$20 billion is quite a lot of money for BP

The oil spill in the Gulf makes both the US and the UK poorer. The Gulf states lose oil, tourism and fishing business. They are seeking the $20 billion from BP for starters to make up for some of their losses. They are taking it from a global company which generates a lot of its revenue and profit in the US. As a result of the BP/Transocean disaster these companies along with the rest of the local oil industry in the Gulf region will now be further restricted by the new controls on oil activity the President has introduced. Much of it is a series of transfers of cash and profit within the USA, with the money all in dollars.

The UK has 40% of the BP shares. The Uk therefore loses 40% of the total dividends paid by BP for as long as the dividends are unavailable. Savers, charities and pension funds between them will loses several billions this year, and the Treasury will lose some tax revenue. There will be less cash switched into pounds by BP to meet payments.

The bad news for BP is their Board has done a “deal” with the President that fails to cap the BP liabilities, makes no mention of the responsibility of any of the other companies involved in the drilling accident and places the disbursement of the money in “independent” hands. BP may find that the administrative and legal costs of handling the funds become high whilst the number of potential claimants multiplies. The Group needs to place some kind of limits on how many people and businesses it is responsible for compensating, whilst the President has every interest in maximising the numbers who will look to BP for cash.

Badly chosen words can also prove expensive in the understandably emotional atmosphere of the crisis. The CEO’s comment about wanting his life back has now been matched by the Chairman saying he cares about the “little people”. How do such highly paid people make such obvious errors? I heard a few weeks ago that BP management regarded holding the dividend as central to their task. I did not pass on this on as I thought it incredible at the time. It will be interesting to hear what BP management now think their main aim is.

Once again I am not offering investment advice on this site. BP remains in acute difficulties all the time it fails to cap the well and stop the flow of oil into the ocean. Once the well is controlled then BP needs to establish some fair limits on its responsibility for clean up and compensation. The Group has important and valuable reserves, but they come with an expensive leaking well and an angry President targetting the company which could prove very expensive even for a Group as large as BP.

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24 Comments

  1. Mick Anderson
    Posted June 17, 2010 at 7:24 am | Permalink

    At the moment, $20M is about a quarter of BPs entire market value, and rather more than last years profit. Admittedly, the former is after the share price has taken its recent pummelling.

    The CEO and Chairman have been seen to be naïve more than once, and the board agreeing to meet Mr Obama and leaving with an agreement in place looks as though they have simply rolled over to his demands. Perhaps they always intended to make such a generous and open-ended gift at such a high profile meeting, but it seems unlikely. It also makes it harder to apply a limit at a later date.

    The mark of a company can be said to be how it reacts when things go wrong. This is such a massive disaster that I can understand why dealing with the actual event has been such a problem, but that doesn't excuse how the board have dealt with the PR and the politics.

    I suspect that once the oil has ceased to spill, there will be a vote of no confidence in the board, followed by the remnants of BPs worth being absorbed by one of the other US oil giants.

  2. Norman
    Posted June 17, 2010 at 7:32 am | Permalink

    It's hard to see how either party, the US government and BP, could have handled this crisis worse. I imagine the Democrats will pay the price in November, BP is paying the price by having it's profits -and maybe it's reserves- nationalised.

    Residents of the Gulf coast are lucky (relatively speaking) that it was BP that this accident happened with. No doubt every other oil company is breathing a sigh of relief and thinking 'There but for the grace of God…' but only 2 or 3 of them could afford to pick up so prodigious a tab. Even after the 6 month moratorium is over (if it is over after 6 months) any company looking to explore for oil in deep water may prefer Brazil or West Africa than US waters in the Gulf, which also won't help the communities of the Gulf coast who rely heavily on the oil industry.

    At least President Obama will be able to use the advice of his Chief of Staff and not let this crisis go to waste by passing a variant of cap and tax.

  3. Mark Parker
    Posted June 17, 2010 at 8:46 am | Permalink

    BP top brass seem to have fundamentally misunderstood how PR works in the USA. Americans respond best to the sinner who repents. The CEO should immediately have said publicly that the company knows it has made a terrible error; that it will do all it can to fix it and it will pay all compensation that it is due to pay and improve its standards in the future.

    But the CEO should NOT have signed an unlimited liability document, he may have ended the company in a single pen-stroke.

    After the leak is plugged and the PR battle won, true financially liability will be determined in the American courts. (Exxon Valdez was twenty years in the courts!) Let's not forget that the Deepwater Horizon was owned by the Swiss/American company Transocean and operated by Anadarko of Montgomery County, Texas.

