The Fourteenth Banker Blog

June 6, 2010

Watch BP Closely Now

Filed under: Running Commentary — thefourteenthbanker @ 6:14 AM

From Naked Capitalism, this great summary of BP’s response to date and this ominous warning:

Despite BP’s brazenness, it could be simultaneously preparing itself for worst case options. Some in the financial media see a breakup, takeover, or bankruptcy filing as a real possibility. From the Globe and Mail:

A few weeks ago, when BP was relatively confident it could stem the flow, there was little sense that BP faced anything more than a very expensive cleanup bill. While some still think that’s the case, others say the company’s breakup, takeover by a rival energy heavyweight, or bankruptcy in whole or in part is probable, if not certain. “BP could be facing the death penalty in the U.S.,” said energy analyst John Kilduff, of New York hedge fund Round Earth Capital. “The viability of the company is definitely in question.”

Another high-profile analyst agrees. Dougie Youngson of London’s Arbuthnot Securities said investors who think BP’s selloff is overdone could be gravely mistaken. The company has “the real smell of death,” he said a few days ago.

The reports on the move to segregate the oil spill operations from a managerial standpoint (it’s conceivable that each major production operation is a separate legal entity) may be a precursor to a “good company/bad company” split. From the Guardian:

BP is to hive off its Gulf of Mexico oil spill operation to a separate in-house business to be run by an American in a bid to isolate the “toxic” side of the company and dilute some of the anti-British feeling aimed at chief executive Tony Hayward, the company said today.

Yves here. If the Guardian has this right, BP could be in the process of trying to maneuver to keep US claimants from getting access to the full resources of the company to pay reparations in the Gulf. This could get nasty indeed.

It may be time to turn the question back to the incentives of corporate senior decision makers. If BP stands good and pays out all claims, which cannot be predicted at this point in time, it may wipe out even more shareholder value, executive stock options, bonuses, and career longevity.  If BP management decides to stick it to the USA, externalize the costs with legal maneuvers, and keep the vast majority of BP assets and cash flow intact, the Executives and Board Members will personally have many millions more.  (I hope their bonuses are paid in euros).  So, how naive should President Obama be? Those calling for seizure or receivership may be on to something. My intuition tells me BP is going to cut and run.

BP will have much higher priced lawyers than the state or local governments. It may be time to pre-empt.

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19 Comments »

  1. BP is just recycling the tried-n-true (and heartily supported by the US Gov’t) Citigroup strategy.

    We all know this drill, and we all know where it will end.

    Just like big banking, big energy is ‘too essential to the struggling US economy’ to let it fail, right?

    We’ll give BP the easy ride because oil is the energy of our economy, just like small business lending/credit is.

    … and then we scratch our heads and wonder why the economy stagnates.

    Comment by Lucy Honeychurch — June 6, 2010 @ 12:53 PM | Reply

  2. Why would BP not compartmentalize their corporate structures to prevent the company from sinking in the event of a catastrophe? This endeavor was of great and permanent importance everywhere I had interaction for my entire career. How to walk away from a portion of the business under a death sentence risk if all else fails. How to make sure no company moron does not allow the corporate veil of protection to be possible? Still people get careless. Rule one is to watch the careless . Rule two is weed them out. This goes triple for Project Managers.

    As for BP, Only a fool would have allowed the acquistion of Amoco and other US refiners to be merged into a common pool of the parent company. That said, BP should be able to put a single lower tiered subsidiary into bankruptcy after losing the first line of defense with a subsidiary owning , operating and contracting the failed well block. Undoubtedly, BP has a number of captive insurance operations that insured these losses in the reinsurance market. How about buying credit default swaps against their own subsidiary debt and even subsidiary equity. It would likely have been quite cheap to buy protection as insurance or otherwise against the loss of say Amoco assets.

    What are these hired gunsel people paid for if they are not ruthless enough or independent enough to build in multiple layers of walk away protection and recovery of the losses incurred from walking away?

