BP details plan for $20 billion claim fund for oil spill in the Gulf of Mexico

By Steven Mufson
Washington Post Staff Writer
Thursday, June 17, 2010; A08

How many companies could take a $20 billion body blow and still be left standing?

Not many. The amount of money BP said it would plunk into an escrow fund for oil-spill claims is enough to cover the entire NASA budget for a year. It's enough to buy all the shares of the Kellogg Co. And it's larger than the annual economic output of 90 countries.

But BP is an unusual company. It made profits of $5.6 billion in the first quarter of this year and $14 billion in 2009. It produces about 2.5 million barrels a day of crude oil from Russia to Angola, from Britain's North Sea to Alaska's North Slope. Until Wednesday, BP also had been planning to pay out $10.5 billion in dividends this year, which would still have left it with $5 billion to $10 billion in spare cash.

It could raise the money for the escrow fund this year without borrowing another dime.

That arsenal of cash and crude hasn't been enough to placate the Obama administration, however, as the company wades through the largest environmental disaster in U.S. history. And BP has struggled to convince markets that it can meet its obligations to both investors and victims of the oil spill in the Gulf of Mexico. In eight weeks, BP stock has fallen to about half its earlier value. On Tuesday, Fitch Ratings slashed the firm's credit rating to BBB, two rungs above junk. And early on Wednesday morning, investors in credit default swaps -- an insurance-like financial instrument -- were pricing an almost 40 percent chance the oil giant would default on its debts within five years.

So although the deal struck at the White House on Wednesday was designed in part to reassure Gulf Coast residents that BP would put aside enough money for their claims, it was also designed to give shareholders a sense that the financial damage was manageable and could, over time, be contained along with the oil spill.

That's why one thing BP asked in exchange for the big escrow fund was a signal from President Obama that he was not trying to run the firm out of business. "BP is a strong and viable company," the president said after his meeting with BP's chairman and top executives, "and it is in all of our interests that it remain so."

That is hard to accept for many Americans who want to punish BP. But anything else might be counterproductive. So far, the company, drawing on its worldwide operations, has paid for everything from National Guard troops to air quality testing by the Environmental Protection Agency, from $5,000 checks for shrimpers to the $100 million or so for each relief well.

"This agreement underscores that as long as we need oil, Big Petroleum is better than Bankrupt Petroleum," Lincoln Mayer, a lawyer specializing in energy and antitrust at McDermott Will & Emery, said in an e-mail. "Few companies could afford a $20 billion mistake. BP is one of them, and that's a good thing."

Investment analysts appeared reassured after the White House meeting. "It takes the political heat off the company and it steadies the ship in rough waters," said Fadel Gheit, an oil analyst at Oppenheimer. "BP is stabilizing its financial position so it can handle cleanup costs and damages." BP stock rose 1.4 percent on Wednesday, closing at $31.85 a share. And the cost of BP credit default swaps dipped slightly, indicating a bit less anxiety about corporate default.

So how does a company come up with $20 billion?

BP's chairman, Carl-Henric Svanberg, said the firm will suspend its dividend for three quarters, starting with the payment that had been scheduled for Monday. That will give it $7.8 billion in cash.

The company also said it will sell about $7 billion worth of assets, a fraction of its total and less than what it agreed to pay for Devon Energy assets earlier this year.

The company's chief financial officer, Byron Grote, said that BP will trim its capital spending plans by about 10 percent this year and next, saving an additional $2 billion in 2010 and $2 billion or so in 2011.

The company still expects to generate $5 billion or more a year in extra cash from operations.

Moreover, the deal with the White House lets BP spread out its payments to the fund. The biggest chunks will come up front: $3 billion in the third quarter, $2 billion in the fourth quarter and then $1.25 billion a quarter until the full amount is paid in three years. To provide a guarantee that it will make those payments, the company said it is "setting aside" $20 billion of U.S. assets; as it makes payments, those assets will be freed up. BP will continue to earn money on those assets, but the government will effectively have a lien on them.

The escrow fund leaves many uncertainties. A BP official said "it's not a ceiling and it's not a floor." Fines and penalties won't be covered by the fund. Many plaintiffs will continue to pursue lawsuits separately.

But, Gheit said, "we think BP has the financial flexibility to survive this crisis." If any money is left over, it will be returned to BP.

BP's Grote said the plan should "give more comfort to those on Gulf Coast of the United States, give more comfort to government, and we hope it will give more comfort to our shareholders." He said that although the company is financially strong, "we think it's important to take a deeply conservative fiscal approach to running our business at this time." And he said he hopes shareholders who will not be receiving their dividends will understand that "it's an extraordinary thing for the company to do, but this is an extraordinary situation we find ourselves in."

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