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Will the Spill End BP?

On Saturday, BP announced the failure of “top kill,” its effort to plug the Deepwater Horizon disaster in the Gulf of Mexico. Markets around the world sent BP’s stock south. Over the weekend, the share price fell from £4.95 to £4.12 on the London Stock Exchange, cutting nearly $23 billion in value from the company. And in New York, shares fell 15 percent in premarket trading. Meanwhile, Washington pundits started calling for more aggressive action against BP, with former Labor Secretary Robert Reich, for instance, arguing Obama should put the oil giant’s North American operations into temporary receivership.

It raises the question: Will the Deepwater Horizon disaster force BP out of business?

It depends. First, let us quantify the costs to the company thus far. As of today, BP will have spent $1 billion on the clean-up effort, “including the cost of the spill response, containment, relief well drilling, grants to the Gulf states, claims paid and federal costs.” That includes $40 million paid out on 15,000 economic injury claims.

But, BP grimly notes, “It is too early to quantify other potential costs and liabilities associated with the incident.” What might those add up to? Congress is expected to raise the liability cap to $10 billion. BP owns 65 percent of the Deepwater Horizon site, meaning its liability could be as much as $6.5 billion.

But the liability cap would not cover some other costs, like those from criminal charges, lost revenue, the loss of government contracts or separate liabilities for worker pay-outs. Plus, if the government prosecutes and BP is found negligent, the cap does not apply at all — and today, Attorney General Eric Holder is headed to the Gulf to meet with local federal and state prosecutors.

On top of that is the cost of BP’s lost business. The region accounts for around one-sixth of BP’s production. A one-percent “rise in Gulf of Mexico royalties, a six-month drilling moratorium and a 20 percent increase in drilling and completion costs add up to a hit of $1.95 billion” this year, an analyst tells The Wall Street Journal.

So will BP be able to shoulder those costs? Up to a point. The company made just a bit less than $6 billion last quarter. Annually, it spends around $10 billion on its dividend, which it will likely cancel for this year. If the liability cap applies and BP manages to contain other costs — and if it is not found negligent — the company hypothetically would have enough cash to survive.

And there’s one other major liability that would force BP to close its doors. If the government chose to prosecute BP under the Clean Water Act, it could fine the company $4,300 per barrel leaked into the Gulf — fines independent of the liability cap. If the government won those damages, BP would currently be on the hook for tens of billions — possibly enough to bankrupt the company.**

** I initially calculated the damages as too high, given the amount of oil that has leaked, and have updated the post to clarify. Apologies for the error.

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