BP Costs Hit $1.6 Billion As Obama Hits TV

BP plc (NYSE: BP) says its cost for the Deepwater Horizon disaster hit $1.6 billion this weekend. More than 51,000 people, organizations or states have made claims against the company. It is finally appearing realistic that BP’s costs could go into the tens of billions of dollars.

President Obama will go on TV tomorrow. One of the parts of his solution to the BP crisis that he will propose will be to force the company to set up and escrow account for clean-up costs and claims. He will propose that an independent commission run the fund. Based on Florida’s request of a similar facility which would have been $2.5 billion, the US government request could easily be $10 billion.

Establishing the fund may actually be good news for BP for several reasons. The first is that the action may allow the company to negotiate a cap on liabilities with the American government. The US has indicated that BP’s liability should be unlimited. That may turn out to be the case, but BP could draw out claims for years as the tobacco industry did with liability for smoking deaths and Merck did with Vioxx lawsuits. Some legal experts would argue that the stalling tactics were good ways to limit the financial fallout of problems that could have shut some companies down.

BP knows that the Administration’s power to force BP to cover all claims is limited, at least in the short-term. The laws about disasters that occur in international waters are not entirely clear although there is a huge body of  them. But the BP disaster is unique which means that the legal solutions may be as well.

Does the US have unrestricted ability to force BP to act according to American whims? That notion will be tested in the coming days.

BP’s best offense in discussions with the Administration may be to offer an escrow fund of a size that will make it nearly impossible to turn down in exchange for that being the end of the matter. That figure might have to be $10 billion or $15 billion. But, the US may not be able to restrict legal claims from states, people, and organizations. That makes any negotiations with the U.S.  government more delicate.

BP may decide that its liabilities are so widespread that offering the US more than a modest escrow is the most prudent path. Obama may say that he will shut down all of BP’s drilling operations in the Gulf and elsewhere within American jurisdiction. BP will almost certainly challenge Obama’s rights to do so in the federal court system. And, the stand-off will go on for years.

An escrow is nearly useless if BP intends to use the courts as its best means of negotiation.

Douglas A. McIntyre