    I would think that BP itself has at least five layers of protection between itself and the spill liability that would have to be pierced by the government. Similarly, BP must have multiple layers of insurance at all these levels.

    These kinds of understandings are greatly obscured by relying on consolidated financial statements which does not exist as a single entity. BP consolidated is an accounting fiction for simplicity. Of course, the mediocre and complacent in corporate groups do routinely do things that allow piercing the corporate veil. Here is where you need a really saavy account. A Meyer Lansky kind of mind in financial organization. So, if BP is a stumblebum organization , they are goners. Doing after the fact things usually fail unless the foundation of the fortress is itself sound.

    It will be very interesting to see this play out.

    Comment by Jerry J — June 6, 2010 @ 9:50 PM | Reply

    • I’m sure you are right. Two questions. Do you think the “piercing the corporate veil” standards are too difficult for today’s reality where giant transnational corporations can inflict enormous damage and actually do have the ability to pay the bills without going out of business. Second, do you think any environmental laws bring liability to the parent level?

      Comment by thefourteenthbanker — June 7, 2010 @ 6:34 AM | Reply

    • Since it took twenty years for the Bopal disaster to wind its way through the legal system, I am not surprised at what Jerry said. Matt Taibbi was only partially right – it isn’t only Goldman Sachs who feed off society, like giant zombie squid. TBTF must mean too big to prosecute successfully.

      Comment by Sandi — June 7, 2010 @ 5:30 PM | Reply

  3. First question must use BP as a model with a lot of guesswork. What would BP do? First, the tort liability must attach to the offending entity and any others that directly contributed to the tort. I assume here that the General Counsel and CFO people that created the operating entity were down the chain to at least the US holding company level. Let’s call that holding company ” Old Amoco” ( OA). It could be old Atlantic Richfield or any other newer entity taking the place of all the old entities. Next assumption is that the owner of the exploration block is the operator entity within OA.

    All claims must be against the operator entity first or the very idea of liability limitation is worthless. This entity may have any number of guarantees by owner entity up the chain to the BP holding company itself. It usually escapes notice that these liabilities are specific… pay them off. Obviously, every guarantor should already have made good to the operating entity. The operating entity should already have paid off every liability it has other than to Transocean, Cameron and others directly connected to the disaster. Next point. This is a sui generis disaster not a crime. Under the case law of torts what duties does anyone have to proptect against what has never happened before? That duty will invariably be quite limited and flexible. All this effectively this and effectively that garbage goes out the window in a court action. At this point , the operating entity has all possible cash due within the corporate group possibly payableto claimants residing at the operating level of OA. I would have also explored the ultimate parent company having paid off its maximum liability directly to the operator under the Oil Pollution Act of 1990. I would take the position that the parents are out of it all having paid the operator entity. Thereafter, I wouls tender all suits to the insurers under this theory. The theory being that OA and BP have no further obligations under the statute, nor do the insurers. In summary, every other BP entity has discharged it’s actual duties and debts to the operating entity, including OA and any lower level holding and parallel operating companies.

    Tell Obama and Holder … here is the pie and all of the pie. We will put it into bankruptcy with only debts to subcontractors and our maximum pile of cash put in. Next move yours.

    It will be up to the tort plaintiffs to establish liability beyond the perpetrator of the tort. Undoubtedly, there will be a class action case here and a number of Federal cases.

    But now BP and every BP entity above the operator entity and subcontractors have already paid off every legal debt and maximum liability under the law. As clean as Caesar’s wife.

    After this get down and dirty and stay ahead of the game.

    Can the corporate veil be pierced in very big corporate ops in a tort action with statutory limits on top of it all? I doubt it if the corporate leadership has real Chutzpah. A guy like Netanyahu if he always had his way.

