BP profits threatened by 2010 disaster payments

London: BP’s compensation payouts under the settlement for victims of the 2010 Deepwater Horizon disaster are on course to hit the company’s earnings before the end of the year, unless it is successful in a legal challenge that will be heard in court next week.

The threat of a material impact to profits, which would be likely to start in the fourth quarter, shows the importance to BP of winning its appeal over the interpretation of the settlement.

Patrick Juneau, the court-appointed claims administrator, reported on Tuesday that he had processed about a quarter of the 194,800 claims he had received, and made compensation offers worth about $3.86 billion, almost half the $7.8 billion that BP initially expected for the total cost of the settlement.

New claims have been continuing to come in at a rate of about 10,000 per month.

BP is fighting the interpretation of the settlement used by Juneau to calculate business losses, which it says results in awards for inflated and fictitious claims.

Those losses account for $2.22 billion of the awards made so far by Juneau — more than half the total he has offered.

Until now, BP has been paying compensation out of the $20 billion trust fund for victims of the spill that it set up in 2010, but by the end of March commitments from that trust had reached $18.3 billion, leaving just $1.7 billion for future claims.

After the remaining money has been used up, future compensation for business economic losses will be charged to the company’s earnings.

In the first quarter BP took a charge of $492 million to the trust, mostly for business economic loss payments under the settlement. In the second quarter, which BP will report on July 30, those payments reached more than $820 million, according to the claims administrator’s website.

If payments continue at that rate, the remaining money in the trust will be used up by about the end of September.

Payouts for businesses’ losses have been averaging about $256,000 each, but there has been a wide variation in awards. Last month a law firm was offered $15 million, a shipbuilder $12.9 million and a construction company $12.8 million.

BP argues that the interpretation of the settlement used by Juneau — and upheld in the US District Court in New Orleans earlier in the year — allows businesses to cherry-pick the numbers they use to claim losses after the spill, using cash inflows and outflows rather than calculations of the economic reality of their profits.

For example, BP appealed against a compensation award offered to a Louisiana commercial property company that had based its pre-spill income on a period in which tenants had paid double rent to cover two months’ payments.

The claims adjudicator recognised that this was the case, but said that given the ruling by Carl Barbier, the judge in the district court who is also hearing the damages case over the spill, the administrator had been right to offer the compensation sought by the claimants.

BP’s underlying replacement cost profit for the first quarter was $4.2 billion.

— Financial Times