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On BP: “Very Difficult, If Not Impossible” to Firewall US Businesses

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FT Alphaville has a very useful chart and related discussion based on Citigroup research, on the question of whether BP could segregate its operations as a precursor to some sort of “good company/bad company” restructuring. Such a move would no doubt be presented as a way to remove the cloud of uncertainty over BP, but the real motivation would presumably be to limit payout on claims related to its Gulf oil spill to assets in the US. (This is not an uncommon issue in litigation, BTW: the wronged party’s dealing are typically with a specific subsidiary. If that subsidiary does not have much in the way of cash in the till or assets, the plaintiff will need to establish that other entities in the corporate family with some ability are also liable).

Below is Citigroup’s chart of BP’s major legal entities, with the ones holding US assets in red (click to enlarge):

Now the wee problem here is that those red boxes also hold a lot of non US assets too. From the Citigroup report:

Based on discussions with our fixed income group and analysis of the various subsidiaries it appears that BP would likely struggle to ring fence the North American operations, given asset ownership and credit guarantees. In the absence of rejigging asset domicile many non-US assets could also be stranded in the US if the company attempted to ‘pull up the draw bridge’.

BP America Production Company appears to be the primary subsidiary involved in oil and gas production and transportation operations in the continental US, Gulf of Mexico and also other parts of the world. This entity also frequently signs and pays for leases in the onshore US based on US state production filings. The credit rating on this subsidiary appears to be tied to the parent BP PLC, which suggests the parent is a guarantor for BP America.

The US subsidiaries also appear to be the domicile for many of BP’s international assets in, for example, Latin America, Trinidad and Tobago and Angola. BP Energy Company, Amoco International Petroleum Company, BP Exploration & Production and Amoco Caspian Sea Petroleum Company are major subsidiaries within BP America that we estimate hold not only much of the US production base but other international operations including much of BP’s assets in South America.

Yves here. This is of course favorable to US parties seeking restitution against BP, not at all hot for its shareholders. I’m a little surprised to see this much mingling of projects. The few corporate general counsels I know are pretty attentive to trying to structure legal vehicles so as to limit exposures, but the business requirements of oil and gas exploration and development may make that difficult (but if not, it would serve as yet another illustration of how inattentive BP is to risk).

Now some readers have cheerily maintained that with $20 billion a year in income, the losses from the Gulf disaster will dent but not derail the company. I’m not certain how anyone can make that determination now. This spill is so far outside historical precedent as to make simple comparisons potentially misleading.

First, BP is being called on to segregate cash and the Administration is pushing for procedures to streamline payouts to those who have suffered losses. By contrast, in past oil spills, payments were not made until adjudication has run its course.

Second, BP is at risk of losing its US oil and gas leases and US government contracts. That would impair cash flow.

Third, there has been no mega oil spill in an area that is ecologically sensitive, has a very large tourist industry, a sizeable fishing industry, and high end residential property. I’m not sure anyone has a good bottoms up estimate of what the claims might total.

Fourth, most analysts are looking to the BP forecast that the leak is plugged by August. The Ixtoc leak, in much shallower water and also needed to use relief wells, took ten months to halt.

Fifth, it isn’t at all clear that the current 20,000 to 40,000 barrels a day estimate is correct. Rolling Stone, in a very well researched article, reported that the median of estimates among scientists was 55,000 barrels.

Sixth, in the past, oil companies could rely on courts to reduce damage claims, often by large amounts. And even though courts have become more and more conservative by design (read up on the law and economics movement if you doubt me), this is a very heated issue. The Supreme Court tends to be political, and any judge who is elected will also have to think twice in getting creative in his interpretation of the law so as to favor BP.

Having said all that, Obama has consistently taken a tough-sounding posture and then quietly dealt big companies a very favorable deal. So history would suggest that BP is indeed in no serious danger. However, this spill is so visible, and cynicism and anger are so high that his team may recognize that he risks not just his re-election, but the historical treatment of presidency if he does not extract reasonably full restitution for damages from BP. And as we indicated above, the tab could prove to be extremely large.

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42 comments

  1. Alan Moore

    Can someone with some understanding of the legal issues explain how BP faces liability for some of the economic losses that are being bandied around? It’s been a few years since i studied law now, and that was in the UK.

    My recollection of negligence, which i believe would be the relevant tort here, restricted pure economic losses to rather narrow circumstances that claimants would struggle to meet here, as they need to be limited to a specific, limited class. Other claimants would only able to claim if they were physically affected by the oil.

