BP Braced for Legal Long-Haul as Spill Payouts Leap

BP is digging in for a long legal battle over the Gulf of Mexico oil spill, Chief Executive Bob Dudley said on Tuesday after compensation costs soared for a second straight quarter.

The payouts, the scale of which BP is disputing even though they are one part of the case that was settled last year, have been the focus of attention in recent months in a wider legal process that has saddled BP with a $42.4 billion clean-up, fines and compensation burden and could yet cost billions more.

BP has said some of claims being paid are “absurd” and “fictitious” and that the terms are being misinterpreted to allow businesses which had no spill-associated loss receive payment. It has so far failed in all its attempts to stop them.

“As we continue to fight these absurd (compensation) outcomes and as the likelihood of extended litigation on other matters increases … we want everyone to know that we are digging in and are well prepared for the long-haul on legal matters,” Dudley said at BP’s quarterly results news conference.

The door is open to a wider legal settlement, he said, but “it’s in the interest of our shareholders now to play it long”.

The 2010 oil spill killed 11 men and despoiled the Gulf of Mexico coastline in the United States’ worst offshore environmental disaster.

The second quarter saw BP take another $1.4 billion in provisions on claims against a $20 billion fund that finances them, leaving the fund with just $300 million left unaccounted for, even though the deadline to claim by Gulf coast businesses is not until April next year.

BP has said claims beyond what the fund can pay will be taken straight off future profits.

MISSES PROFIT FORECASTS

The company revealed the extra cost in its second-quarter results, which missed profit forecasts due to the tax effects in Russia that the company said would even out over time, and other currency-linked tax effects.

BP’s shares were down 4.5 percent in early afternoon trading, having tumbled to their lowest in a month.

Adjusted net profit for the quarter fell to $2.71 billion compared with expectations of $3.41 billion and with $3.6 billion a year ago. Profit was also hit by lower prices and by lower production – partly the result of asset sales to pay for the costs of the spill.

The extra $1.4 billion of spill compensation costs come on top of a $500 million addition in the first quarter and bring BP’s estimate of the cost of claims so far to $9.6 billion.

Some $900 million is for extra claims, while about $500 million is for the costs of the claims administrator, BP said.

BP is locked in a legal battle over the compensation payouts with the administrator, Patrick Juneau. It says Juneau is paying out “fictitious” and “absurd” claims due to a misinterpretation of the settlement.

Last week, though, its legal campaign had appeared to receive a boost when Halliburton Co, which was involved in preparing the doomed Macondo well for production, abandoned one of its arguments that tried to paint the British oil company as unconcerned about well safety.

FINAL BILL

BP also faces a resumption of its trial on civil charges in September. It increased its overall provision for the cleanup, fines and compensation for the spill to $42.4 billion from $42.2 billion. Analysts expect BP’s final bill to be billions bigger.

The quarterly result was the first to include a contribution from its 19.75 percent stake in Rosneft, the state-controlled Russian company, which BP acquired in part-exchange for its 50 percent holding in Russian oil group TNK-BP.

Analysts had expected a bigger contribution from the Rosneft stake. They said the tax-lag factor and the impact of a weaker rouble looked to have accounted for about $450 million of the $700 million shortfall.

A broader tax and currency effect of a stronger dollar raised the company’s tax rate to 45 percent from 35 percent last year, accounted for the remainder.

“I think people will have to listen to what BP’s got to say on that (Russia) and try to digest how to forecast it,” said Santander analyst Jason Kenney. “The 45 percent tax rate was also a bit of a surprise … they’re saying a stronger U.S. dollar versus a basket of currencies, but we’ve not seen this kind of swing in effective tax rates before.

“The core upstream division was actually ahead of consensus and that’s still going great guns. The refining and marketing division is probably as expected,” Kenney said. “Fundamentally, I think BP’s still moving forward.”

Underlying production of oil and gas excluding Russia – adjusted for divestments and production-sharing agreements – grew by 4.4 percent compared with the same period last year, as production from major projects in Angola and Norway ramped up.

Upstream production in the third quarter is expected to be lower as a result of planned seasonal turnaround activity and continuing divestment impacts, BP said.

(Editing by Sarah Young and David Holmes)