A $20 Billion Check From BP plc?

BP plc (NYSE: BP) faces what may be the hardest decision in its history. The U.S. government has supposedly asked for a $20 billion escrow fund to cover clean-up costs and other liabilities stemming from the Deepwater Horizon disaster. The UK-based firm knows that its obligations may not end at $20 billion, but the Obama administration will pressure BP to allow the fund to be administered by an independent third party.

BP may have to write the check for PR and perhaps ethical reasons, but it will give up a great deal of the bargaining power it may have in the future.BP appears nearly ready to capture all the crude leaking from the pipe 5,000 feet below the Gulf based on information it gave the Coast Guard yesterday.  That would help prevent the further spread of oil. BP has already offered relief to many of those who have been affected by the catastrophe. It now may turn that role over to the proposed independent board.

By succumbing to the request, BP may give up some of the future leverage it will have in court. Some members of Congress say that the oil company cut corners on the rig because it wanted to save money. Those documents released ahead of CEO Tony Hayward’s White House meeting this week are damning enough to make criminal and civil charges easier to bring and prove. BP will have to face the uncertainty that the $20 billion fund will be used to pay most claims, but it is hardly a guarantee that this will be the case.

BP has an alternative, and it is one the company should take. It should put the $20 billion into a special fund which it should administer itself. That would open it to the charge that it will act in the its own self-interest, but it will be plain enough whether that is true as the money is dispensed. No escrow system will be perfect no matter who runs it. The needs of some of those hurt by the incident will be overlooked no matter how the fund is operated.

The primary reason for BP to run its own fund is so that it can keep  a portion of the capital for claims that will tie it up in courts for years. It can see what Merck (NYSE: MRK) went through with Vioxx liabilities and the tobacco companies did with charges that they covered up the risks of smoking.

If BP passes the power to control the $20 billion to an outside party, it gives up a large part of its ability to control its own financial fate.

Douglas A. McIntyre