    In other words, someone who owns a beach that gets oil on it could easily sue BP for the oil, but someone who fishes in the (communal) ocean couldn’t claim for their inability to fish there.

    Is US law different in this respect?

    1. Roger Bigod

      It’s common law, unless there’s a controlling statute like the liability limit. That means it’s whatever a judge and jury think could “reasonably be foreseen” as damages from negligent behavior. IIRC, the Exxon Valdez suit included fisheries. Tourism is a bigger economic factor in the Gulf.

      But the details get complicated fast. Tort law tries to get things settled and finished as fast as possible. But nobody knows how many years a given fishery will be ruined for. And there are secondary suppliers of boats, fishing gear, etc. There’s no way to do the accounting accurately even under an administrative law scheme. Throw in litigation at multiple steps and it’s hopeless.

      The whole thing will get amalgamated into a few class action suits, like asbestos and tobacco. There will be huge administrative overhead for the legal system, but it’s probably the best we can do in the real world.

      1. Darryl

        US Law is different if you have money. Specially if it is OIL money. Clearly, there is probable cause to issue some arrest warrants, starting with Tony Hayward.

        If this where something caused by some otherwise inconsequential small company, the owner would have been interrogated by a local police officer who would have found sufficient evidence to arrest him and be held without bail awaiting for trial. Instead, Mr. Hayward gets to answer questions from a comfortable chair at Congress in a most elusive and arrogant style.

        This is an insult to the American people. It is clear that once again our Government has failed to protect its citizens against all threats. Justice is not driven by a desire to protect our citizens. It is driven by greed and political gain without appealing to our basic fears and squandering every dime of taxpayer’s money even if it has to be borrowed. The same applies to our military.

  2. alex

    “the wronged party’s dealing are typically with a specific subsidiary. If that subsidiary does not have much in the way of cash in the till or assets, the plaintiff will need to establish that other entities in the corporate family with some ability are also liable”

    That’s no secret to me, but it is such a scam. Limited liability of corporations is one thing, but (potentially) limiting the liability to a specific subsidiary is ridiculous. On the stock market BP is one company, and should be so for liability purposes.

  3. anonymous

    Thanks Yves. I’ll ask again: Who goes to jail if the anti-British Petroleum posturing drives share prices so low that the restructured entity can’t pay for the clean-up?

    And while we’re on the topic of blaming BRITISH petroleum, how do you think sinking the share value of BP while is going to play among America’s rapidly dwindling number of friends?

    Karzai is hedging his bets, in large part because he can read the BP, Israel, Japan writing on the wall. Britain, Israel, and Japan are three of America’s closest allies and this administration has demonstrated repeatedly a willingness that borders on zeal, to throw old friends over the side.

    How do you think that makes those America will be courting this year and next to pull American irons out of the fire feel?

    BP was a regulatory failure driven by the greed of all concerned with consumers of fossil fuels right at the top of the list, by which I mean the gas-guzzling electorate.

    Endless war in Afghanistan and regulatory failures of 9/11 proportion all across the domestic front.

    Heck of a job, us.

    1. Yves Smith Post author

      You have just stuck your foot in mouth and chewed in public.

      The share price has nothing to do with BP’s ability to pay damages. That depends on cash flow generation and (if worst case scenarios pan out) sale of assets.

      The stock market price is relevant to corporate operations only if one is selling shares to fund investments. For most companies, that is a rare event. Far and away the biggest source of funds for internal investment is free cash flow, second is debt.

      No investor would buy shares in a company to help fund its huge legal damages. The more likely endgame for BP (assuming we are talkin’ endgame) is sale of assets to other majors to raise funds. The share price is completely irrelevant to the satisfaction of claims against BP.

      Honestly, you sound like a BP shareholder, and your level of understanding of corporate finance says you should only buy index funds.

      1. Peter

        Isn’t the person you replied to wrong only in that he mentions share price rather than CDS.

        If we rephrase that as who “goes to jail if BP’s CDS are open shorted so much that it is impossible for them to borrow money at a non-loan shark rate” even though they are hugely asset rich then might that not be a relevant question?

        “Now some readers have cheerily maintained that with $20 billion a year in income, the losses from the Gulf disaster will dent but not derail the company. I’m not certain how anyone can make that determination now”
        I don’t understand how this follows on from the analysis of the corporate structure.

