Oil at the highest price since 2008 is increasing BP Plc (BP/)’s available cash as it negotiates a final bill with the Obama administration to pay for damages caused by the worst U.S. spill.
The soaring price for crude that helped Chief Executive Officer Bob Dudley rescue BP from the brink of collapse may figure into talks with the U.S. government, potentially the biggest claimant in the Deepwater Horizon accident, according to Barclays Plc. The U.K. oil producer estimates its earnings rise $350 million a year for every $1 gain in Brent crude, which has jumped $41 a barrel to $126 since the April 20, 2010, tragedy.
BP has been in talks with the Department of Justice to settle pollution claims that can reach as much as $17.6 billion, a person familiar with the discussions said last month. The company set up a $20 billion trust and has already agreed to a $7.8 billion settlement with residents and businesses.
“The oil price may well affect attitudes on both sides,” said Ivor Pether, a fund manager at Royal London Asset Management, who holds BP stock. “The DOJ doesn’t want to be seen as soft on BP given near-record U.S. gasoline prices, but high oil prices also give BP scope to pay a few extra billion.”
BP has set aside $3.5 billion for the federal government claim. President Barack Obama faces re-election this year with Republicans blaming him for rising fuel prices charged by petroleum companies.
David Nicholas, a spokesman for London-based BP, declined to comment on settlement talks. DOJ spokeswoman Tracy Schmaler also had no comment. BP Chief Financial Officer Brian Gilvary said March 4 that $37.2 billion remains the company’s best estimate for the cost of the spill.
Cost of Gasoline
Obama is trying to overcome hits to his popularity from rising gas prices to win the Nov. 6 election. Regular gasoline at the pump, averaged nationwide, has climbed 16 percent this year to $3.792 a gallon as of March 10, according to AAA data.
The Justice Department can and should consider a company’s ability to pay when calculating civil and criminal penalties, said John Kostyack, a vice president at the National Wildlife Federation, an environmental lobby group in Washington.
“BP continues to reap this enormous windfall that comes from the run up in oil prices.” Kostyack said in a telephone interview. “That is a strong indicator that it has the ability to pay a very substantial civil and criminal penalty.”
BP, operator of the doomed Macondo well whose blowout destroyed the Deepwater Horizon rig and killed 11 workers, already struck a deal to pay an estimated $7.8 billion on March 2 benefiting residents and businesses, from fishermen to Gulf hotel owners.
Lost Market Value
The company’s shares are little changed since that settlement. Its market value is down 28 billion pounds ($44 billion) since the accident.
The $7.8 billion was more than the company had provisioned, and payments will come out of a $20 billion trust BP had already accounted for.
The trust has about $14 billion remaining, and victims’ lawyers have noted there isn’t a cap on damages BP must pay. The U.K. company said if the trust is exhausted, it will pay additional funds directly.
The settlement delayed a trial to apportion blame for the accident as U.S. District Judge Carl Barbier decides how to organize proceedings with the remaining plaintiffs.
Dudley has shored up BP’s finances by overseeing more than $20 billion in asset sales since the spill out of a target of $38 billion. BP returned to profit last year, earning $26 billion after a loss of $3.7 billion in 2010.
Reversal of Fortune
At the height of the spill two years ago, BP couldn’t sell bonds and Bank of America refused to buy oil from the company. Shares plunged more than 50 percent and are still 24 percent lower than before the accident.
The first American head of BP in its century-long history was rewarded last year with a $6.8 million pay package, more than three times his compensation in 2010. He increased the dividend in the fourth quarter, a year after the payout to shareholders was reinstated at half the pre-spill level.
The reversal of fortune at BP may give margin to U.S. Attorney General Eric Holder to extract more punishment. Holder said Feb. 28 that the U.S. has a “strong” case over liability for the explosion. The U.S. estimates more than 4 million barrels of oil spewed into the Gulf.
The company set aside $3.5 billion for Clean Water Act fines, based on its own lower estimate for the number of barrels released. It also assumes no gross negligence, a standard the government would have to prove showing the accident resulted from a conscious BP act or omission. Gross negligence raises the level of penalty per barrel to as much as $4,300 from the $1,100 maximum under simple negligence.
BP still faces claims from the five U.S. states whose coastlines were soiled by the spill.
“The higher oil price definitely gives them more flexibility,” said Lucy Haskins, an analyst at Barclays Plc in London. “It’s interesting that it’s easier to deal with 116,000 litigants than it was with the DOJ. That tells us it’s going to be harder.”
BP estimates its pretax replacement cost operating profit increases $350 million a year for every $1 gain in benchmark crude.
Still, the government will focus on the cost of the disaster rather than rising oil prices, said David Uhlmann. a University of Michigan law professor and former chief of the U.S. Justice Department’s environmental crime section.
“They will seek a penalty that does justice, which has more to do with the losses caused by the spill than the profits that oil companies currently are making,” Uhlmann said in an e- mail.
Colin McLean, chief executive officer of SVM Asset Management in Edinburgh, who holds BP shares, said the market “probably doesn’t have an exact figure in mind, it just wants closure.”
“The DOJ will get more out of BP if they meet BP’s time scale, which is the sooner the better,” McLean said. “It’s likely to move along now.”
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