How Much Will BP Really Pay?
Keep BP Viable

By now, the enormity of the spill, long underestimated by both BP and federal officials, has become clear, but its ultimate environmental and economic effects will not be felt for many years, and are likely to be hotly contested by all parties.

BP has insisted that it will pay "all legitimate claims"--but Americans increasingly wonder what that means, and how we can be sure the company will stand by that pledge in the years ahead.

Andrew Ross Sorkin noted in the Times last week that the company has only $12 billion in cash and investments on hand; cleanup cost estimates range from $15 billion to $40 billion, but juries could add tens of billions to BP's tab. Even for a company with robust revenues, those are daunting figures. Bankruptcy would not free BP from its liabilities--but it could provide a measure of protection, raising concerns that taxpayers may yet shoulder some of these costs.

The $20 billion is a substantial sum but it is unlikely to be enough to cover all costs.

Today, BP said it would reserve $20 billion to compensate workers and businesses, but some crucial details remain murky. The company reportedly will be allowed to pay into the account over time, alleviating the cash crunch it would have faced if it had been forced to fully fund it immediately.

In theory, this approach is appealing. The money will be escrowed to pay for future claims, protecting it from the possibility of the company's demise, and it would give an independent arbiter control over its disbursement. Problem solved? Not quite.

The $20 billion is a substantial sum but it is unlikely to be enough to cover all costs. Hamstrung by a crisis of investor confidence that has cut its value in half and dramatically raised the cost of credit, BP may still struggle when confronted with the expansive Gulf Coast Restoration Plan that federal and local officials will demand.

Also unresolved, apparently, is the question of how far to extend compensation. The president's insistence that BP bear the cost of his decision to idle thousands of oil rig workers is reportedly a point of particular contention with the company, which might fear that such a concession would expose it to claims from companies such as Shell that are now saddled with regulatory obstacles inspired by BP's negligence. Where do BP's obligations end?

Paradoxically, the best way to ensure that resources will be available for environmental restoration and economic revitalization work far in the future would be keeping BP viable under its current ownership.

If Obama pushes BP into bankruptcy, he may be left with a partially-funded escrow account that can't cover the full cost of cleanup. The administration has been at pains to hold itself at arm's length from BP, but in crucial respects, the nation's long-term recovery may require a continuing partnership with BP.

Samuel Thernstrom is a resident fellow and the codirector of the Geoengineering Project at AEI.

Photo Credit: Flickr user arbyreed/Creative Commons

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About the Author


  • Samuel Thernstrom has studied and written about environmental issues for twenty years, with a particular emphasis on global climate change. He served on the White House Council on Environmental Quality prior to joining AEI in 2003. As codirector of the AEI Geoengineering Project, Mr. Thernstrom studied the policy implications of geoengineering, or climate engineering. This groundbreaking field of climate science involves changing features of the earth's environment to offset the warming effect of greenhouse gases. He has been published on and in the Los Angeles Times and the Washington Post, and he has appeared on BBC News, ABC News, CNN, FOX News, NPR, and The NewsHour with Jim Lehrer on PBS.

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