        The corporate structure makes it look like BP can’t ‘cut loose’ it’s US operations. But it’s ability to generate $10B a year (what it has up to now paid in dividends) is only affected by what you mention afterwards… if indeed Obama were to confiscate assets, institute onerous time scales on posting collateral and so forth…

        “However, this spill is so visible, and cynicism and anger are so high that his team may recognize that he risks not just his re-election, but the historical treatment of presidency if he does not extract reasonably full restitution for damages from BP.”

        Well it will be a supine Britain if for the ‘sake of his presidency’ he does a ‘Chrysler’ and tears up the rule-book and there is no anger voiced from across the Atlantic.

        Tricky though. What I would really like to see is instead of all this talk of ‘ecological disaster’ some quantitative facts to support that.

        Looking at http://ht.ly/1YadW and checking ‘Shoreline Cleanup Assessment Technique (SCAT)’ I see an awful lot of ‘blue lines’ meaning ‘No Oil Observed’. So surely sun bathing on the beach really hasn’t been affected that much?

        Meanwhile does anyone know exactly how long the ‘fishery closure’ is likely to continue? Surely if they skim off the oil; and it generally dissipates we’re looking at what 6, 12, 24 months of no-fishing maximum?

        I’m open to being proven wrong but I’d like to see what generally have been a scant number of facts as to the precise nature of the ‘ecological disaster’ (e.g. what percentage of fish have likely been killed?) .

        1. Yves Smith Post author

          Read this, then we might be able to have a useful discussion.

          http://www.theoildrum.com/node/6593#comment-648967

          And no creditor will fund borrowings (except at a catastrophic price) to fund payments of large legal liabilities. Your argument is intellectually bankrupt. If BP suffers massive losses, no sensible creditor will fund that except at a penalty rate. You supporting the same faulty logic as the anon above. The CDS and stock aren’t trading down due to bad press, they are trading down correctly due to a bad fact set.

          1. Timmy

            well, I was wondering what oil asset/portofolio they have, in case they lost major court/political battle in the US. It seems they are spread out pretty wide. (amazingly so.) They are filthy rich.

            They are truly global leech and seems to be in all the right “troubled” places. I’d say let’s fuck ‘em. I can’t imagine what they do to angola or nigeria with their track record.

            http://www.thestreet.com/story/10779956/9/bps-global-assets-to-sell-or-not-to-sell.html

          2. Peter

            Cash flow
            “BP’s liquidity position as at the last investor conference call (4 June 2010) was USD5bn of available cash across the group, USD5.25bn of undrawn committed bank lines, and USD5.25bn of committed stand-by bank lines. Using Fitch’s forecasts, the group’s free cash flow before dividends for 2010 is USD6bn”

            Assets
            “Our asset base is strong and valuable, with more than 18bn barrels of proved reserves and 63bn barrels of resources as at the end of 2009″ source: bp.com
            So that would be circa $150B in assets.

          3. Yves Smith Post author

            Peter,

            Your tally leaves a lot to be desired.

            Proven reserves most assuredly do not equal that figure times the current price of oil. You still have the expense of lifting the oil, and a major NPV factor, since the reserves are not nor could they ever be all pulled out of the ground in one year (ex catastrophically damaging the resource). The average reserves to production ratio was 11.3 in 2007.

            The “resources” number is very soft, those “resources” have not even been developed yet. And you seem to forget that the US may cancel all BP drilling leases and contracts here, which would likely substantially reduce those figures.

            And just about no company draws down all its lines of credit. That is a “I’m about to fail” move. Bear did not, AIG did, knowing it was on the verge of collapse.

          4. Peter

            1) I never suggested the reserves should be extracted in a year… I stated BP’s assets to show their financial strength. If they had to put up money suddenly those are assets against which creditors could have confidence in lending to them.
            2) The $150B was deliberately a very round number. On the flip side to your argument of costs reducing the number is new finds and exploratory work increasing the number.

            There are risks either way .. but when you look at the absolutely maximum likely compensation BP would have to pay* VS the assets BP has and its cash flow position I’d favour BP getting through it.

            3) Finally rumour has it a number of large banks also think BP will get through it and are lining up to extend BP’s credit lines if it needs an even larger amount of up front payment (say for the escrow) all of a sudden. http://blogs.news.sky.com/kleinman/Post:f3398d7f-d185-4a62-a883-bc0a9e7d5f6f#commentContainer

            When it comes to sooth-saying I think we’ll just have to agree to disagree as to what may be…. A positive scenario could be 90% cap and a quick kill August 1 with the relief wells. A negative one could indeed be the spill gets faster, goes on until X, hurricanes hit (although I’ve heard arguments this would help break up the oil in a good way) and so on….

