BP Got a Bargain
By: David E. Y. Sarna
OIEE Writer
BP agreed on June 16th to pay $20 billion into a trust fund to compensate victims of the Gulf oil spill.
Assuredly, that’s a lot of money. But is it too much, too little or just right?
In 1989 Exxon Valdez spilled 257,000 barrels of crude, until then, the worst oil disaster ever. When all was said and done, Exxon paid $115 million in compensation, equivalent to $447.50 per barrel spilled or 33.37 times the oil’s value at a time when the price of crude was $13.41 a barrel. Their liability stemmed from a “failure to supervise,” according to The National Transportation Safety Board.
While the total is not in, and final numbers won’t be learned for years, the government’s latest revised estimate is that at least 60,000 barrels a day are spewing into the gulf from the sinking of the Deepwater Horizon. 11 crew lost their lives. It appears as though the spill will continue to gush for a total of about 100 days until it’s finally stopped. On that basis, a total of 6 million barrels will spill, over 23 times the total for the Valdez spill, so the $20 billion will amount to compensation of $333.33 per barrel, or only 75% of what Exxon paid on a per barrel basis. However, when adjusting for the value of the oil at today’s prices of about $70 a barrel, compared to $13.41 back then, BP would be paying about 4.76 times the value of the oil spilled or only one seventh of what Exxon paid per barrel spilled, expressed in constant oil dollars. To be sure, BP consented to the payment “without making its case in court,” as the Wall Street Journal reported, in contrast to Exxon, which fought in court for years. On the other hand, BP is accused of systemically stinting on safety and cutting corners on design. Still, Exxon paid the value of 8.6 million barrels of crude for spilling 257,000 barrels. Even if we add in another $5 billion for BP’s own costs (they say they paid $3.50 to date, and will be done in “days,”, BP would only be paying $25 billion, the equivalent of 35.7 million barrels or 4.2 times as much for a spill that was over 23 times as large.
Today, the Wall Street Journal reported that “BP PLC is in talks with U.S. independent oil and gas producer Apache Corp. on a deal worth as much as $10 billion that could include stakes in BP’s vast Alaska operations, according to people familiar with the matter.” This is but a small fraction of BP’s overall holdings. BP last reported net assets (assets less liabilities) of $102 billion. In valuing assets, Generally Accepted Accounting Principles (GAAP) generally substantially undervalue proven reserves (oil still underground) and even further undervalue reserves from non-producing wells. So to say the least, BP cannot cry poverty. It also seems like they got a pretty good deal with their $20 billion settlement.
David E. Y. Sarna is a writer and software entrepreneur. His latest book, History of Greed will be published by Wiley in September.