    From here the down and dirty on the part of BP is limited only by the chutzpah of it’s leadership. That is a jury could make a big judgement stick right on up to the Supreme Court. The government could well have most energy producers leave the US in such a situation. The government knows this and it’s survival depends on this not happening. At some point, with an adverse judgement, the big operators will be compelled to have exceedingly high crack spreads or shut down and demolish domestic refining. Why not? The facilities would be near worthless since the increased crack spreads due to reserves against liability would be required of all. New refineries would be welcomed elsewhere and why cause a glut of refining derived from refineries you did not demolish?

    A vicious tort liability will insure very high priced petroleum products and the government knows it too!

    What are the real damages going to be here from a single well exploration failure? Could be $1 trillion according to some material I have read. Then there are damages. Attaching strict liability here would be catastrophic to the nation.

    So, if BP, contained the tort problem to a bankrupt operator after paying every debt to the operator as a capital contribution then kick the problem to the lessor of the field… the US government. If in a sui generis situation the pick of the lessor is liable , the lessor would be too. If I knowingly lease a house to drug dealers am I not culpable. So Uncle S would be in a similar situation if sui generis situations are never-the-less strictly held liable. Collect from Uncle S. Just musings here from lack of internal knowledge. But this would be the first avenue I would explore.

    I have always been a whisperer into the ears of the big shot. This would be my first pass whisperings.

    Is it possible to write a law criminalizing what has never happened before but clearly anticipated in the blow out shut down apparatus constructed by Cameron? Every expert thought the device would almost always work. Failures do happen no matter the due diligence done. Congress recognized it’s sharing of the risk in passing the Oil Pollution Act of 1990 AND bythe government as a whole in leasing the oil block to the BP operator. If the government had done due diligence to the standard that the BP operator is liable beyond limits, the government should not have entered into the lease.

    Of course, BP might have been as dumb as a doorpost in guarantees to the government.

    Comment by Jerry J — June 7, 2010 @ 1:03 PM | Reply

    • One option would be to put in a big pile of cash, more than might be lost in litigation.

      Comment by thefourteenthbanker — June 8, 2010 @ 9:07 PM | Reply

  4. The idea of seizure or receivership is really intriguing. To be placed in receivership is not really an option. Creditors legally owed may petition for involuntary bankruptcy. Right now, not even the operating entity has legal debts in excess of it’s assets. That requires a final enforcable judgment. Many years away, especially if the operating entity files bankruptcy. The trustee owes a duty to existing creditors to resist unjust claims. An unperfected judgement is just that… an unjust claim until perfected.

    If the government is able to literally seize BP assets ala Venezuela in the US, a lot of people will wind down their affairs and exit. But, the idea seems to be the usual ignorant populist blather.

    It is in the cards that most losses in gulf states are not collectable. What gives a shrimper property rights over free creatures in the Gulf of Mexico? For that matter, what gives anyone property rights over oil below the surface of the Earth but legal concepts long antedating the very idea of digging for even coal.

    What makes sense is socialist collective rights to clean air and so forth. That is a state implemented right. But here, by leasing, the state leased away those rights.Furthermore, the same state statutorily limited collections for citizen damages. Does the state have such a right claiming sovereignty over the ocean floor? The state obviously so claims.

    The state must claim the right to subrogate socialist collective rights or they could not lease the oil blocks in the Gulf. The lessee’s relied on the right of the state to lease sovereign owned land above or below water. Did the state commit an ultra vires act in leasing the block to BP? If so, the state must make good BP’s losses?

    In short, we have George Carlin’s ” goofy Shit” being lobbed to kingdom come in the BP conundrum.

    Comment by Jerry J — June 7, 2010 @ 2:22 PM | Reply

  5. I have a couple of confused sentences I originally missed looking the posts over before pushing the button. Simply put. If the lessee is liable in a sui generis situation for having attempted to drill for oil, the lessor must be liable too even if the lessor is the government of the United States. The USG will have consented to being sued under such circumstances. If this is not the case, all present operators off shore in the US should cease ops over time and phase out. The government will have been proven commercially untrustworthy.