            I’m taking a wager on the bright-side given that the media tends to focus on the negative side.

            In the coming months we’ll have a clearer idea on the total compensation costs; and in the coming years both sides will come much closer to reconciliation.

            At the end of the day something we agree on I’m sure is that the US and probably all of us in general need to shift to renewables. And this accident has been a terrific wake up call to push people towards that.

      2. anonymous

        Gee, I guess we can forget about the “there’s no such thing as a stupid question”, part. No worries. I should have been clearer and thanks for the brutal reply.

        I suppose my point is that we are all BP shareholders in the larger sense. I get the sense, wrongly perhaps, that you’d like to see BP stripped of its assets. Is that correct?

        I’m for regulating companies and against destroying value. I’d like to see BP retain its share value and pay its debt.

        Is that so terribly wrong? What’s to be gained from screwing the shareholders? Is this one of those ‘time to teach you all a lesson moments, cause the lesson I’m seeing is one of regulatory failure dressed up as corporate malfeasance.

        Regulatory agencies, I thought, existed to protect the public from bad/unsafe practices. They gave the DWH the 2009 safety award.

        Thanks for the concise answer. Naked Capitalism is listed as a ‘lefty blog’, by some folks. Is that how you see yourself?

        1. Yves Smith Post author

          In addition to your incorrect corporate finance argument in your original comment, you also provided some straw men, as you in this one as well. To wit:

          In original comment, the “BRITISH” Petroleum comment, which is not a usage in this or any of my posts on BP. Trying to make a connection to Karzai is simply bizarre (the US by all accounts made a monstrous mistake in not cutting him loose, but you use him as an example of the dangers of insufficient loyalty? Huh?). Israel has hardly been a loyal ally of late; it’s been completely intransigent and ungrateful. And I have no idea what you are insinuating re Japan, but it’s off base.

          So your first remark demonstrated considerable aggression combined with a lack of understanding of corporate finance and distorted and dubious analogies from geopolitics.

          Your question was not a serious question, it was merely the set-up to a diatrib, but you nevertheless used it as the set up for a second aggressive comment.

          And you ignored my reply, which is in essence that this is a matter of solvency. If BP’s liabilities exceed its assets, no one will fund it. It’s bankrupt. Now someone might come in once debts are restructured, but that’s after a resolution process has started. So the argument about share price and CDS is spurious. BP will either be able to satisfy its creditors through its cash flow and asset sales or not. This is bimodal. If its cash flow and assets are adequate to satisfy its obligations, it might choose to borrow against them, but its ability to borrow is a function of its liabilities v. its assets. This isn’t a matter of “loose lips sink ships” as you want to position this issue.

          And if the liabilities are greater than the assets, the company is bankrupt and should be resolved. You (in another peculiar distortion of which you seem fond) want to depict that as “lefty” and evidently suspect. Sorry, that’s capitalism. By contrast, you seem to be arguing for welfare for the rich.

          We most certainly are NOT all BP shareholders. That is a bizarre construction. Equity is a residual claim. It is what is left after liabilities have been satisfied. Right now, BP is facing a lot of legitimate claims, and the dollar amount will keep rising until the well is sealed. The equity may have no value. You seem to reject that as asset stripping. No, that’s business 101.

          1. anonymous

            Actually, I didn’t ignore your comment, I simply elected to accept it.

            If stripping BP of its US oil and gas leases isn’t stripping BP of its assets, I really don’t understand how BP makes money. And as far as diatribes go your reply is longer and more of a lecture directed at moi than my queries of you.

            You do seem keen to see BP lose its US oil and natural gas leases. I’ll cheerfully accept I’ve misunderstood you, if that’s the case.

            The reason I asked about the ‘lefty blog’ business is because Naked Capitalism is considered a lefty blog by at least one right-wing site I visited. I was frankly a little surprised to see Naked Capitalism on the list.

            I’ve followed your work for several years and consider you a bona fide authority. I stand by claim that the general level of discourse ‘bashing BP, alienating allies, and fiddling while the US sinks deeper into the quicksand is all part of the same problem’, but your welcome to take exception to that stance.

            I wouldn’t dream of positioning myself as any kind of authority on finance. A bit of history, yes. But not finance.

            There’s a pervasive ‘no we can’t philosophy’ that’s taken root in America ever since Yes, we can won the election.

