Slick accounting: BP’s cost exposure down 42%?

In a previous post, the Slick Economist showed the current value to BP of the $20 billion escrow fund to pay for spill clean-up and remediation is 11.35% lower in current value owing to the scheduling of payments and typical discount rates. Indeed, using typical discount rates used in the oil and gas sector, 15%, the total cost is 20.35% lower at $15.93 billion. 

So, how much of a bargain is BP getting for its apparent $20 billion fund creation? How do tax breaks drive further discounts? U.S. Attorney General Eric Holder said tax breaks that BP might claim against its costs for cleaning up the Gulf of Mexico oil spill weren’t mentioned during discussions at the White House (WSJ).

There are precedents for such tax breaks:

• Exxon did the same thing after the Valdez disaster in 1989, but was criticized for it (Montreal Gazette). Tax breaks were given to litigants in this case too (Anchorage Daily News).
• More recently, Boeing decided to forgo seeking a tax deduction for a $615-million settlement with the government in 2006 over ethics charges, under pressure from lawmakers (Reuters). The fine allowed Boeing to avoid criminal charges for stealing secret documents from a competitor and for illegally recruiting a top Air Force procurement official who was overseeing Boeing contracts (WisconsinFuture). Letters were written by Senators to (NYT). There are parallels with the scale of the BP spill. Boeing had a $20 billion contract cancelled because of conflicts of interest involving an Air Force procurement officer, Darleen Druyun, and the company. Druyun inflated her income, passed company secrets about the Airbus A330 MRTT. Druyun and a Boeing official served prison time.

US tax law and levies are complicated, so in the strive to be precise, the Slick Economist turned to Wikipedia. With US corporation tax levelled at 35%, at today’s prices, BP could be writing off between $ 5.58 billion (at 15% discount rate) and $6.2 billion (at 8% discount rate), putting the total investment by BP into the escrow fund $10.36-11.52 billion. Total discount of 42-48% – a pretty good PR investment.