June 16, 2010
BP to set up $20 billion spill claims fund
President Barack Obama said today that he had had "a constructive meeting with BP's chairman, Carl-Henric Svanberg.
He said he was "pleased to announce that BP has agreed to set aside $20 billion to pay claims for damages resulting from this spill."
According to the President, the $20 billion will be "put in a escrow account, administered by an impartial, independent third party."
"Additionally," said the President, "BP voluntarily agreed to establish a $100 million fund to compensate unemployed oil rig workers affected by the closure of the deepwater rigs."
"We've mutually agreed that Ken Feinberg will run the independent claims process we're putting in place," said the President, adding that "there will be a three-person panel to adjudicate claims that are turned down."
Kenneth R. Feinberg has been key to resolving many of most challenging and widely known disputes. He is best known for serving as the Special Master of the Federal September 11th Victim Compensation Fund of 2001. He currently serves as the Special Master for TARP Executive Compensation, the so-called "pay czar."
The BP Board also released its version of what was agreed, going into some details of how much it will put into the claims fund and where the money will come from. The Board also said it will cancel the previously declared first quarter dividend scheduled for payment on June 21, and that no interim dividends will be declared in respect of the second and third quarters of 2010.
The Board statement made no mention of the $100 million fund for oil field workers idled by the Obama moratorium on deepwater drilling.
BP says agreement was reached to create a $20 billion claims fund over the next three and a half years on the following basis:
BP will initially make payments of $3 billion in Q3 of 2010 and $2 billion in Q4 of 2010. These will be followed by a payment of $1.25 billion per quarter until a total of $20 billion has been paid in.
While the fund is building, BP's commitments will be assured by the setting aside of U.S. assets with a value of $20 billion. The intention is that this level of assets will decline as cash contributions are made to the fund.
The fund will be available to satisfy legitimate claims including natural resource damages and state and local response costs. Fines and penalties will be excluded from the fund and paid separately. Payments from the fund will be made as they are adjudicated, whether by [a newly established] Independent Claims Facility (ICF) referred to below, or by a court, or as agreed by BP.
The ICF will be administered by Ken Feinberg. The ICF will adjudicate on all Oil Pollution Act and tort claims excluding all federal and state claims.
Any money left in the fund once all legitimate claims have been resolved and paid will revert to BP.
The fund does not represent a cap on BP liabilities, but will be available to satisfy legitimate claims. BP says that further and more detailed terms regarding the establishment and operation of the claims fund and the ICF will be finalized and announced as soon as possible.
As a consequence of this agreement, the BP Board has reviewed its dividend policy. It says that, ""notwithstanding BP's strong financial and asset position, the current circumstances require the Board to be prudent and it has therefore decided to cancel the previously declared first quarter dividend scheduled for payment on 21st June, and that no interim dividends will be declared in respect of the second and third quarters of 2010.
"The Board remains strongly committed to the payment of future dividends and delivering long term value to shareholders. The Board will consider resumption of dividend payments in 2011 at the time of issuance of the fourth quarter 2010 results, by which time it expects to have a clearer picture of the longer term impact of the Deepwater Horizon incident.
"The Board believes that it is right and prudent to take a conservative financial position given the current uncertainty over the extent and timing of costs and liabilities relating to the spill. BP's businesses continue to perform well, with cash flows from operations expected to exceed $30 billion in 2010 at current prices and margins before taking into consideration costs related to the Deepwater Horizon spill. BP's gearing level remains at the bottom of its targeted band of 20-30 per cent. In addition, the company has over $10 billion of committed banking facilities. To further increase available cash resources, the Board intends to implement a significant reduction in organic capital spending and to increase planned divestments to approximately $10 billion over the next twelve months."
Chairman Carl-Henric Svanberg said: "We appreciated the constructive meeting conducted by the President and his senior advisers and are confident that the agreement announced today will provide greater comfort to the citizens of the Gulf coast and greater clarity to BP and its shareholders. We welcome the administration's statements acknowledging that BP is a strong company and that the administration has no interest in undermining the financial stability of BP. This agreement is a very significant step in clarifying and confirming our commitment to meet our obligations. We regret the cancellation and suspension of the dividends, but we concluded it was in the best interests of the company and its shareholders."