            I used to think Republicans were the problem. No longer.

            If they’d spent the money and cleaned-up the regulatory process, I could forgive even the unforgivable unemployment rate. But there I go again.

            Thanks for the reply and the schooling. Haven’t read your post on the double-dip yet but I’ll bet it’s good. Glad I caught you in a good mood. Cheers.

  4. Timmy

    The high politics part of this drama is about to begin. What better than giving little boost to opposition party. Palin ‘drill baby drill’ is going to be an asset, specially with her connection to the tea party crazy.

    UK, can certainly play the afghanistan/NATO angle too. (That pretty much end all arguments, imo.)

    Sarah Palin Hopes to Create “Special Relationship” with Margaret Thatcher

    Speculation started about such a meeting after Britain’s Daily Mail reported that Palin’s representatives had requested a meeting with Thatcher, and that she accepted.

    “We had an informal approach asking if Lady Thatcher would meet Mrs Palin if she comes to Britain and we said yes,” a spokesman for Thatcher told the newspaper.

    Palin wrote that she received an invitation to visit London, which included an offer of arranging the meeting. She did not say from whom she received the invitation.

    http://www.cbsnews.com/8301-503544_162-20007680-503544.html

    1. K Ackermann

      I don’t believe Thatcher is in any shape to be doing publicity stunts for Palin.

      Unless, of course, Palin is looking to appear smarter than someone else. Thatcher, having completely lost her short term memory, might fit the bill.

  5. Paul Tioxon

    America’s friends? If Britain was our friend, they would have talked us out of going to war in AfPak. They would said it was a bridge too far. Look at our experience and the Soviets. America’s disappearing friends? The Japanese are an occupied enemy. We have no friends, just temporary coinciding interests.

  6. scharfy

    Coming soon to a congressional hearing near you…..

    You want answers America?

    We think we’re entitled to them.

    You want answers?

    We want the truth!

    You can’t handle the truth! Son, we live in a world that needs cheap energy. And this energy comes from Oil. Oil.

    What else is gonna do it? Solar? Wind ? Hydro? Ha. I have a greater responsibility than you can possibly fathom. You weep for Gulf Coast and you curse BP. You have that luxury. You have the luxury of not knowing what I know: that Gulf Spill, while tragic, finds cheap oil. And my existence, while grotesque and incomprehensible to you, finds oil…

    You don’t want the truth. Because deep down, in places you don’t talk about at parties, you want me on that rig. You need me on that rig.
    We use words like flow, lease permits, subsea…we use these words as the backbone to a life spent providing cheap energy to you obese Americans. You use ‘em as a punchline.

    I have neither the time nor the inclination to explain myself to a man who rises and sleeps under the blanket of the very cheap energy I provide, then questions the manner in which I provide it! I’d rather you just said thank you and gassed up your SUV and went on your way. Otherwise, I suggest you pick up a bicycle and ride your fat ass to work. Either way, I don’t give a damn what you think you’re entitled to!

    Were you trying to cut costs at the Horizon site?

    I did the job you sent me to do.

    Were you trying to cut costs?

    Your goddamn right I was!!

    1. attempter

      The truth which the system and “conventional wisdom” can’t handle is Peak Oil, and the fact that the drive for offshore drilling itself proves the age of cheap oil is closing. All this insanity is perishing. The ponzi exponential debt economy was unsustainable in itself, let alone post-oil. And there will be no “alternatives” which can replace cheap oil. It’s a matter of simple physics and EROEI. Fundamentalist religions of markets and technology can’t make 2+2=5. As the philosophers said, even god can’t do that.

      Since writing versions of that movie rant is a parlor game these days, I should try a few of my own, on the real truths.

      1. ArmchairRevolutionary

        I just cannot understand how this is not just blatantly obvious to everyone and their mother. Oil companies are going for oil in plus 10000 feet of water, in tar sands and in shale. All are locations where it is more difficult/costly to get it. They would only do this because there is no more easy oil.

        Peak Oil is here.

  7. Doc Holiday

    The BP shit is about to hit the beaches:

    http://www.nytimes.com/2010/06/15/science/earth/15cleanup.html

    From the beginning, the effort has been bedeviled by a lack of preparation, organization, urgency and clear lines of authority among federal, state and local officials, as well as BP. As a result, officials and experts say, the damage to the coastline and wildlife has been worse than it might have been if the response had been faster and orchestrated more effectively.

