Is BP Blackmailing the Feds?

| Fri Sep. 3, 2010 7:35 AM PDT

When the details on the deal between the federal government and BP to set up a $20 billion fund to compensate spill victims were released last month, I reported on concerns that the design of the fund might compromise its long-term viability and create a conflict of interest in cracking down on BP's misdeeds. The fund was designed in such a way that it basically hinges on keeping BP's Gulf-drilling subsidiary in production and turning a profit.

In an interview with New York Times published today, BP executives confirmed as much—if the government cracks down on the company by cutting it off from obtaining new leases or permits, the fund could go belly-up:

But as state and federal officials, individuals and businesses continue to seek additional funds beyond the minimum fines and compensation that BP must pay under the law, the company has signaled its reluctance to cooperate unless it can continue to operate in the Gulf of Mexico. The gulf accounts for 11 percent of its global production.
"If we are unable to keep those fields going, that is going to have a substantial impact on our cash flow," said David Nagle, BP’s executive vice president for BP America, in an interview. That, he added, "makes it harder for us to fund things, fund these programs."

This, of course, is the problem with making the fund contingent upon keeping BP Exploration & Production Inc., a subsidiary of BP America Production that deals primarily with Gulf of Mexico production, profitable. The House-passed spill bill includes a provision that would bar companies with bad safety and environmental records from obtaining new leases in US waters; while the provision doesn't specifically name BP, it's clear that's who the measure is gunning for. But now BP is using the spill fund to pressure the federal government into backing off actual penalties for their transgressions in the Gulf.

BP is also pointing to other actions they've taken, like providing $89.5 million to states for the promotion of tourism, as reasons why the government shouldn't crack down on them:

Andrew Gowers, a BP spokesman, said that BP had shown good will by going beyond its legal obligations to clean up the spill and compensate those affected.
"We have committed to do a number of things that are not part of the formal agreement with the White House," he said. "We are not making a direct statement about anything we are committed to do. We are just expressing frustration that our commitments of good will have at least in some quarters been met with this kind of response."

I can imagine the threats will only get worse when (or perhaps, if) the federal government starts announcing the fines for legal violations and costs for damage to natural resources that BP will be expected to pay. The company could owe up to $17.6 billion for Clean Water Act violations alone. But if the price of making sure BP pays up is keeping the company drilling in the Gulf, the government has certainly cut a bad deal here.

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