    BP's responsibiity could be quite limited. But that's no excuse for such a bad PR operation. Like you John, I am baffled at how such senior people could be so naive.

  4. Alfred T Mahan
    Posted June 17, 2010 at 8:46 am | Permalink

    The hounding of BP by President Obama seems to me to be worthy of an African dictator not the leader of the free world.

    First, he is driving a coach and horses through the law on pollution liability. Transocean, who own the Deepwater Horizon rig, have initiated proceedings in Houston to limit their liability to $26.8 million – a low amount, based in the nineteenth century on the value of the vessel after the incident. The limit may be broken if, effectively, gross negligence by Transocean can be proved. A judge would be sympathetic to breaking such a low limit on such grounds (if they are proven -ed). That is what Obama is constantly alleging (probably about BP rather than Transocean? ed) (although without a detailed investigation how can he know?). But importantly Obama is attacking BP, not Transocean, which can only be for political reasons.

    BP may also entitled to limit its liability for consequential damage – i.e losses to hoteliers, fishermen and so on – but not for the cost of cleanup itself. "May" because inconsistent US state legislation means the position is complicated, but essentially BP is on the hook for cleanup costs but not necessarily consequential damage, for which the USA has a top-up fund called the Oil Spill Liability Trust Fund if damages from BP are inadequate. I understand that will pay up to $1Bn in this case.

    The law on limitation of liability in maritime law is there for a reason and has very ancient roots – without it, people will not undertake hazardous operations. It is generally closely connected to the amount of insurance available for the risk (although Transocean are trying to use an archaic system which provides a very low limit, which is why any court (may disagree-ed)), but the point is that it is the law and Obama should not ignore it.

    Second, Tony Hayward has been vilified for commenting that the environment damage will be slight. That is not quite as wrong as it sounds. Crude oil is present in the oceans naturally in vast quantities as it seeps out of the seabed, and is biodegradable. It is eaten by bacteria, which in turn create food for plankton, fish, and so on up the food chain. Older readers will remember the spate of tanker casualties off the French coast in the 1970s and 1980s. Those showed that fishery catches – including intertidal farmed species such as oysters – exceeded their pre-spill levels within about two to three years. High local mortality was quickly replaced, unless the spill affected a unique breeding site without which a species could not live (which is very, very rare). Essentially, the problem is that oil is smelly, and makes a mess of beaches, i.e. it is the human amenity damage that is the worst issue unless one ascribes a value to a dead wild bird – which would be unique to this type of damage; what about eagles killed by wind farms?

    The French learned the hard way that making a big song and dance about an oil spill was the worst thing to do as it reduced tourist, fishery and other revenue for years as people were put off anything to do with the “maree noire”. But that is exactly the mistake that Obama is now making – by making wild exaggerated claims about the worst ecological disaster in American history and so on he inflates the losses.

    BP will pay for the cleanup anyway, but Obama is magnifying the consequential losses, ignoring the law, and extorting money by force and blackmail. Those are not actions of a responsible leader. .

  5. NickW
    Posted June 17, 2010 at 8:51 am | Permalink

    What makes Obama's comments transparently anti-British and offensive is his failure to publicly acknowledge the major involvement of Halliburton and Transocean.
    Just who WAS responsible for the errors and fiailures of judgement which caused the accident?
    Are the Obama attacks deliberately intended to conceal Halliburton's (role-ed) and distract the American public from pursuing it?
    The American Government is strongly linked to Halliburton through Dick Cheney; this affair (needs examination -ed).

    • Acorn
      Posted June 17, 2010 at 10:42 am | Permalink

      I think you will find it was Halliburton and Transocean, that were telling the BP well designer, that he was doing it wrong. This well was a nightmare from when they drove in the first 36 inch casing – the bit that all the other bits hang on (casings) or sit on (BOP and LMRP).

      Informed speculators – and there are many – are telling me it really went bad when they had nine attempts to blow through the "float collar" using six times the normal pressure; I don't know. I am still trying to catch up with the jargon; so, here is a picture of a float collar and a glossary of oil terms:-
      http://www.glossary.oilfield.slb.com/Display.cfm?…

      I was also told yesterday, I paraphrase; "sealing the well via the relief well will not be easy as the well is flowing significantly …it will need loads of "junk" and cement … the formation has probably ballooned and casing leaks are continuing to erode the bore and any casing cement left". (I have sent for an interpreter).

  6. Iain
    Posted June 17, 2010 at 9:37 am | Permalink

    The British political establishment have gone awol over the defence of an important strategic company BP. It seems they have just been sitting there while Obama kicks the living daylights out of the company. The British political establishment have forgotten that we have a strategic interest. The world has a looming energy crisis, and I find it un-bloody-believable that our political class sit on their fannies while an oil major with strong links to this country is destroyed.