    “The present system is not working,” Senator Bill Nelson of Florida said Thursday at a hearing in Washington devoted to assessing the spill and the response. Oil had just entered Florida waters, Senator Nelson said, adding that no one was notified at either the state or local level, a failure of communication that echoed Mr. Bonano’s story and countless others along the Gulf Coast.

    ==> http://www.google.com/crisisresponse/oilspill/

  8. Doctor Stock

    Here’s where my confusion lies…

    The government sets up various regulations (whether they be financial or environmental or construction, etc.) and then when one of these fail, miserably, they go head hunting and want to blame those that are just functioning within the regulations they set up.

    C’mon… we reap what we sow. And when we fail to sow common sense, we shouldn’t be surprised to find stupidity everywhere!

    1. bob

      You have no confusion, just an agenda, and a very weak argument.

      In the middle of a soccer(football) game, with well defined rules and regulations, a player decides to head butt another player. How do the well defined rules apply? Find me the specific FIFA rule that states a player may not head butt another player. He is simply kicked out, and punished.

      Your argument seems to favor the government gaming out every possible outcome of every possible situation.

      Keep making money every morning.

  9. Frank Ohsen

    There’s another possibility I can see the administration making an attempt to sell vs causing BP to go teats up: They allow BP (being that it’s such a strategic partner to the U.S.’s national security), to pay off the liability claims and damages over time.

    Kind of like a royal-fuckup revolving credit plan except the American taxpayer in the meantime and temporarily (cough) foots the bill. BP pays us back with let’s say 10% interest over 20 years which our goobermint will state is really quite the fortuitous windfall considering we’re at ZIRP anyhow.

    Of course if and when inflation goes to Mars, BP will pay us back with incredibly cheap money while the politicos they helped get into office pull another fast one on Joe Public who has been violated in all orifices so many times he doesn’t any longer feel insertion.

    Look, am I just being too cynically jaded here? And if so, do I have a future in politics by thinking like this whenever there’s a crisis? Waste not a crisis, want not.

    Rahm, move your skinny incompetent ass over. I have arrived.

    1. Timmy

      I really can’t see how the cost of cleaning will bankrupt BP. At the peak of “superfund”, total was $3B. The biggest toxic site run in upper hundred millions. And we are talking PCB contaminating entire river. very toxic.

      If done correctly, with proper equipments, the spill shouldn’t cost more than several billions. Back envelop calculation.

      1. the price of top of the line drill ship is ~$700m, a pumping/processing ship wouldn’t cost more than $2-300m a peace. And probably only need 2 for entire gulf.

      2. skimmers can be made from modified fishing ship (just buy those clunker at second hand rate, consider it job for fishermen)

      3. A boomer (textile/plastic facility) Probably ~$1-200m

      4. big garbage Incinerator/electricity generator (way overkill, but consider it a gift to city of new orleans) ~$150m

      5. ~$5m a piece for portable oil processor,

      6. ~20m, for a trucking company with fleet of 500 trucks.

      7. pay for say 1500 people for 5 years to run machines above. about $300m

      without counting the harder to calculate item such as hand clean up, animal clean up, job placement, total above are less than $2B, and it doesn’t have to be paid all at once, 10% interest of $1-2B. Most oil should be taken out of the water and easier to reach coast.

      + $ 1B for smaller jobs order. (that’s a lot of money)

      next:
      1. job placement for permanently lost farming/fishing.
      2. clean up of tourism beaches
      3. long term effort to restore animals and key ecological enclave.

      So, I really can’t see if done properly, BP needs to go tits up. Even if my number is off by half, It’s still under $6B for the basic clean up and rudimentary compensation. BP can afford it.

      I am sure BP can do something more creative than handing out raw cash for long term economic fix (eg. construction program in tourist area goes a long way in small community.)

      1. Yves Smith Post author

        First, you need to read this. There are decent odds the the relief wells will not succeed AT ALL. If that is the case, the entire oil reservoir empties into the Gulf. I have not verified the reader factoid, but by all accounts this is a very big field, he put it at 50 million barrels.

        http://www.theoildrum.com/node/6593#comment-648967

        And we have the underwater plumes which cannot be cleaned, the oil that is floating around in the water due to dispersant (ditto). And you neglected the loss of revenues to the tourist industry and the losses to owners of shore property. Cleanup is manual labor and also involves health risks (oil fumes, the workers who did the Exxon Valdez cleanup have reported very serious health problems). That will not compensate the owners of tourist businesses, and many workers in those businesses will not be suited to cleanup work.

