The Fourteenth Banker Blog

June 11, 2010

Criminal and Civil Fraud – BP Edition

Filed under: Running Commentary — thefourteenthbanker @ 12:26 PM

Would not misrepresenting the actual oil spill flow, on which massive fine calculations depend, be an act of fraud against the United States of America and all BP shareholders?

Reuters announces that the daily flow rate from the spill is actually double previous estimates: “News that the flow rate may be as high 40,000 barrels (1.68 million gallons/6.36 million liters) per day — twice as much as previously thought — came after the U.S. market closed on Thursday.” This is very bad news as it effectively doubles any accrued fines that the firm will ultimately have to pay: the new liability estimate now may be as high as $80 billion!

So the Justice department probes may not be just political posturing.

Additionally, from Naked Cap, is this discussion of whether full externalities recovery has a chance of going anywhere.  This opens up a whole new topic for discussion.  Limiting corporate liability as a general principle has something going for it.  It helps the profit motive and capital formation.  But, in the last several decades, capital has seemed to go disproportionately to large enterprise, which has a number of negative effects which I won’t attempt to enumerate.  I think much of the discourse out there, whether regarding Financial Services or any industry, is that industry has become too powerful.  If there was a general profit squeeze in big business, would capital seek out new entrepreneurial ventures or even local staple businesses more readily? Would this not be good for our communities even if the cost of goods was slightly higher.  After all, look what happens to all those cheap goods?  They break or are discarded.  If a more moderate, or as our government leaders put it, austere style of living is necessary, why not at least do it with more local businesses and fewer mega corporations?



  1. If fraud could be even hinted at as a result of public pronouncements, why would BP or any other company release anything? Not even a “No Comment” . What could be worse than day after day of big mouthing that makes BP look like morons. Better silence as a PR tactic if what is put out is incompetent. Then , everything put out by BP sounded like opinion to me. The excercise of “free speech”. Now, private communications by BP with say the Coast Guard might be taken differently if BP did not constantly qualify their statements with ” it appears” and other words like ” may”.

    Can it be a crime to not know what you are talking about? If so, the vast majority of Americans are guilty of crimes too! This might be the case if there were a standard of criminal culpability based on licensed knowledge as in the case of physicians. But that is acts, not motor mouthing.

    My first word to any Federal Officer I encountered is to ask if this is a criminal inquiry. In front of witnesses always.

    Yesterday, the WSJ carried a piece or two about BP and it’s liability issue. Onw major lawyer said Obama’s latest grandstanding would be a line in the sand. That, BP was subject to statutory limitations on liability for direct damages. One of the pieces claims BP Exploration and Production, Inc has paid out $49 million in claims. That suggests that BP will take the position that the tort extends only to BP Exploration and Production, Inc. and that that liability is capped at $75 million.

    It is obvious that BP is already getting the Crown on it’s side as it should given the stakes to Great Britain. The British press and public seem to be rallying to BP as well.

    One must wonder, if one were an insider bigshot at BP, if BP has strayed too far beyond it’s safety limit from a self preservation viewpoint. If there are problems with BP’s deep water exploration of a legal nature as lessee , the Lessor, The US Government, has problems too. This is clouded by the USG being a sovereign. One would think, the meanest and dirtiest legal types inside BP would be prepared to go the limit on this at some point.

    Will not BP litigate the issue stops at BP Exploration and Production and it’s tort costs cap out at $75 million. Undoubtedly, BPE&P has general liability and property coverages that cover themselves and subcontractors for the bulk of the losses.

    As for the government proscribing doing business with BP, they do not do business with BPE&P but with other BP subsidiaries that would not be a party to the tort in any way. They attack the “innocent”. But , if BP outside of BP&E were proscribed would they not shut down refining operations due to US revenue declines? As for retail ops, they can divert refined product to their retail ops from elsewhere or buy it open market for the duration.

    So, unless BP were utter fools they almost surely have isolated their losses. They understand the other majors will understand their own future dangers if BP is attacked. I would expect that all will curtail Gulf Operations to a minimum out of necessity of self preservation. Then, BP has the government of the UK in it’s corner out of sheer necessity too.

    If the lessor of the lease to BP were a private party, what would be the private parties risk possibilities here from the Lessee leaking oil all over the land around the well with huge amounts going into the rivers and water table? Would the big hit be the Lessor, who has tort claims on the Lessee who has tort claims on subcontractors. This was an accident. If the Lessor should not have entered into the lease out of latent danger to the public and planet, that lessor would be responsible. The public purse desired royalties and incurred risk trying to earn those royalties. That says the profits were privatized and the losses were socialized.