  7. Iain
    Posted June 17, 2010 at 9:38 am | Permalink

    Daniel Yergin wrote an interesting book on the oil business, 'the Prize', one thing that came through very clearly was that it was all about national power politics, and the countries that had a very clear idea of their national interests made dammed sure they were players, that can't be said of the British political establishment now, Now they are all a bunch of Oxbridge educated, PPE graduates professional politicians, who wouldn't recognise a national strategic interest if it hit them in the face. But then that is the decedent British political establishment for you, after all they have been sitting on their fannies as one after other strategically important British company is flogged off , so why not sit there and watch BP get destroyed and flogged off, its what the British political establishment are good at?

  8. Simon
    Posted June 17, 2010 at 10:09 am | Permalink

    The incentives should be there for several engineering companies to come up with solutions for capping this well and for BP to fund all of them all .

    At the moment it looks like BP are content to let it bleed out until the pressure and rate of leakage are reduced before trying again .

    Perhaps they don't want to be perceived as desperate , given that the truth usually comes out in the wash this would be a mistake .

    BP need to treat the cause , not the symptoms of this problem .

    It is to be hoped that BP's board have more expertise in the oil exploration business than RBS and the other banks boards had in the banking business .

    Did the major share holders ask the difficult questions or were they content all the while the money was rolling in ?

  9. Javelin
    Posted June 17, 2010 at 10:18 am | Permalink

    I've been watching this quite closely. My view so far is that BP, along with other oil companies have gotten away with lax saftey due to lax regulations.

    I think their PR has been responsive but poor and has been behind the curve all the way.

    The oil pipe line is so deep that I'm not sure they're going to cap the leak – I think they can only drill relief wells. In Russia they dropped tiny nukes down these deep wells and capped them. That to my knowledge is the only way to cap wells this deep.

    • Acorn
      Posted June 17, 2010 at 11:01 am | Permalink

      Which bit do you think will rise highest out of the water when the nuke goes off? The BOP; the Well Head or the string of drill pipe which is still stuck in the casing 🙂

      Probably best to use the American 8 inch nuke cannon shell on its highest setting of 40 kilo ton yield. Ah, it may not fit down the hole; bugga.

    • nonny mouse
      Posted June 17, 2010 at 11:51 am | Permalink

      They wont use explosives (including nukes) because they are scared that it would open up a lot of small cracks and the whole oil deposit would come rushing out at once.

  10. Milton
    Posted June 17, 2010 at 10:28 am | Permalink

    Mentioned on an earlier comment – I had 10 happy years with BP and they paid my way through University.

    I would question the independence of the escrow account overseer. If this money is paid out like water though the sands, and in such a litigious country it may be, then the pressure will be on for a bigger fund.

    You may not be proffering investment advice, but you are giving them PR advice.

    Your BP/Transocean is a free simple but brilliant prop for BP

    Who on Earth are their PR advisers? Or are the chairman and CEO bypassing them?

    I just hope Mr Hayward puts on a glittering display today.

  11. nonny mouse
    Posted June 17, 2010 at 12:09 pm | Permalink

    Some thoughts and observations:
    – BP can claim some of their costs against insurance. I'm not sure what is claimable and what is not. This will hit further than BP share price and dividend cuts. It could do a lot of damage to the Swiss insurance industry if they are liable for everything.
    – This is an escrow account, not actual payments. The payout could, in theory, be lower, but I'm guessing that Obama or Congress would fine some way of taking any money left in the pot.
    – I read somewhere that the $20 billion was just for payments to people who lost out due to lost earnings etc. It might not even cover the cleanup costs which are already >$1 billion.
    – Just wait for all this to hit the US legal system. US shareholders suing BP for giving up a large chunk of cash without needing to (there is a cap on liability that they volunteered to ignore).
    – This will take 20+ years to work its way through the legal system. I think Exxon Valdez is still going through it.
    – The oil is entering the gulf stream. It might actually make its way over to the UK, but it would be very diluted by then.

  12. nonny mouse
    Posted June 17, 2010 at 12:12 pm | Permalink

    For Exxon Valdez an Anchorage jury awarded $287 million for actual damages and $5 billion for punitive damages (although this was later reduced). This is a lot bigger.

    Fun fact: Exxon Valdez caused the banking crisis – the first Credit Default Swap was made by JP Morgan because they gave Exxon a $5 billion line of credit and they needed to reduce their reserves needed against the risk of Exxon defaulting.

