Posted on 17 Jun 2010
BP PLC, under intense legal and political pressure from President Barack Obama, agreed Wednesday to put $20 billion into a fund to compensate victims of the Gulf oil spill, and said it would cancel shareholder dividends for the first three quarters of this year to offset that cost.
BP said it would pay another $100 million to a separate fund to help oil-industry workers sidelined by the Obama administration's moratorium on deepwater drilling.
The payments far exceed the letter of U.S. law, which caps economic liabilities in oil spills at just $75 million. BP agreed to waive that limit. In a pact hammered out in a four-hour White House bargaining session, BP agreed to "set aside" $20 billion in U.S. assets as a guarantee that it would make good on the promised $20 billion in cash by 2013.
The deal is the latest in a series of interventions by the Obama administration in the operations of private businesses in crisis. Mr. Obama sent an emissary to demand that the then-head of General Motors Corp., Rick Wagoner, resign prior to the government-led rescue GM. The administration has pressed Wall Street banks in the aftermath of the financial crisis, calling for sharp cuts in executive pay.
For BP, the deal is highly unusual, as the company conceded huge sums without making its case in court. But the British oil giant is bowing to immense pressure from American politicians and the public, and the company hopes the fund can earn it back goodwill. Earlier this month, Attorney General Eric Holder announced a criminal investigation of the company.
A BP adviser said the company was seeking stability and more certainty as it sought to make good on the commitments it has made to clean up the Gulf.
To raise cash, BP said it would make a "significant reduction" in capital spending and speed asset sales to generate about $10 billion in the next 12 months. The move could cost BP shareholders, many of them U.K. pension funds, roughly $7.5 billion during the next three quarters. BP said it would consider resumption of dividend payments in 2011, but it could face pressure to cancel them until the Gulf of Mexico recovers from the massive spill that began when a drilling rig exploded on April 20.
The deal also could help Mr. Obama revive his political fortunes, which have suffered amid complaints that he has been soft on BP and mismanaged the government response. "The structure we are establishing today is an important step toward making the people of the Gulf Coast whole again," Mr. Obama said.
Mr. Obama and BP still face a summer-long siege, fighting to contain the estimated 35,000 to 60,000 barrels of oil spewing daily from BP's broken undersea well until drilling rigs complete relief wells by August. It's unclear what the ultimate cost of the disaster will be for BP.
The White House announced that the compensation fund would be run by Kenneth Feinberg, the independent administrator who oversaw executive compensation at banks that took public money under the financial-industry rescue plan. Previously, he ran the fund that handled claims from victims of the Sept. 11, 2001, terror attacks.
BP shares rose after the announcement Wednesday, but they have lost nearly half their value since April 20.
BP Chairman Carl-Henric Svanberg emerged from the White House and apologized publicly for the spill. "Through our actions and commitments, we hope that over the long term that we will regain the trust that you have in us," Mr. Svanberg said, with BP Chief Executive Tony Hayward and other top executives standing behind him.
During the talks, a major issue was whether Mr. Obama would agree to cap BP's liabilities at $20 billion. He declined, and BP ultimately conceded the point, White House officials said.
Another bone of contention was the White House demand that BP compensate workers idled by the administration's six-month drilling moratorium.
A BP adviser said that BP made clear to the White House it did not believe it was liable for claims related to the drilling halt. She called the $100 million fund "a goodwill gesture."
Mr. Svanberg said the pact provided comfort to U.S. authorities that the rebuilding funds were assured, even if BP were to go bankrupt. "They need to think of extreme circumstances," he said. "It doesn't help them if no one is around" to pay up.
White House officials said the $20 billion figure was neither a floor nor a ceiling for the cost of rebuilding the Gulf. BP will put $5 billion a year into the fund, and will set aside assets worth $20 billion up front as insurance that all of the cash will be forthcoming, said Carol Browner, the president's chief energy adviser.
Claimants can still go to court against BP, White House officials said. But the agreement set up a buffer between BP and the U.S. court system. Claimants would first go to the fund administered by Mr. Feinberg.
Dissatisfied individuals and businesses, as well as local, state, tribal and federal claimants, would be offered interim payments, but could appeal to a new three-judge panel. If they are still unhappy, they could take their claims to court or seek compensation under the existing Oil Spill Liability Trust Fund, set up in the wake of the 1989 Exxon-Valdez spill by the Oil Pollution Act. White House officials said BP agreed to wave liability limits under that act. The interim payment would be subtracted from awards that are above and beyond it.
BP can only appeal Mr. Feinberg's decisions if the claim granted is in excess of $500,000, or if Mr. Feinberg specifically allows an appeal.
If the fund operates like the Sept. 11 compensation program, people and businesses affected by the spill will likely be paid less if they have insurance that covers some of their losses, said Richard Bieder, president of Trial Lawyers Care, which represented families of Sept. 11 victims pro bono.
Wednesday's negotiating session went on far longer than planned, forcing the participants to skip lunch. Much of the heavy lifting on the BP side was handled by Jamie Gorelick, a former top Justice Department official in the Clinton administration, hired by BP from powerful law firm WilmerHale.
Administration officials involved included Ms. Browner, White House Counsel Bob Bauer, Associate Attorney General Tom Perrelli, and Coast Guard Adm. Thad Allen, head of the federal disaster response in the Gulf, the White House said.
Mr. Obama spent 25 minutes alone with BP Chairman Svanberg, speaking of what he had seen in his four trips to the Gulf, his meetings with local officials, businessmen, fishermen, shrimpers and oystermen.
"This is not just a matter of dollars and cents," Mr. Obama said he told the chairman. "A lot of these folks don't have a cushion. They were coming off [hurricanes] Rita and Katrina, coming off the worst economy that this country has seen since the Great Depression, and this season was going to be the season where they were going to be bouncing back."
The president then joined the dozen negotiators in the West Wing's Roosevelt Room, where Mr. Svanberg opened with an apology. Mr. Obama spent about 45 minutes of the four hours in the room, but U.S. negotiators took breaks to consult on progress and sticking points, Ms. Browner said.