        The Gulf already has dead zones. What charge should be assessed for the creation of a dead zone? What if the shrimp and oyster beds are damaged permanently?

        1. K Ackermann

          That is one scary post. I hope he’s wrong, but Jesus… he sure had a lot of backing material.

        2. Timmy

          off the top of my head BP worst nightmares in descending order would be:

          1. They can’t cap the well, and the entire oil inside reservoir keep gushing. 1-2 billion gallon of them for next 30 years. (or whatever the secret estimate of that reservoir size)

          2. large number of people start getting sick from the oil spill in coastal area. (IMO, it is in their self interest to collect as much oil as possible instead of letting it vent into the gulf like that)

          3. People getting sick from eating seafood catch. (they are banking on oil to disperse quickly and evenly then simply go away. But what happen if it turns lumpy, with plume, and bio accumulate in seafood over next 5-10 years.)

          4. The oil spill becoming large enough to feed into the gulf stream and spread/soiling coastal area all the way up to north east.

          5. Hurricane season causing major accident and delay capping operation.

          ———–

          As for the rest:

          - Seafood fishing/farming area in coastal/near coastal are permanently gone for next 5-8 years. This is a given. BP simply has to provide job placement. I don’t think compensation is sufficient to fix that. people really need help finding another way to earn a living in some of the poorest area in the country. (I don’t know how much this will cost. But BP is a big boy an they can handle it, even if it drain all their cash)

          - 11 death. Somebody has to go to jail. Specially in light of at least willful negligence.

          - tourism/beach property. I for one would be content if BP simply clean up and minimally tried to restore the main attraction to said area.

          -large section of marsh ecosystem will have to be restored at great effort/cost/for a long time. BP has to pay for that. All endangered species better survive or BP will get it.

          - those underwater plume has to be removed, I don’t now how, but they better do it. It’s an utter nonsense that those plume will “go away”. They are big.

          - hey maybe those nitrogen rich dead zone can be used to grow oil eating bacteria (You know scoop the fertalizer contaminated water, add bacteria, and dump it on oil..

          - And for final punishment, BP has to pay zero emission car research. (oh few hundred million will do it.)

          tho’ I for one would opt for the gov. to simply buy BP at current bargain price stock, and change the name to “No More Petroleum for You people” and used all proceed of oil to a) pay for clean up b) develop alternative energy pronto.

          More Serious stuff here:
          http://news.sciencemag.org/oilspill/

        3. Roger Bigod

          The current political theater reflects Obama’s tardy relization that the relief wells may fail, or the casing could blow out before they reach the required depth. Much as he likes corporations, he likes the idea of reelection more.

          Estimates of the size of the field vary all over the place. BP has been accused of overstating their reserves in other areas, so it’s an open question. A known unknown, in the Rumsfeldian formulation.

  10. reskeptikal

    My comment is not directly related to this topic- maybe it belongs in the news section. Apologies if so:

    I was talking to a political science academic yesterday about the developments here in Europe and /very/ generally about the US response to the financial crisis and he basically said, ‘the US government is owned by the banks- this isn’t just lobbying, what we’re seeing is the kind of power relationship that exists between lenders and borrowers.’ The US as a nation is simply so deep in debt, that the people in charge (I hazard to use the word administration) simply have no choice, when it comes to financial reform, etc.

    To use another of his buzz-words, all we get out of this convoluted contraption known as the US government is “window-dressing.” (Apologies to those Americans in Afghanistan and Iraq today.) I have no article to present that substantiates this, this isn’t even really much of an argument, but I was still hoping that Yves or someone else on this board, would pick it apart a little bit.

    I find the GoM-spill upsetting, I believe BP is culpable, and should take responsibility etc. but the more I think about it, the more angry I am about this country being taken to the cleaners by the finance industry.

    If the government /can’t/ do anything about financial regulation, where does that leave Americans?

  11. Pierre

    Can maybe shed a small light on the ring fence topic as I have had experience with BP as a banker. The “spaghetti” legal vehicle set up is built on a combination of fast historical growth, tax needs, and operational “primary address” needs. This “messy” org chart is not uncommon for either the oil&gas business (especially to segregate upstream from downstream, and Amoco’s business that BP acquired) or huge global firms (IBM has over 1,000 legal entities), with myriads of cross-firm guarantees etc. That all said, I think it is doable to ring fence “U.S. territory based upstream” so that BP could create a separate P&L. But to what point?

