BP struggles to cap compensation bill

Investors wary as oil giant announces an extra $1.4bn to cover claims from the Macondo disaster and Russian revenues fall

More than three years after the Macondo well exploded, the shadow of the Gulf of Mexico disaster appears to be lengthening. Investors are used to the spiralling cost of the accident in April 2010, in which 11 people died, but they were still rattled by BP's announcement yesterday that it had increased its provision for compensation claims by $1.4bn (£913m) in the second quarter, to $9.6bn.

More worryingly, BP warned that the final compensation cost could be "significantly higher" as the oil giant is likely to keep receiving new claims until next April.

Shareholders were so concerned about this turn of events that they sent the company's stock down by more than 5 per cent at one point, its biggest decline in a single day in more than 18 months. The shares ended the day down 15.95p at 451.45p.

BP gave shareholders a second cause for disappointment yesterday, as it unveiled a disappointing 25 per cent drop in underlying profits, excluding exceptional items, to $2.7bn for the second quarter. This is well below the consensus analyst forecast of $3.4bn.

The group's bottom line was hit by an oil price that was 5 per cent lower, on average, in the period compared with the year before. BP also suffered a decline in revenues as a result of the disposals, totalling more than $50bn, which it has made since the spill to help finance the cost, as well as higher-than-expected tax charges.

The most notable income loss came from the reduced contribution from Russia. BP reported a lower-than-expected $218m profit contribution for the period from its 20 per cent stake in Russia's Rosneft, which the company acquired as part of the cash-and-shares sale of its TNK-BP joint venture in Russia in March. But the Rosneft contribution was well below the $452m payout BP received from the TNK-BP stake last year, when it still owned half the business.

Including exceptional items, BP's second-quarter profits rebounded from $104m to $2.4bn in the second quarter, after BP made billions of dollars of writedowns this time last year. The $1.4bn rise in compensation costs pushed up the net charge for the spill to $42.4bn at the end of the second quarter, when other costs such as the clean-up were included. BP's chief executive, Bob Dudley, put on a brave face: "We are seeing growth in production from new high-margin projects and are making good progress in exploration and delivery."

And analysts agreed that the so-called upstream business of oil and gas production is basically sound, if a little slimmed down after a prolonged period of disposals. Underlying oil production – adjusted for the impact of divestments – was up 4.4 per cent on the year before, BP said.

"The core upstream division was actually ahead of consensus and that's still going great guns. Fundamentally, I think BP is still moving forward," said Jason Kenney, a Santander analyst.

BP has also made good on its promise to return a large portion of the proceeds from the TNK-BP sale to investors, buying back about $2.4bn of its shares so far.

But in view of its lost income from Russia, where its exposure is now limited to the Rosneft stake, and its Gulf of Mexico compensation costs, BP is largely governed by forces over which it appears to have very little control.

The company has tried unsuccessfully to freeze compensation payments being made under the settlement it agreed last year with private sector plaintiffs over the Gulf of Mexico oil spill. It says that the office of Patrick Juneau, the claims administrator, has interpreted the settlement in a way that opens the door to "absurd" payments to people not affected by the spill.

BP is continuing to challenge Mr Juneau's interpretation but has warned that even if it succeeds, the total cost of the settlement would be "significantly higher" than $9.6bn because that figure does not reflect business economic claims not yet received or processed. BP has just $300m left in its compensation fund. The company has said that claims beyond what that fund can cover will be taken straight off future profits, so investors are expecting a hefty hit to the bottom line in the coming quarters.

Keith Bowman, an analyst at Hargreaves Lansdown Stockbrokers, said BP also remains hostage to other forces outside its control – the "oil price, government appetite for tax revenues and the strength of the broader global economy".

But the biggest problem remains whether BP will be found guilty of being grossly negligent, rather than simply negligent, with respect to the oil spill. A verdict of gross negligence would add tens of billions to its costs. That's why the company's shares continue to trade at a 40 per cent discount compared with those of its peers.

Legal saga: Investors face a long wait

BP's giant court case in New Orleans, Louisiana, will resume in September and will cover state claims related to economic restoration, damage to natural resources and the Clean Water Act.

The company has already budgeted for nearly $43bn (£28bn) in legal, clean-up and other costs. However, the bill could soar by up to $50bn if BP is found to have been grossly negligent, rather than just negligent. In that case, the maximum penalty under the Clean Water Act alone could rise from $4.5bn to about $21bn.

That worst-case scenario receded a little last week, after Halliburton – BP's cement contractor in the Gulf of Mexico – pleaded guilty to destroying evidence that would have worked in BP's favour.

However, the company is by no means in the clear. And with the case set to drag on for months, it is likely to be a long time before shareholders can sit comfortably and the share price has a chance of recovering to a level worthy of an oil company of this size.

In numbers

$2.7bn BP profit for second quarter of 2013, down from $3.6bn a year ago.

$42bn BP's total provision so far for compensation, clean-up and other costs relating to the Gulf of Mexico oil spill.

$1.4bn The amount BP's provision for compensation claims rose in the second quarter, taking the figure to $9.6bn.

$218m Profit from BP's stake in Russian giant Rosneft. A year ago its Russian joint venture TNK-BP added $452m to BP's bottom line.