  13. gac
    Posted June 17, 2010 at 5:05 pm | Permalink

    Why are not TransOcean and Haliburton contributing to this compensation fund?

    I have recently read that they were drilling so deep below the Earth's crust that the pressure of the oil was so great that it blew straight through the safety devices; nor is present technology capable of holding such a pressure force.

    If this is even remotely true then Obama will also know this which is why he has trurned this into a BP witch hunt.

    Also why the big ole USA 7th cavalry hasn't rode in to save 'all

  14. Mark
    Posted June 17, 2010 at 5:58 pm | Permalink

    $20bn could be raised by a federal excise tax on oil: 1,000 days at $1/bbl would do it. That's a shade over 2 cents per US gallon. I'm waiting to see if Anadarko will be putting up $7.7bn and Mitsui $3bn as co-venturers to match BP. If OPA 1990 can be re-written on the whim of a President in this fashion the US will find many risks become uninsurable.

    • Mark
      Posted June 17, 2010 at 10:47 pm | Permalink

      If you're a pilot with a failed engine you don't ask the CEO of the airline for permission to follow safety procedures. The same approach applies on an oil rig or at a refinery: safety is always a paramount concern and must be understood and acted out at the operations levels, as well as the design engineers. Safety is a 24/7 issue, not a meeting with the bank risk managers at 8 a.m. to review last night's COB VaR. Sometimes people may be caught out through lack of experience – and even the most experienced can get caught by something new, or because someone else failed to do a job properly and (worse) failed to admit it.

      Hayward took over from Browne precisely on safety concerns at Amoco (the US company that BP took over that was mostly involved in refining and marketing) and the earlier Sohio operation in Alaska. I doubt he is at fault: he probably feels that he may have been badly let down, though as yet he doesn't know how responsibility may divide among those involved.

      • Mark
        Posted June 17, 2010 at 10:47 pm | Permalink

        Meant as a reply to Javelin.

    • StevenL
      Posted June 18, 2010 at 12:46 am | Permalink

      Yeah, if people cock up? Just socialise the cost, that's always the best solution! BP shareholder by any chance?

  15. Javelin
    Posted June 17, 2010 at 6:55 pm | Permalink

    Just looking at Hayward in Congress hearings. He chairs the group saftey commitee on a bi monthly basis and he says this committe is reflected down through the company (I assume one for the Americas and Gulf). Hr also says he had no knowledge of the well apart from being told they found oil.

    He also say. He Said previously wanted to focus on safety like a laser. I find it hard to believe that BP wasn't at fault if safety problems weren't escalated up through the company. I think that's where BP will get caught out – not escalating safety concerns up the CEO.

    I presume each of these commitees lists risks and issues on a spreadsheet which is then passed up to the next committe. So the question is given the huge risks involved why wasn't the CEO aware of these risks and problems at well.

    I think the whole company is being very poorly run.

  16. Adrian Peirson
    Posted June 17, 2010 at 11:25 pm | Permalink

    I see this event as another attempt by the globalists to divide and conquer western civilization.
    Wouldn't surprise me if there were some secret diving activity going on prior to this disaster occuring.

  17. John C
    Posted June 18, 2010 at 3:32 pm | Permalink

    Mr Redwood,

    I watched every minute of the testimony from congress yesterday and was astounded at the way the BP CEO approached the sub committee.

    You asked:

    "How do such highly paid people make such obvious errors?"

    He said that his compensation last year was $6 million. That is one massive amount of money but his company generates a lot of profit and dividends so good luck to him *if he is worth it*.

    However, if I was a member of that committee I would have took a step back and reflected on what he was actually saying to the committee (and expecting them to believe him).

    He claims that, since he became CEO in 2007 he has focussed "like a laser beam on safety".

    If so, is it credible that the CEO of an organisation, which lost 11 people in a tragic accident does not know, *59 days later*, who took the decisions regarding safety and how far up the management chain this went?

    I've never ran any organisation but, if I were CEO of a company like BP, I would demand to know this information within 2/3 days and let people know that, if I was not provided with this information, people would be sacked.

    The alternative view……is that the CEO is ( is being very careful in what he says as he is not yet able to rebut his critics-ed)

  18. christina sarginson
    Posted June 20, 2010 at 11:49 am | Permalink

    I am really quiet concerned how the president has handled this as I have said in previous comments. I think he has caused a lot of upset by suggesting that it is a totally British owned organisation. I think we all feel really sad for this situation but we should be working together during this time not blaming and accusing. As you suggest there are other companies involved who I am sure wanted the contracts at the time but are now moving away quickly. Ain’t that life.

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    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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