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UPDATE-3 BP Risk Assessment: Calculating the Costs

August 4th, 2010
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UPDATE-3 BP Risk Assessment:

Calculating the Costs of the BP Gulf Oil Spill

original article written by Net Advisor™

GULF of MEXICO. In June 2010 we published two reports (Report 1, Report 2) citing that BP may be at bankruptcy risk.

In the first report we stated that there was a 30% chance of bankruptcy risk. The move by BP to agree to a $20 billion settlement fund without a court order or trial, which may or may not cover the actual costs to BP over the incident, probably helped the company to reduce bankruptcy risk. The problem is that is seems the potential liabilities to BP are far greater than $20 billion. At this time Net Advisor™ maintains that the bankruptcy risk is still at 30%.

From Oil Mess to Legal Mess

Based on recently published data (08-04-2010, Reuters), the potential fines to BP under the Clean Water Act may now be somewhere around USD $5.39 Billion. The fine is $1,100 per barrel under the Clean Water Act (Source: Reuters). However this assumes that there are 205.8 million gallons of oil that spilled in the Gulf or what amounts to 4.88 million barrels of oil (205.8 million divided by 42, the number of gallons of crude per barrel = 4.9 million, rounding up) (Sources: CNN, U.S. DOE).

Thus with $5.39 billion or so in EPA fines is definitely a hit to the company’s bottom barrel, but if this is it, then this fine might be a drop in the well for BP.

The problem is however if BP is found that they were negligent in the Gulf incident, which 60 Minuets TV news program, the Guardian.UK, CBS News, and the NY Daily News all seem to suggest that this risk may exist, then BP could be looking at $4,300 in EPA fines per barrel, or $20.984 Billion ($4,300 x 4.88 million = $20.984 Billion). It may be tough for BP to cap that fine.

The EPA fine alone would exceed the entire BP settlement fund. The U.S. is in total control over the BP fund (Source: ABC News). If the EPA submits a bonafide legal claim, the Obama Administration will then have cause to cut a big check out of that fund and pay the money to the treasury.

BP has currently estimated $4 billion in clean up costs (Source: CBS News).

What we have not added are the class action lawsuits from people affected by the spill to completely separate shareholder lawsuits which have yet to be heard, and this is an unknown number. Many of these claims can be paid out from the settlement fund, but of BP is found negligent the plaintiff’s lawyers may seek punitive damages for such negligence, or lawyers may ask the court for Treble damages, which could be three times the actual damages. The problem is we don’t know what the litigation damages are, this as we stated earlier in June “is a HUGE wild card.”

As if BP didn’t have enough problems, U.S. Attorney General Eric Holder announced last June that the Justice Department will be exploring a criminal probe against PB.

“We have what we think is a sufficient basis for us to have begun a criminal investigation,” said U.S. Attorney General Eric Holder.

— Source: Wall Street Journal

Thus the costs and risk to BP is still very high.

PB’s Tax Loss Strategy

In late July, BP opted to take a $32.2 Billion charge against earnings toward clean up costs, capping the well, paying money for those who suffered a loss relating to the incident, and government fines. The result of all this is that it reduces the amount of income tax BP will have to pay to the IRS by about $10 Billion (Source: MS-NBC). This should get the Obama Administration very up set, along with general public.

Now, I am not a lawyer nor accountant, but I didn’t know know that a company can deduct fines, or potential litigation damages as an expense against earnings. As individual citizens, my understanding is that we cannot deduct say for example parking tickets or other fines from our taxes, but corporations can make these deductions as a matter of a cost to doing business. The question I would present to corporate tax-law experts is this true even if a company is found negligent or guilty of a crime? If you now this answer please contact us.

Sorry Baby, You’re Not Drilling Here

The Obama Administration had a no drill moratorium after the Gulf spill. A Federal Judge later blocked Obama’s moratorium indicating that the Obama Administration ‘rashly concluded that because one rig failed, the others are in immediate danger, too.’ (Source: Fox News) The White House sought an appeal and on the same day, Interior Secretary Ken Salazar “would issue a new order” (Source: NY Times). About a week later, on or about July 12, 2010, the Obama Administration via the Secretary of the Interior issued a new no drill moratorium (Source: AP/ Nola.com).

Obama’s own oil spill commission was critical regarding the no drill moratorium. Senator Mary Landrieu (D-Louisiana) also testified against the moratorium (Source: Heritage.org).

No More Gas Either

In New York, which has nothing to do with BP or the Gulf Spill, state legislators there passed a one-year moratorium on gas drilling known as hydrofracking (Source: wNYC, New York).

No Real Ass Kicking

President Obama said he was looking to kick some ass over the BP spill (Sources: CNN-video, Fox News, Washington Post). Despite the tough talk with no drilling, $20 billion fund, threats of criminal charges and potential record fines, according Nick Turse, the U.S government continues to do business with BP with over $5 Billion in contracts with the Department of Defense (DOD) (Source: CBS).

The cost and risk to BP is still fully unknown and this effort may go on for years. The oil and gas battle continues in the Obama Administration. It is tough to call what the eventual outcome for BP will be at this point.


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