    In short, let the government do all the extraction in the United States itself and market for it’s own account without consent to being sued.

    There is no getting around the fact that the USG entered into a commercial transaction here and the general conditions the government submitted to were limitations on risk to the operators. The government pre-empted citizen tort losses with statutory caps PLUS agreements as general conditions in the lease of the block by the operators.

    My thinking is evolving here as a result of your blog. Thanks. BP keeps looking to having a lot more options than are apparent at first blush.

    The government has the power to limit citizen tort claims as a general power. The very idea of a tort claim requires the consent of the sovereignty. When I was a kid, my parents generation literally were known to collect with baseball bats. That was their consent of the sovereign.

    Comment by Jerry J — June 7, 2010 @ 5:27 PM | Reply

  6. I’ve spent some time reviewing the images as the oil spill makes land fall. It looks pretty hopeless. Catastrophic ecosystem damage. Irreparable damage to the local economies and way of life. The army, national guard, industry, citizens are up against the forces of nature unleashed by the BP spill. They cannot prevent this disaster, but can lessen some of the harm in localized areas. Mainly the losses are going to be socialized.

    Most likely, BP has a fiduciary duty to “stick it to the USA”.

    Comment by tippygolden — June 7, 2010 @ 7:38 PM | Reply

  7. I’m wondering if the oil spill could mark an economic decline of the Gulf States into third world status. (Allegations are parts of the United States already qualify.) If this environmental disaster took place in some uninhabited or “non-Western” country BP could mainly get away with it. (High Arctic, Alaska, Nigeria, Alberta tar sands). But the Gulf States are neither remote nor foreign.

    Comment by tippygolden — June 7, 2010 @ 7:50 PM | Reply

    • This morning I listened to reports of the damage UNDER the sea (about time), followed by a story about how we’re killing ourselves by being so sedentary. Turns out we are designed to MOVE (who knew???). It hit me, my old friend was right – “man is the only animal who s..ts where he sleeps.” We are supposed to be the dominant (smartest) species, and yet we are killing ourselves, but not before we destroy the rest of the life on earth. Talk about arrogance! We would be lucky to end up a Third World country – right now, as I see it, we’re headed for extinction, and deservedly so.

      Comment by Sandi — June 7, 2010 @ 8:30 PM | Reply

  8. The damage is simply disgusting . But , is it irreparable? The stuff evaporates after a time. To me, there are far more damaging things going on with most unpleasant overtones. My own personal perspective starts from a Deep Ecology perspective. Far, far worse will be the agriculture related losses of fertile soil degradation and shallow swamp effects arising from soil compaction. Add in water degradation in many marginal agricultural areas and human die off looms. The entire problem of overpopulation can be traced to the sudden spurt in populations of breeders that commenced with massive attempts to decrease infant mortality a century ago. This unintended effect of compassion set off the explosion that would have been somewhat self correcting had not increased food resources become available from the Green Revolution in the mid twentieth century. Add in the tertiary effects of other kinds of population extenders as in being able to deplete the oceans, the correcting influence would have again been set in motion.

    The crux of the problem is the absolute refusal under moral understandings handed down to us for millennia to force preventative birth solutions. I view this aspect of solutions to now be impossible to implement. That leaves social breakdown from inability to cope with societally required solutions that triggers mass population collapse. That said, the solution is abroad among humans already in asymetrical warfare forcing the collapse of mass sovereignties. Some will still dominate.

    As for oil and gas, a really detailed look into the logistics of both in North america shows North america could survive far longer than elsewhere. Cirumstances in the US though heavily suggest breakdown and simplification that will force down US populations.

