Fishy but slick economics: costs update, from one red herring to another

The Slick Economist is getting nauseous at the continued exposure in the media of BP’s investment in the clean-up operation in the Gulf and beyond. It is almost the only monetary figure we hear. What about the total economic value?

Today, BP announced its total costs to date have spiralled to $3.2 billion (BBC News) – less than 10% of expected total costs of clean-up, remediation and compensation. This continued ability of BP to keep its costs high on the media’s radar are admirable, but tell us little about the real financial (and frankly who cares other than BP stockholders?), let alone economic, environmental or social, costs of the oil spill.

Yet, it is clear the daily costs are escalating. Current daily costs paid for by BP are estimated around $100 million per day. This appears to be partly down to the final stages of relief well drilling. There remains risk that these relief wells might not fix or even stem the gusher (The Telegraph (UK)). Cost escalation can be expected in the near future as the costly relief wells are finalised (over the next month) and new skimming capacity – with the 2 million barrel capacity “A Whale” vessel comes on-stream (MonstersAndCritics).

Outside of BP’s immediate future exposure, some new pieces of legislation threaten to increase expected future costs in the long-term and persistent future:

Costs are also being pursued by BP from several sources:

  • From the other companies liable under the OPA: As the oil major came under renewed attack at the weekend for its handling of the Deepwater Horizon blow-out, it emerged that BP’s 25% joint-venture partner in the leaking Deepwater Horizon well, Anadarko, has refused to contribute to the multi-billion dollar clean-up bill. BP has threatened legal action, the Telegraph reports (ShareCast).
  • The definitions, parameters, exposure and risk for BP and its drilling partners on MC252 remain unclear. The timing of payments also matters:
    • Tax breaks – every penny spent on oil spill clean up, is a tax deductible business expense for BP in the form of IRS tax deductions (Political Spin Examiner).
    • Interest: Will BP have to pay interest? Exxon did (ADN) totalling $470m in interest from deferred compensation payments, paid in 2009 (Financial Times – UK).

Finances at BP remain an ongoing issue:

  • BP plans to shore up its battered finances against the escalating clean-up costs of the Gulf of Mexico oil spill by raising around $50bn (£33bn) and pursuing its main partner through the courts (ShareCast).
  • BP’s debt is trading at junk levels, and the cost of insuring it against default with credit-default swaps has soared in recent days. While the company is still rated at investment grade, Standard & Poor’s last week cut its long-term rating on BP to AA- from AA and said the outlook for its long- and short-term corporate credit ratings was negative (NYT).
  • BP’s standby loan for future cost exposure inches up to $9 billion as a growing number of lenders “back” the company (WallStreetJournal)
  • BP’s full exposure to complex financial systems and tools operating in the oil and gas sector are further explored here (The Telegraph).

 Slick image from MMS website.

The Slick Economist is keen to see more-informed discussion around the economic values (economic, environmental and social) around this spill. The debate needs to be informed by these values to shine a spotlight on BP and its partners, but also on the regulatory changes required, actions needed in future, measures that consumers can take and other ways to converge on a sustainable future. Yet more data on how big BP’s hole is are beginning to smell fishier … while the actual fishermen and their communities stand idle.

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3 Responses to Fishy but slick economics: costs update, from one red herring to another

  1. frank patton says:

    I don’t believe any of this, it’s all based on what BP says. Just another path we are being sent down by the BP PR people. All smoke and mirrors.

  2. Pingback: Gulf slick economics update: spill’s INDIRECT costs dominate | Slick Economist

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