    First, no banker in their right mind would agree to continue lending (or underwriting) BP debt if this particular slice of business was made standalone including (assuming you can figure it out) the portion of parent corporate debt the “new” entity owed and would be responsible for. This action would breach every covenant on every debt BP has and would more or less toss the company into restructuring.

    Secondly, the issue of legal vehicle liability – when it comes down to it – is not the issue. I’m not a lawyer, but bet that somehow some legal wizards (or Uncle Sam) will figure out how to make BP the parent organization liable. The primary reason is that is where the money is, not with some subsidiary which pumps oil from the ocean.

    Tongue in cheek, BP should instead apply to become a U.S. bank holding company and that way save themselves via TARP and the tax payers. OR, perhaps consider changing their head office to Detroit and become an auto company (if GM as a huge pension fund who happens to make unprofitable cars on the side can get away with it, so can BP).

  12. Doc Holiday

    BP is the Eggman

    We found that all of these companies, not just BP, made the exact same assurances.

    The covers of the five response plans are different colors, but the content is ninety percent identical.

    Like BP, three other companies include references to protecting walruses, which have not called the Gulf of Mexico home for 3 million years.

    http://blogs.ft.com/energy-source/2010/06/15/other-majors-accused-of-walrus-oil-spill-plans/

    http://www.youtube.com/watch?v=Nnpil_pRUiw

  13. yarro

    Under current US law BP is responsible for three things:

    1) Capping the well and all costs associated with that effort.
    2) Cleaning up the spill and all costs associated with that effort.
    3) 75 million dollars of other damages related to the spill unless gross negligance can be proven, which will be hard considering the Federal regulators signed off on a lot of the risky behavior that resulted in the accident and not just at BP.

    The government wields the threat of procecution as a club and the possible revoking of drilling and produciton leases. BP wields #3 above. The US government has taxed production and put money in a fund for #3 and companies who can’t pay for #1 and #2, but like any money left laying around in the government has been swapped for IOUs (US treasuries). Lead by Obama, the demands for things that fall under #3 by the government have gotten beyond where a court would probably consider BP liable, like paying competitors for losses from the Federal drilling ban. So far, BP has surprised me for not hiding behind the statutory liability cap. If the US government tries to wield their club, BP will wields it’s club as well. BP’s club is a very clear Federal law and is easy to defend in court. The Fed’s club is not as clear cut, and it’s use will hurt our relations even further with the UK to the point that we really won’t have them. I will also hurt the US economically.

    Transocean seems to be on the hook for 75 million as well under #3 and some portion of 1 and 2, but BP seems to just be ignoring that. Don’t know if it is contractual, or BP doesn’t want an unwilling partner in dealing with 1 and 2, which would cause even worse damage to their reputation.

    -yarro

    1. Chris of Stumptown

      “under current US law BP is responsible for three things…
      3) 75 million dollars of other damages related to the spill unless gross negligance can be proven”

      One question is whether federal law trumps state law in this regard. It could well be that be the BP is vulnerable to unlimited liability on this point in FLA, LA, MS, and Tx.

  14. mario

    “So history would suggest that BP is indeed in no serious danger. However, this spill is so visible, and cynicism and anger are so high that his team may recognize that he risks not just his re-election, but the historical treatment of presidency if he does not extract reasonably full restitution for damages from BP. ”

    Completely agree, although the society is to some degree desensitized by now

  15. steehead23

    I recognize that NC is a financial blog and certainly this catastrophe will dramatically affect BP’s finances, but the overarching issue isn’t money, its safety. BP has a history of favoring profits over safety. This history will be exploited during litigation and punitive damages could dwarf actual damages. I recall a certain swashbuckling lawyer from Wyoming named Gary Spence who routinely got punitive rewards for his clients specifically aimed at bankrupting the culprits.

    Also, the ring-fence concept might not work at all. Let us assume a worst case liability of $100 billion. If BP lopped off BP America and paid 50% of its liabilities, it would not be beyond the pale for the MMS to ban BP and all of its subsidiaries from any future drilling permits. This would severely reduce the market value of its leases in U.S. waters. I suspect that it would be far better for BP to borrow the money to pay its liabilities in full. Also, this is an enormous company with astounding assets in a resource that is unlikely to go down in value. Its future earnings potential would seem sufficient to pay off bonds, even if the marketplace demanded a stiff risk premium. The knee-jerk response of many to short the stock may be a good short-term play, but a bankruptcy leap put is unlikely to payout.

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