    One failed well here. Working from memory and using Topic Papers 19 and 29 especially relating to the NPC Global Oil and Gas Study, The Us has 22 Bn Bbl of Proved Reserves. This is an SEC mandated number that is quite meaningless in terms of field potentials. This number would correlate now to US recoverable Conventional Oil remaining. The study concludes that another 240 bn bbl would be recoverable by Enhanced Oil Recovery Methods. The total future recoverable Conventional and Unconventional Oils would approximate 430 bn bbl in the US. This number has only 10 bn bbl of tar sands. It does include around 60 bn bbl of Deep Water . At the same time Transition Zone oil recoveries are estimated at only 20 bn bbl. I am most interested in Residual Oil Zone recoveries and there is much opinion that Transition Zone or ROZ recoveries will be much, much greater. These studies were done with an oil price of $35-$50 bbl WTI.

    All in all, a higher oil price will increase these numbers so that a working estimate of 400 bn bbl of future recovery would be in order excluding the bulk of deep water.

    Add in Unconventional Gas potentials even discounting production curves and we will be awash in gas too. The major contention is that UG wells drop 50 % in the first full year. After several years they will produce steadily low humbers for many many years. Price in the profits and cost recovery in the first two years and eventually there will be huge numbers of wells steadily producing mass amounts. This aspect of gas production would be ideal for use of the Syntroleum portable direct conversion of gas to middle distillate process.

    All in all there is a global conundrum . Find the energy to provide food, heat and shelter to the existing population or reduce the population to levels where existing energies will provide for the survivors. The warlords will make these decisions?

    Another aspect of all this is that much of the US energy pig assertion is a cannard. The critical use to maintain population food, heat and shelter currently centers around uses of middle distillates derived from refining. For every two gallons of present critical middle distillate requirements we automatically get 3 gallons of light distillates. Most of the light distillate production is gasolines. If we cut US piggish gasoline uses we also cut critical middle distillate uses. Quickly, there would be home heating shortages and transportation shortages of needed middle distillates once the relatively thin layer of personal diesel uses are forclosed. Think of the financial losses if you cannot drive your diesel transportation for personal uses.

    We wanted complexity and became the Sorcerer’s Apprentice as Mickey Mouse became in Fantasia.

    The state could decree us out of this conundrum by forcing all heating oil conversion to gas. By forcing conversion of diesel rail to electric power and forcing virtually all but short distance trucks onto rail systems using Road Railer etc. Obviously, we would suffer huge shortages of gasolines . Equally obviously, all these factors would require highly competent co-ordination. This requires a strong socialist mix state that is very much delegatory to the executive. I see this as nearly impossible tonight. The US would disintegrate before any reasonable effort could achieve success. The financial losses would be catastrophic. It would take an American Caesar.

    Comment by Jerry J — June 7, 2010 @ 9:00 PM | Reply

  9. I’d like to add here that electric power is far from clean. Indeed, the majority of our electrical power comes from coal production which (even IF it could be rendered clean burning, which it can’t) decimates the natural balance in mining areas and beyond.

    As a result, I would posit that electrical power is much more destructive than oil in it’s current form.

    Nuclear costs a fortune, and there’s that pesky problem of waste – so IMO, that’s not an option.

    The only sustainable/acceptable solution is solar/wind power and conservation going forward.

    Comment by Lucy Honeychurch — June 8, 2010 @ 10:41 AM | Reply

  10. Electric power need not rely on explosively fired powdered coal. More and more plants are able to switch to gas at will.There is more and more Combined Cycle Generation coming on line. We are also at a crossroads given the development of the Solid Oxide Fuel Cell. Electric power for rail purposes could readily be a hybrid power generation system in open space trunk systems like UP or BNSF. Wind generation for dedicated rail use will now have the intermittancy problem solved. Probably in quite flexible ways. The SOFC will allow conversion of wind power to hydrogen in off peak current draws or when trains are not in the power zone fed by wind generation. When the windturbines are down the stored hydrogen could be drawn off to produce power via the SOFC. A third variant would be use of the Syntroleum process to produce middle distillate from local pockets of stranded gas nearby to fuel generation in the power zone when trains are in the zone. Then too, pipelines could fuel distillate or gas depending on economics. Just as an example, BNSF runs close to sources of Syncrude that could be gasified or cracked for middle distillate and piped to main line power stations. Naturally, these power stations dedicated to providing rail power will also distribute locally. Lastly, a nuclear power plant could feed power as well. The problem in the East is also now amenable to electric power applications and is significantly electrified already. The eastern roads , particularly in the north, could easily rely on Marcellus Shale and imported LNG. Both could quite readily end middle distillate heating in the North East.Of course, there would be a sudden heavy shrinkage of gasolines. Indeed, LNG regas facilities are already planned or underway to remove heating oil from the more populous parts of the Northeast… the NYC -Boston corridor. Marcellus Shale could replace this process or supplement it. Here too, there is an already existing transport corridor through the Berkshires. The Hoosac Tunnel now has only one track. It could also be expanded.