    Comment by Jerry J — June 11, 2010 @ 2:29 PM | Reply

  2. Oops, I misposted a reply meant for here just below in the banking blog.

    I see the pundits are factoring in a $4300 max per bbl civil gross negligence fine in arriving at these numbers. That fine would be against the corporate perpetrator of gross negigence causing the leaked barrels of crude. I would think , as a matter of public policy, that the fine would go no further than BP Production & Exploration,Inc. Besides, the gross negligence occurred in the causes of failure that led to the blowout. If, after the fact PR blatherings constitute gross negligence on which a fine based on per barrel of leakage caused before the fact can be levied the other players should exit Gulf production. If the fine can cross over to other entities from a subsidiary perpetrator that is adequately capitalized under the normal circumstances, that exit should be forthwith. Indeed, BP plc would be well advised to put all pressure possible to it’s own government and deeply consider spinning off US ops or liquidating same . That would include unilateral abandonment of lease blocks. If,as has been suggested, BP will not last the summer is quite possible or probable, these decisions would be forced in the immediate future.

    If the US as lessor of the block is unable to suggest a workable solution to the blow out, how can they hold the lessee to what the government is unable to do? Even more startling, we would see that the Department of Energy itself was evenj more negligent than the BP unit involved. Under such circumstances, might not BP in litigation be able to prove that the relevant government agencies were grossly and willfully negligent in allowing themselves to be captured by the industry. No crime or negigence there. The government was compromised by ownership of the lease, taking royalties and kissing the industry tuchess? What better proof of gross negligence on the part of the government than their own allegation that they relied on public relations ineptness of BP? I wonder what a full, in court or by filings, airing of industry dominance over regulatory matters since Reagan would do?
    Might the lessor be shown to be more negligent than the lessee? Has the government tried to subpoena anything from BP since the blow out? If the government did not forcibly try to get data to interdict the leak , even yet?, they could hardly allege gross negligence of their own lessee unless it applies to the government too.

    What would a guy like Sir John Cadman who ran Anglo Iranian in the 1930’s do today?

    Comment by Jerry J — June 11, 2010 @ 8:43 PM | Reply

    • “[M]ight not BP in litigation be able to prove that the relevant government agencies were grossly and willfully negligent in allowing themselves to be captured by the industry.”

      This is truly hilarious. You cast BP as the man who kills his parents, then throws himself on the mercy of the court because he’s an orphan. Such a breathtaking distortion of justice is only conceivable in an environment corrupted beyond redemption by money.

      Comment by reslez — June 17, 2010 @ 10:28 PM | Reply

  3. This subject gets more interesting, the more I delve into it from a total perspective. CNN Money today has a chart ” Big Oil races to drill deep in the Gulf of Mexico”. There are 70 wells and projects deeper than 1000 feet extant. BP accounts for 13 of them. Anadarko/ Mobil has 12, Shell 9, Chevron, ENI and Murphy 5 each. After that it spreads out to quite a few players. 33 of these wells are projects underway. If, these players can be fined $4300 bbl for gross negligence in circumstances of a blow out failure, then they are fools not to abandon wells under way as soon as they can confirm what might happen to them.

    Much will be made of a plan response that I bet was contemplated by none of these failures. That is failure of the blow out preventer itself and destruction of the casing itself. Ultimately, my thinking is that it will be quite provable that no immediate method existed to interdict what happened in BP’s project. I also suspect that none of the remediation attempts made the problem worse. That is, no amount of official prevarication between BP and the government, should there be anything substantial, would have increased the damage. The gross negligence occurred only with the blowout.

    It would be very interesting to research the realistic estimated future production decrease of these wells should they all be shut in. The number will be quite substantial. My own interest is centered in EOR of terrestrial domestic wells plus Prudoe Bay EOR. EOR could readily offset this deep well production plus a great deal more over time. ( That is 240 bn bbl for EOR total and 119 bn bbl including all deep water according the NPC Global Oil and Gas Study Topic Paper 19)But these wells are operating or underway. What is even more interesting is that EOR in the areas I am interested in requires huge sequestration of CO2 from present extant emitters. all are reasonably pipeline close to major areas of where US EOR would be effective. ( That, or the CO2 is easily shipped to the EOR fields such as Prudoe Bay.

    So, are all these big liability numbers in the realm of the real world? If the government does an Andersen to BP, would the present players stick around in the Gulf? There are 21 players in the deep gulf compared to a handful in the accounting area. That is, the pols could run for cover against any of these players in subsequent accidents given their numbers.

    Besides, shutting down might permanently increase crude prices in the US. That would be great for EOR in the continental US.

    Obama must be very correct on what he pursues here.

