain is 'tiny', then think again. The language you speak, the computer your typing from, and the World wide web that lets you do it were ALL MADE IN BRITAIN. As was the United States. One of our worst inventions.

  • rate this
    0

    Comment number 202.

    201 Rich
    The test will come when there is another accident through deep-water drilling in the gulf.
    The standard has now been set with the level of fines levied at BP and even if it is an American company which transgresses next time the same fines should be levied and we should have the right to come onto sites such as this one and say they should pay up and stop moaning.

  • rate this
    -1

    Comment number 201.

    How lame. You play in a market, you accept the rules. BP has lawyers like anyone else. If they have a beef they should fight it in the courts not go crying to Mummy that life is unfair. I would have thought they should also be passing on consequential loss to their suppliers. I do not see BP refusing to use the law to its advantage when it can. Maybe rehearsal for any EU action over fuel pricing.

  • rate this
    +1

    Comment number 200.

    186.DynamicEntrance

    If BP used the same methodology as USA uses to compensate countrys its companys have decimated then USA would get around $2 & maybe thats a bit much.

    Walmart & other USA companys refuse to come upto standard in Bangladesh & elsewhere in Asia & USA wonders why so many around the world see it as the new Old Germany

  • rate this
    0

    Comment number 199.

    Dynamic Entrance,

    No point sniping at the Brits.

    If US companies are gaming the system then unless you happen to be one of them YOU will also lose out (I'm assuming you're a US citizen for some reason). BP pays large federal tax bills and many US pension funds will have a stake in the company.

    We should all just be arguing for a level playing field rather than doing some crude flag waving.

  • rate this
    0

    Comment number 198.

    172. DynamicEntrance
    .... the US tax payer gives in aid for your tiny island to keep operating.

    The United States gives precisely $0 to this 'tiny island'. If you really think Britain is 'tiny', then think again. The language you speak, the computer your typing from, and the World wide web that lets you do it were ALL MADE IN BRITAIN. As was the United States. One of our worst inventions.

  • rate this
    0

    Comment number 197.

    Goldman Sachs are releasing their study on the matter, culled from their trading experience during a century. Register early for your copy of 'The Pursuit of Happiness ~ An insight to wealth creation and its flaws'.

  • rate this
    -2

    Comment number 196.

    186.DynamicEntrance
    18 Minutes ago
    @183

    A con? BP tried to ruin America first and now you chumps are upset because we're hitting "too hard?" Get real.

    ++
    Ur avin a larf, yanks ruined america & continueing to do so, fracking every bit of land they can & never mind the consequences.

    Fraking is doing MORE damage to USA than 10 BP oil spills, you WILL find out in years to come

  • rate this
    +2

    Comment number 195.

    It should not matter whether a company is large or small when it comes to deciding what is, or is not, fair treatment. Judging by some of the claims that have been paid to date, BP is not being treated fairly. Whether people like BP or not, we are all supposed to be equal in the sight of the law.

  • rate this
    -1

    Comment number 194.

    Dynamic Entrance. You wanted cheap oil. You reap what you sew so dont expect to be compensated or seen as some hero for wanting BP's blood. The US is one of the worlds largest if not the largest polluter of the environment so please give the nationalist crowing a rest. You did this to your selves by being cheap skates, deal with it your selves.

  • rate this
    +1

    Comment number 193.

    191.trumpet
    100% agree.

    There should be no special treatment for any business, regardless of its size. We're all equal or we're not, there is no in-between.

 

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