BP 2012 Annual Report Download - page 44

Business review: BP in more depth
BP Annual Report and Form 20-F 2012
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or economic injury, actions for breach of contract, violations of statutes,
property and other environmental damage, securities law claims and various
other claims. See Legal proceedings on pages 162-169.
BP is subject to a number of investigations related to the Incident by
numerous federal and State agencies. See Legal proceedings on pages 162-
169. The types of enforcement action pursued and the nature of the
remedies sought will depend on the discretion of the prosecutors and
regulatory authorities and, in some circumstances, their assessment of BP’s
culpability, if any, following their investigations. Under the Clean Water Act,
any finding of gross negligence for purposes of penalties sought against BP
would result in significantly higher fines and penalties than the amounts for
which we have provided and would also have a material adverse impact on
the group’s reputation, would affect our ability to recover costs relating to the
Incident from other parties responsible under OPA 90 and could affect the
fines and penalties payable by BP with respect to the Incident under
enforcement actions outside the Clean Water Act context.
On 3 March 2012, BP reached an agreement (comprising two separate
settlement agreements) with the Plaintiffs’ Steering Committee (PSC) in the
Multi-District Litigation pending in New Orleans (MDL 2179) to resolve the
substantial majority of legitimate private economic and property damages
claims and medical benefits claims stemming from the Incident. The
settlement agreement in respect of economic and property damages claims
was approved by the Court on 21 December 2012, and the settlement
agreement in respect of medical benefits claims was approved on 11
January 2013. The PSC settlement is uncapped except for economic loss
claims related to the Gulf seafood industry. The cost of the PSC settlement
is expected to be paid from the $20-billion Deepwater Horizon Oil Spill Trust
fund (Trust). As at 31 December 2011, the estimate of items covered by the
settlement with the PSC for Individual and Business claims was $7.8 billion.
During 2012, BP increased its estimate of the cost of claims administration
by $280 million and also increased the estimate by a further $400 million as
described below.
Business economic loss claims received by the Deepwater Horizon Court
Supervised Settlement Program (DHCSSP) to date are being paid at a
significantly higher average amount than previously assumed by BP in
formulating the original estimate of the cost. Further, BP’s initial estimate of
aggregate liability under the settlement agreements was premised on BP’s
interpretation of certain protocols established in the economic and property
damages settlement agreement. As part of its monitoring of payments
made by the court-supervised claims processes operated by the DHCSSP
for the economic and property damages settlement, BP identified multiple
claim determinations that appeared to result from an interpretation of the
settlement agreement by that settlement’s claims administrator that BP
believes was incorrect. This interpretation produced a higher number and
value of awards than the interpretation BP assumed in making the initial
estimate. Pursuant to the mechanisms in that settlement agreement, the
claims administrator sought clarification from the court on this matter and on
30 January 2013, the court initially upheld the claims administrator’s
interpretation of the agreement.
In its unaudited fourth quarter and full year 2012 results announcement dated
5 February 2013, BP stated that if the initial trend of higher average payments
than assumed by BP in its original estimate of the cost continued, then it was
likely that BP’s estimate of these claims would be increased significantly.
Management’s initial assessment of the ruling regarding the interpretation of
the settlement agreement led to an increase in the estimated cost of the
settlement with the PSC of $400 million, bringing the total estimated cost to
$8.5 billion. This estimate was based upon management’s initial assessment
of the ruling’s impact on claims already submitted to and processed by the
DHCSSP. At that time, BP was seeking reversal of the court’s decision in
relation to this matter, management concluded that it was not possible to
estimate reliably the impact of the interpretation on any future claims not yet
received or processed by the DHCSSP.
On 6 February 2013, the court reconsidered and vacated its ruling of
30 January 2013 and stayed the processing of certain types of business
economic loss claims. The court lifted the stay on 28 February 2013. On 5
March 2013, the court affirmed the claims administrator’s interpretation of
the economic and property damages settlement agreement and rejected
BP’s position as it relates to business economic loss claims. BP strongly
disagrees with the decision of 5 March 2013 and the current implementation
of the agreement by the claims administrator. BP intends to pursue all
available legal options, including rights of appeal, to challenge this ruling.
Other business economic loss claims have continued to be paid at a higher
average amount than previously assumed by BP in determining its initial
estimate of the total cost. Management has continued to analyse the claims
in the period since 5 February 2013 to gain a better understanding of
whether or not the number and average value of claims received and
processed to date are predictive of future claims (and so would allow
management to estimate the total cost of the Settlements reliably).
Management has concluded based upon this analysis that it is not possible
to determine whether the claims experience to date is, or is not, an
appropriate basis for determining the total cost. Therefore, given the inherent
uncertainty that exists as BP pursues all available legal options to challenge
the recent ruling and the higher number of claims received and higher
average claims payments than previously assumed by BP, which may or may
not continue, management has concluded that no reliable estimate can be
made of any business economic loss claims not yet received or processed
by the DHCSSP.
Therefore, BP’s estimate of the cost of business economic loss claims at
31 December 2012 now includes only the estimated cost of claims already
received and processed by the DHCSSP. An amount of $0.8 billion
previously provided for future claims not yet received and processed by the
DHCSSP has been derecognized, with a corresponding reduction in the
reimbursement asset and therefore no net impact on the income statement,
as no reliable estimate can be made for this liability. It is therefore disclosed
as a contingent liability in Note 43. A provision will be re-established when a
reliable estimate can be made of the liability as explained more fully below.
BP’s current estimate of the total cost of those elements of the PSC
settlement that can be estimated reliably, which excludes any future
business economic loss claims not yet received or processed by the
DHCSSP, is $7.7 billion.
If BP is successful in its challenge to the court’s ruling, the total estimated
cost of the settlement agreement will, nevertheless, be significantly
higher than the current estimate of $7.7 billion, because business
economic loss claims not yet received or processed are not reflected in
the current estimate and the average payments per claim determined so
far are higher than anticipated. If BP is not successful in its challenge to
the court’s ruling, a further significant increase to the total estimated cost
of the settlement will be required. However, there can be no certainty as
to how the dispute will ultimately be resolved or determined. To the
extent that there are insufficient funds available in the Trust fund,
payments under the PSC settlement will be made by BP directly and
charged to the income statement.
As previously disclosed, significant uncertainties exist in relation to the
amount of claims that are to be paid and will become payable through the
claims process. There is significant uncertainty in relation to the amounts
that ultimately will be paid in relation to current claims, and the number, type
and amounts payable for claims not yet reported. In addition, there is further
uncertainty in relation to interpretations of the claims administrator regarding
the protocols under the economic and property damages settlement
agreement and judicial interpretation of these protocols, and the outcomes
of any further litigation including in relation to potential opt-outs from the
settlement or otherwise.
While BP has determined its current best estimate of the cost of those
aspects of the settlement with the PSC that can be measured reliably, it is
possible that the actual cost could be significantly higher than this estimate
due to the uncertainties noted above. In addition, the provision will be
re-established for remaining business economic loss claims and the
estimate will increase as more information becomes available, the
interpretation of the protocols is clarified and the claims process matures,
enabling BP to estimate reliably the cost of these claims. See Financial
statements – Note 36 on page 235 and Note 43 on page 253 for further
information.
The Gulf of Mexico oil spill has damaged BP’s reputation. This, combined
with other past events in the US (including the 2005 explosion at the Texas
City refinery and the 2006 pipeline leaks in Alaska), may lead to an increase
in the number of citations and/or the level of fines imposed in relation to any
alleged breaches of safety or environmental regulations.
See Legal proceedings on pages 162-169 and Financial statements – Note 2
on page 194.