    Comment by Jerry J — June 11, 2010 @ 10:06 PM | Reply

  4. Obama is starting to make a lot of noise about the BP spill. When you read all about the noise, you get no details of just what they are going to do. Now they want to hold BP accountable which is meaningless drivel. A lot like saying I am going to make sure I can breathe. What matters is what the government can compel BP to do that would not be at cross purposes with what little passes for real life integrated energy policy. Right now, there are 70 rigs operating in deep waters of the Gulf of Mexico. 37 of these operating rigs are producing oil. Quite a bit of oil actually. The producing rigs are multiwell operations. I am trying to get a number on daily production of these 37 producing rigs but the numbers seem buried in total gulf production. Thunder Horse alone is now producing a couple hundred thousand bbl a day. Policy question one is what acts against BP would cause these wells to shut down and abandon from insane risk being suddenly put on the operators. Question two is what would the price effect be on this sudden ending of production? The corollary to both would be it’s effect on financing these domestic production cessations as imports. Specifics may not be known but the effect would be to increase fuel oils and gasoline costs substantially. These price increases will have an effect on crack spreads. In short, as Obama told the PM in Britain yesterday , he does not seek to break BP.

    Now BP may only be forced to pay out what it may legally be imposed on BP. The law limits this exposure. So, what I really see here is a lot of political grandstanding by Obama. He and the administration do not know what to do both financially and in ending the spill, let alone remediation.

    Why has the government not seized the BP well itself and acted to close it down itself? Again obvious. The government does not know what to do and probably still lacks the means to shut in the well even if they did know. If the government has both knowledge and means and my preceding statement is pure bunk, it means the government is letting the leak go on and on over financially securing itself against BP who they limited liability for as a condition to the deal itself.

    Must be one or the other or both. That is one hell of a fix for Obama to walk into when he took office. Obviously , BP does not know what to do successfully either or they long ago would have done it.

    Comment by Jerry J — June 13, 2010 @ 12:48 PM | Reply

    • Quite a quandry. Youvare correct that to actually break BP is probably too severe with too many unpredictable consequences. I would like to see severe but not fatal consequences to the corporation. Then, severe consequences to the individuals that hide within the corporation that contribute, even lead, this culture of shortcuts, dissembling, greed, etc. If the firm lost 2-3 years full profits, haircuts on out year profits, some production rights, was required to do some “community service”, and took down some of it’s on the scene managers and right up the chain as far as decision making or the establishment of excessive performance pressures goes; and subjected those individuals to termination, clawbacks, and perhaps individual liability through full records disclosure, that might be enough to change the prevailing culture while keeping responsible production going.

      Comment by thefourteenthbanker — June 13, 2010 @ 3:24 PM | Reply

  5. Today, the Guardian UK ran a piece ” Tide of anger may turn a n ecological tradgedy into a political nightmare” By suzanne Goldenberg,Paul harris, Jullia Kollewe

    They discuss Robert Reich’s outburst about seizing BP as if it were AIG. This really surprises me even if it is bluster. The block and operation that encompasses the Deepwater Horizon well is a huge separate Joint venture that is 65 % owned by BP, 25 % owned by Anadarko with the remaining 10 % pareceled out to other majors. This entity would be the only legal entity that could possibly be seized to rectify the disaster. This entity would be the entity subject to any fines for leaking oil etc. I find it inconcievable that BP and Exxon Mobil ( Anadarko)would not have created an airtight entity to contain any and all tort actions or government seizures. ( I went to great lengths to make sure no payroll tax liabilities migrated from the several dozen ventures of a similar nature I was involved with at any one time. Similarly, insurance and liability isolation was just as tightly controlled. My J/V’s were a petty nuisance compared to this venture.)

    There can be no AIG problem at BP because AIG had legally owing liabilities not payable at the moment. BP , in no way could be insolvent. At least until final judgements are entered a generation from now with respect to both BP and Exxon Mobil and others. These types of liabilities , should they attach would almost certainly be joint and several.

    Are these bureaucrats cum professors really that out of touch with realities?

    My own view has been that the specific joint venture should have been seized weeks ago providing the government could actually remedy the situation by curing it. Obviously, the government was not logistically prepared. That is a fact demonstrated from the first days of the disaster. Virtually nothing of a logistics nature actually existed to contain the oil in ways that could be immediately deployed. It was all on paper only. This was deliberate policy in Bush Administration. They were starving the beast as the right has proclaimed since the forties.

    Going even further just who are the venturers within BP, XOM and others. Almost certainly they are , at top, the E&P subsidiary of the big oil firms.

    Perhaps we ought to glad Israel will do the dirty work if we are fixin to doin the Iran caper?