    What is needed here are long term decisions that cannot be ideologically reversed to insure recovery of the investment. I view that as politically impossible under the present failed system. Hyper tech society requires stable fixed governance or the hyper tech systems capital is not recoverable. Decisions need to be made that stick.

    The key is flexibility of local application and living with the basic choice.

    If we want everything pristine, population must be reduced by decree. I suspect the US could exist under existing energy supplies using ingenuity with a 100 million population.

    Our problem is ourselves. The practical solutions to most of the problems already exist.

    Comment by Jerry J — June 8, 2010 @ 12:10 PM | Reply

  11. So, that’s some good news in all this. LNG has potential, but you’re right about the requirement for a consistent government commitment. This prerequisite is also key due to the fact that much remediation is required re: safe/sustainable natural gas production/delivery regulation/oversight/enforcement. A natural gas power plant locally (to me) just blew up during construction, and the persistent use of fracking to get at the gas has proved disastrous in a variety of ugly ways.

    I think solar/wind has much greater potential for private equity/vc investment, and is less dependent on government coordination to succeed. The PE/VC industry has it’s own problems with their current funding models, but those are much easier to solve than the competing interests the government is subject to. Which is a good thing. None are mutually exclusive solutions to our problem.

    I like the potential of renewables for the obvious reasons, and because it’s much more likely to create an economic multiplier effect due to the fact that it leverages our core competence – small company innovation. For example, I think it’s entirely possible that in the near future, most consumers will use solar water heaters for their hot water.

    If we could each work (as individuals) on getting our homes to a net-zero energy consumption rate, we’d be a long way toward a solution without having to depend on the government to make it happen.

    Comment by Lucy Honeychurch — June 8, 2010 @ 12:41 PM | Reply

  12. This afternoon, the press is carrying accounts that scientists are scoffing at BP’s claims of containment. In fact people officially involved are making the most startling claims of even 100,000 bbl day now escaping collection. They claim they are denied data and so forth. This tells me that BP has run out of options or that the government types involved are in panic mode. Or both. The scientists are feeding a press field day. Might all concerned now simply be out of options?

    At some point, probably long past, Obama needs to seize the site under color of national security . They had better have the requitred logistics and methodolgies in place to interdict the problem. My sense all along has been that the government stood back here to use the time to assemble the logistics to interdict. Now they may be forced to go with what they have. I assume here that the government gave permission for BP to cut the riser pipe as they did once the government logistics were sufficently in place to seize the well site. Pushing the envelope on completion of the logistics build up, of course.

    Might BP and the government both simply be without abilities to interdict here? That is, the possible foresight and mobilization I outline above is pure bunk? if so, the Obama response would be more tardy and incompetent than the Bush Katrina reponse.

    Comment by Jerry J — June 8, 2010 @ 5:08 PM | Reply

  13. Environmental Lawyers Weigh BP’s Liability in Leak – from todays PBS Newshour. You can watch it here:

    http://www.pbs.org/newshour/video/module.html?mod=0&pkg=8062010&seg=1

    Comment by Lucy Honeychurch — June 8, 2010 @ 8:04 PM | Reply


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