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Insurance to Stem BP's Cost of Oil Spill Clean-Up

Source: IFA

Posted on 04 May 2010

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With the cost of containment and cleanup of a massive oil spill in the Gulf of Mexico rising into the billions of dollars every day, the financial impact for oil company BP will be limited because of its insurance coverage.

Fitch Ratings recently noted that insurance will likely cover the majority of BP's costs, limiting rating pressure, according to Reuters.

On April 20, an oil-drilling rig leased to London-based BP caught fire and collapsed two days later, with 11 workers killed in the accident. The collapse released a massive oil spill that now threatens significant damage to Louisiana, Mississippi, Alabama and Florida. The company already faces a class action lawsuit on behalf of Louisiana shrimp fishermen, accusing it of negligence, Reuters said.

In a statement, Fitch said, “The ultimate financial impact on BP will depend on how the environmental and economic impact develops when the spill reaches land.”

A new analysis by investment firm Bernstein puts the cost of the spill cleanup alone at more than $7 billion, according to Reuters, with BP indicating recently it was spending $6 million a day on activities related to the oil spill.

Morgan Stanley analysts put a figure of $3.5 billion on the cleanup alone, while Citigroup, Evolution Securities and Panmure Gordon put cleanup costs at under $1.1 billion, Reuters reported.

In a statement today (May 3), BP said it will pay “all necessary and appropriate clean-up costs” from what is being called the Deepwater Horizon oil spill. The company said in a statement, its payments will include “legitimate and objectively verifiable claims for other loss or damage caused by the spill,” including claims for assessment, mitigation and clean-up of spilled oil, real and property damage caused by the spill, personal injury and commercial losses.

Reuters reported that BP self-insures through its own insurance company, Jupiter, which does not lay off risks onto reinsurers or syndicates at Lloyds of London, according to a spokesman for the company.

BP may still end up paying costs out of its own pocket, but it is possible that the company could also seek to reclaim damages from Cameron International Corp., the supplier of the well-head equipment being blamed for the accident or other companies involved in the maintenance of the drilling machinery, according to Reuters.