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Venture

Robert Trigaux

BP may find cash outlay to cover spill damages harder to close than spewing oil well

17

June

Oilspillbeachcleanup1gettyimages  Wake up and good morning. The good news for Florida and other gulf oil spill-tainted states is that BP agreed to a $20 billion fund for oil spill victims. The decision, with White House encouragement, separates BP from a very large chunk of change, reduces the threat of nickel and diming by the company and, yes, is a sign of good faith from BP that it's not going to quibble over at least an initial guess at the clean-up bill for the worst environmental mess in U.S. history. (Photo: Getty Images.)

The bad news is that $20 billion may very well become a, er, drop in the ocean of expenses ultimately required to make good on the gulf disaster. And the wheels are clearly turning at BP as to how this giant oil company can extricate itself from this gulf financial black hole with both some dignity and some real assets left. The company will pay into the reimbursement fund over 3 1/2 years, so the financial hit doesn't come all at once.

In the market, betting on BP's survival is not looking good for the company. Credit investors Wednesday, following the announcement of the $20 billion escrow fund deal, priced in a 36 percent chance that BP would default within five years. Prior to the deal, the chance of default implied by credit-default swaps stood at 39 percent -- meaning investors were little swayed by the deal. A month ago, the risk was 7 percent, says CMA DataVision, which monitors such investments. More on this angle here and here.

PavelMolchanovRaymondJamesoilanalyst  Debate is brisk that BP's final price tag could be dramatically higher, especially once the impact of 200-plus lawsuits, and their threat of punitive damages, are felt. Here's more on this issue. Based on the latest estimates, for example, the daily civil fine for the escaping oil alone could be $280 million, as this New York Times story today explains. And analysts like Pavel Molchanov (photo, right) of St. Petersburg's Raymond James Financial, are detailing why the price tag may be multiple times higher.

Molchanov, as detailed in this Wall Street Journal blog posting, puts the total cost to BP at $63 billion. He uses the costs of the Exxon Valdez disaster as a comparison, saying that all of the civil settlements and criminal fines that Exxon paid amounts to $7,942 a barrel of oil spilled in the waters off Alaska. (The Valdez leaked 257,000 barrels).

Use that same formula for the 5.3 million barrels now expected to spill into the Gulf yields a total cost of $42 billion. As Molchanov says in the blog post: “We think this is too low, however, since the U.S. legal system has generally become more plaintiff-friendly over the past 20 years, especially in environmental cases such as this.”

Add in the cost of inflation, Molchanov raises the price tag 50 percent on top of $42 billion to come up with $63 billion.

--- Robert Trigaux, Times Business Columnist

[Last modified: Wednesday, July 28, 2010 11:59am]

    

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