    Comment by Jerry J — June 13, 2010 @ 5:42 PM | Reply

  6. I just started trying to do some detail research on the Deepwater Spill. ( Block 252 Macondo Play) As I mentioned above my interest is in US mature well EOR . My only interest here was general to the industry. I thought there was a tie in with XOM here but Anadarko is out on their own. Anadarko has 25 % operating interest in the lease and is literally responsible for 25 % of any losses according to a Bloomberg piece citing Fadel Gheit of Oppenheimer. The other 10 % is owned by MOEX a unit of Mitsui and it too is liable for it’s prorata share of the losses. Anadarko is relatively small company but very important in US E&P. According to Gheit Anadarko may well take the bigger hit although holding a silent non operator position may not be liable for negligence fines and so forth. Anadarko has insurance to cover about three months of their share of the costs according to Gheit.

    I tried to find a subsidiary chain here relating to BP but it is fragmentary. In a worse case situation, the Block 252 Macondo Lease is directly owned by BP Exploration and Production , Inc. with no intermediate owner of the lease. BPE&P should have huge amounts of insurances compared to Anadarko and Mitsui. My first question for further investigation would be would the $75 million tort limit enacted in 1990 be the total for all three parties since they share a single tort? It would be meaningless to hold differently. That said, Anadarko has $177 million of coverage, so for press relations purposes they are not interjecting that they may be subject to limitations. Once the insurance is used up, you can bet they will raise this issue if not way, way before. Even considering the limit separately, they would top out at $75 million.

    Anadarko is the second biggest operator in deep water exploration and is a huge leader in it’s field. Between BP and Anadarko, they have 24 out of 70 rigs operating in the Gulf. This must be a considerable portion of wells in place and underway. Both together have 24 rigs conducting ops. As of early December the Gulf production was around 950,000 bbl day. Given increases in Thunder Horse for example that number could be a fair bit higher.

    Bust these two companies and US oil E&P will radically suffer. It would not take too much to put Anadarko out of being an E&P player here . BP is many times larger than Anadarko leading Gheit to caution that the biggest balance sheet damage would be to Anadarko based on prorata liabilities required . That says to me that the limitations arguments will be fought out in court. That too suggests to me that both companies or one start limiting payouts and let it all go to court.

    Equally obviously, non operating deepwater participants positions may well not be close to marketable. If they write down the impairment they may as well abandon the risk too. I bet this will be a very big item at current board meetings of those holding deep water positions.

    Anadarko just recently bought their 25 % position in Macondo Lease.

    No wonder Obama is grandstanding. It would take 50 days just to get up to speed on this in WH staff circles. So outside of negligence fines to BPE&P, BPE&P is only liable for 62.5 % . But surely all these costs if owed would be joint and several? If they are, there must be some very paniky people in big oil.

    Comment by Jerry J — June 13, 2010 @ 9:21 PM | Reply

  7. Oops, that is 65 % above. Today, the abysmal panic in government over the BP Macondo spill is allegedly reaching a screamers pitch. Bloomberg is running a piece headlined ‘ BP May Lose Oil Leases, Contracts After Spill’. Look at this tout! ‘The U.S. may revoke BP’s status as operator of producing wells in the Gulf of Mexico, such as Thunder Horse,or of leases at Prudoe Bay, said David Pursell,a managing director at Tudor Pickering Holt Co. LLC, a Houston investment bank.’

    Take Prudoe Bay . The leases are owned and operated by BP Alaska which in turn sold the lease for an operating royalty to BP Prudoe Bay Royalty Trust. It is a virtual certainty that BP Alaska had literally nothing to do with the Macondo Spill. Just how would the USG deprive BP Alaska of it’s property without compensation? They might sell BP Alaska having acquired title to the stock from BP in a court action many years from now. But just how do they acquire the right to strip a company and outside shareholders such as those holding BPT like me?

    We get to another TBTF situation here. BP plc is a consolidation of British Petroleum, Standard Oil of Indiana and the Atlantic Richfield Company. On top of that,Anadarko, a very key player in oil and gas E&P would be severely impacted for its 25 % passive lease position in Macondo.

    So, I sold out of BPT today at a gain to await developments. BP itself must be severely in play because its value will be zero or way above its 52 week high of around $62 share. There must be a lot of long term options for BP being traded.

    Just how does the government strip a lease away from someone unless it has the right when they, as lessor, leased to the operator entity. Since the Macondo lease has three participants in the single property the Block 252 lease called Macondo, the operating entity is a joint venture of some sort. A separate legal entity. Undoubtedly , this entity is financially viable on it’s own and not ” Thinly Capitalized”. That is , unless BP, Anadarko and Molex ( Through subsidiaries , themselves viable.) were quite foolish. Do these three joint venturers carry a wrap insurance for the JV?

    Are billions being made here just putting it all in play and the government is too stupid to squelch comment about their future actions? Is the government as negligent to investors , or more so, than the players if they are the ” Tale” of the grift? Is the government doing Professor Black’s ” control fraud” here. Encouraging deceit practices on investors by their lack of clarification? Or simply to damn stupid to understand the situation?

    Comment by Jerry J — June 14, 2010 @ 2:57 PM | Reply

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