Alexis Sanchez has completed a £35m move to Arsenal, the club have confirmed
sportGunners complete £35m signing of Barcelona forward
Poor teachers should be fearful of not getting pay rises or losing their job if they fail to perform, Steve Fairclough, headteacher of Abbotsholme School, suggested
voicesChris Sloggett explains why it has become an impossible career path
world cup 2014
Ray Whelan was arrested earlier this week
Arts and Entertainment
In a minor key: Keira Knightley in the lightweight 'Begin Again'
Arts and Entertainment
Celebrated children’s author Allan Ahlberg, best known for Each Peach Pear Plum
peopleIndian actress known as the 'Grand Old Lady of Bollywood' was 102
Wayne’s estate faces a claim for alleged copyright breaches
newsJohn Wayne's heirs duke it out with university over use of the late film star's nickname
Life and Style
It beggars belief: the homeless and hungry are weary, tortured, ghosts of people – with bodies contorted by imperceptible pain
lifeRough sleepers exist in every city. Hear the stories of those whose luck has run out
Mick Jagger performing at Glastonbury
Life and Style
fashionJ Crew introduces triple zero size to meet the Asia market demand
ebookA unique anthology of reporting and analysis of a crucial period of history
Santi Cazorla, Mikel Arteta and Mathieu Flamini of Arsenal launch the new Puma Arsenal kits at the Puma Store on Carnaby Street
sportMassive deal worth £150m over the next five years
Arts and Entertainment
Welsh opera singer Katherine Jenkins
musicHolyrood MPs 'staggered' at lack of Scottish artists performing
Life and Style
beautyBelgian fan lands L'Oreal campaign after being spotted at World Cup
Arts and Entertainment
Currently there is nothing to prevent all-male or all-female couples from competing against mixed sex partners at any of the country’s ballroom dancing events
Potential ban on same-sex partners in ballroom dancing competitions amounts to 'illegal discrimination'
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Business Analyst Consultant (Financial Services)

£60000 - £75000 per annum: Harrington Starr: Business Analyst Consultant (Fina...

Systems Administrator - Linux / Unix / Windows / TCP/IP / SAN

£60000 per annum: Harrington Starr: A leading provider in investment managemen...

AVS, JVS Openlink Endur Developer

£600 - £700 per day: Harrington Starr: AVS, JVS Openlink Endur Developer JVS, ...

Technical Support Analyst (C++, Windows, Linux, Perl, Graduate)

£30000 per annum: Harrington Starr: A global leader in trading platforms and e...

Day In a Page

A History of the First World War in 100 Moments: Peace without magnanimity - the summit in a railway siding that ended the fighting

A History of the First World War in 100 Moments

Peace without magnanimity - the summit in a railway siding that ended the fighting
Scottish independence: How the Commonwealth Games could swing the vote

Scottish independence: How the Commonwealth Games could swing the vote

In the final part of our series, Chris Green arrives in Glasgow - a host city struggling to keep the politics out of its celebration of sport
Out in the cold: A writer spends a night on the streets and hears the stories of the homeless

A writer spends a night on the streets

Rough sleepers - the homeless, the destitute and the drunk - exist in every city. Will Nicoll meets those whose luck has run out
Striking new stations, high-speed links and (whisper it) better services - the UK's railways are entering a new golden age

UK's railways are entering a new golden age

New stations are opening across the country and our railways appear to be entering an era not seen in Britain since the early 1950s
Conchita Wurst becomes a 'bride' on the Paris catwalk - and proves there is life after Eurovision

Conchita becomes a 'bride' on Paris catwalk

Alexander Fury salutes the Eurovision Song Contest winner's latest triumph
Pétanque World Championship in Marseilles hit by

Pétanque 'world cup' hit by death threats

This year's most acrimonious sporting event took place in France, not Brazil. How did pétanque get so passionate?
Whelks are healthy, versatile and sustainable - so why did we stop eating them in the UK?

Why did we stop eating whelks?

Whelks were the Victorian equivalent of the donor kebab and our stocks are abundant. So why do we now export them all to the Far East?
10 best women's sunglasses

In the shade: 10 best women's sunglasses

From luxury bespoke eyewear to fun festival sunnies, we round up the shades to be seen in this summer
Germany vs Argentina World Cup 2014: Lionel Messi? Javier Mascherano is key for Argentina...

World Cup final: Messi? Mascherano is key for Argentina...

No 10 is always centre of attention but Barça team-mate is just as crucial to finalists’ hopes
Siobhan-Marie O’Connor: Swimmer knows she needs Glasgow joy on road to Rio

Siobhan-Marie O’Connor: Swimmer needs Glasgow joy on road to Rio

18-year-old says this month’s Commonwealth Games are a key staging post in her career before time slips away
The true Gaza back-story that the Israelis aren’t telling this week

The true Gaza back-story that the Israelis aren’t telling this week

A future Palestine state will have no borders and be an enclave within Israel, surrounded on all sides by Israeli-held territory, says Robert Fisk
A History of the First World War in 100 Moments: The German people demand an end to the fighting

A History of the First World War in 100 Moments

The German people demand an end to the fighting
New play by Oscar Wilde's grandson reveals what the Irish wit said at his trials

New play reveals what Oscar Wilde said at trials

For a century, what Wilde actually said at his trials was a mystery. But the recent discovery of shorthand notes changed that. Now his grandson Merlin Holland has turned them into a play
Can scientists save the world's sea life from

Can scientists save our sea life?

By the end of the century, the only living things left in our oceans could be plankton and jellyfish. Alex Renton meets the scientists who are trying to turn the tide
Richard III, Trafalgar Studios, review: Martin Freeman gives highly intelligent performance

Richard III review

Martin Freeman’s psychotic monarch is big on mockery but wanting in malice