2010 Sep 03

BP Says Limits on Drilling Imperil Oil Spill Payouts

BP is warning Congress that if lawmakers pass legislation that bars the company from getting new offshore drilling permits, it may not have the money to pay for all the damages caused by its oil spill in the Gulf of Mexico.

The company says a ban would also imperil the ambitious Gulf Coast restoration efforts that officials want the company to voluntarily support.

BP executives insist that they have not backed away from their commitment to the White House to set aside $20 billion in an escrow fund over the next four years to pay damage claims and government penalties stemming from the April 20 explosion of the Deepwater Horizon drilling rig. The explosion killed 11 workers and spewed millions of barrels of oil into the gulf.

The company has also agreed to contribute $100 million to a foundation to support rig workers who have lost their jobs because of the administration’s deepwater drilling moratorium. And it pledged $500 million for a 10-year research program to study the impact of the spill.

But as state and federal officials, individuals and businesses continue to seek additional funds beyond the minimum fines and compensation that BP must pay under the law, the company has signaled its reluctance to cooperate unless it can continue to operate in the Gulf of Mexico. The gulf accounts for 11 percent of its global production.

“If we are unable to keep those fields going, that is going to have a substantial impact on our cash flow,” said David Nagle, BP’s executive vice president for BP America, in an interview. That, he added, “makes it harder for us to fund things, fund these programs.”

The requests keep coming for BP to provide additional money to the Gulf Coast to help mitigate the effects of the spill. This week, Bobby Jindal, the governor of Louisiana, reiterated his request that BP finance a five-year, $173 million program to test, certify and promote gulf seafood.

BP has already agreed to pay for some measures that exceed its legal obligations. For instance, to help promote tourism in affected regions, it donated $32 million to Florida’s marketing efforts and $15 million each to Louisiana, Mississippi and Alabama.

But the company, which is based in London, now appears to be using such voluntary payments as a bargaining chip with American lawmakers.

BP is particularly concerned about a drilling overhaul bill passed by the House on July 30. The bill includes an amendment that would bar any company from receiving permits to drill on the Outer Continental Shelf if more than 10 fatalities had occurred at its offshore or onshore facilities. It would also bar permits if the company had been penalized with fines of $10 million or more under the Clean Air or Clean Water Acts within a seven-year period.

While BP is not mentioned by name in the legislation, it is the only company that currently meets that description.

The provision was written by Representative George Miller, Democrat of California, who is a strong environmental advocate and a close ally of Nancy Pelosi, the House speaker.

It was specifically designed to punish BP for its past transgressions, including the Deepwater Horizon explosion, and deny the company access to American offshore oil and natural gas.

“The risk of having a dangerous company like BP develop new resources in the gulf is too great,” said Daniel Weiss, Mr. Miller’s chief of staff. “Year after year after year, no matter how many incidents they’re involved in, no matter how many fines they’ve had to pay, they never changed their behavior. BP has no one to blame but themselves.”

BP’s concerns are becoming public as the company begins final preparations for permanently sealing its stricken well. On Thursday, it removed the temporary cap on top of the well, which had earlier been blocked with cement, so that it could replace the blowout preventer. The blowout preventer, a massive piece of equipment whose valves failed to shut down the oil flow after the explosion, is a crucial piece of evidence in the investigation.

Andrew Gowers, a BP spokesman, said that BP had shown good will by going beyond its legal obligations to clean up the spill and compensate those affected.

“We have committed to do a number of things that are not part of the formal agreement with the White House,” he said. “We are not making a direct statement about anything we are committed to do. We are just expressing frustration that our commitments of good will have at least in some quarters been met with this kind of response.”

Mr. Gowers suggested that the proposed legislation contradicted President Obama’s stated desire to keep BP a strong and viable company after the agreement to set up the escrow fund. He added, “I am not going to make a direct linkage to the $20 billion, but our ability to fund these assets and the cash coming from these assets that are securing these funds would be lost” if the House bill were enacted by Congress.

BP executives have said that regulators in other countries have not circumscribed their deepwater operations since the gulf accident. The only exception came in Greenland, where officials quietly told BP that it was not welcome to join in an auction for offshore leases in a new Arctic drilling zone.

BP is the largest producer of oil and gas in the gulf, pumping 400,000 barrels a day and accounting for about 20 percent of total production from deepwater reservoirs in the region. The company operates 89 production wells and shares a stake in 60 other wells operated by partner companies.

As BP has tried to raise cash to pay for damages caused by the spill, it has suspended its dividend and intends to sell off as much as $30 billion of assets around the world.

But the Gulf of Mexico remains crucial to the company’s finances.

“The gulf is the most profitable barrel in BP’s portfolio,” said Fadel Gheit, a managing director at Oppenheimer & Company. He estimated that the gulf generated $5 billion to $7 billion in profits annually for BP, or about a quarter of the company’s total.

Mr. Weiss dismissed BP’s warning that it might not be able to meet its financial obligations. “BP has substantial assets, whether they develop them or sell them,” he said. “If BP needs to sell assets to meet its financial obligations, that’s a decision they have to make.”

BP said that the House bill would stymie new drilling and cripple the company’s existing gulf operations.

Mr. Nagle said BP had discussed the matter with House leaders, and that company executives intended to discuss the matter with Senate leaders after the summer recess. The Senate version of the drilling reform bill does not specifically ban BP from future leases, but it grants regulators explicit authority to deny leases to companies with safety or environmental problems.

The Obama administration endorsed the overall House bill, but has been silent on the Miller amendment. An Interior Department official said that the agency already had the authority to deny a company guilty of safety or environmental regulations the right to bid on offshore leases.

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