$20B deal is one BP can afford

WASHINGTON — The showdown between President Obama and BP executives Wednesday turned into a no-nonsense business meeting in which the oil company agreed to pay $20 billion into an escrow account to cover claims associated with the Gulf of Mexico oil spill.

There were also apologies from BP's chairman, Carl-Henric Svanberg, to the president and to the American people when Svanberg and his grim-faced fellow executives went before the cameras.

The thorniest issue — an administration demand that BP pay lost wages of oil-industry workers sidelined by a six-month moratorium on deep-water drilling — appears to have been resolved by a compromise. BP agreed to a $100 million voluntary contribution to a foundation that will support unemployed employees.

In the end, both sides got what they wanted. The administration, under fire for its response to the calamity, can boast of creating a huge pot of money for easing the pain of Gulf Coast residents. BP received much-needed clarity on its long-term liability, plus an explicit statement from Obama that the administration doesn't want to see BP driven into bankruptcy.

"BP is a strong and viable company, and it is in all our interests that it remain so," Obama said. "This is about accountability. At the end of the day, that's what every American wants and expects."

So, how many companies could take a $20 billion body blow and remain standing?

Not many. The amount would cover NASA's budget for a year. It would buy all shares of Kellogg. It's larger than the annual economic output of 90 countries.

But BP is an unusual company. It made profits of $5.6 billion in the first quarter of this year and $14 billion in 2009. It produces about 2.5 million barrels a day of crude oil from Russia to Angola, from Britain's North Sea to Alaska's North Slope. Until Wednesday, BP also planned to pay $10.5 billion in dividends this year, which would have left $5 billion to $10 billion in spare cash.

The company could raise the money for the escrow fund this year without borrowing a dime.

But BP has struggled to convince markets it can meet its obligations to investors and victims of the Gulf spill. BP stock has fallen to about half its value before the spill. On Tuesday, Fitch Ratings slashed BP's credit rating to BBB, two rungs above junk. Early Wednesday, investors in credit-default swaps — an insurance-like financial instrument — were pricing an almost 40 percent chance that BP would default on its debts within five years.

So, while the deal struck at the White House was designed in part to reassure citizens of the Gulf Coast, it also was designed to give shareholders a sense that the financial damage was manageable and could, over time, be contained along with the oil spill.

That's why BP asked Obama for a signal that he was not trying to run the company out of business.

That is hard to accept for many Americans who want to punish BP. But anything else could be counterproductive. BP so far has paid for everything from National Guard troops to air-quality tests done by the Environmental Protection Agency, from $5,000 checks for shrimpers to the $100 million or so for each relief well.

"This agreement underscores that as long as we need oil, Big Petroleum is better than Bankrupt Petroleum," Lincoln Mayer, a lawyer specializing in energy and antitrust at McDermott Will & Emery, said in an e-mail. "Few companies could afford a $20 billion mistake. BP is one of them, and that's a good thing."

Investment analysts appeared reassured. "It takes the political heat off the company, and it steadies the ship in rough waters," said Fadel Gheit, an oil analyst with Oppenheimer. "BP is stabilizing its financial position so it can handle cleanup costs and damages."

Svanberg, the BP chairman, said the company will begin to raise the $20 billion by suspending its dividend for three quarters, starting with one that was scheduled for Monday. That will give it $7.8 billion in cash. The company also said it would sell about $7 billion worth of assets, a fraction of its total and less than what it agreed to pay for Devon Energy assets this year.

The company's chief financial officer, Byron Grote, said BP would trim its capital-spending plans by about 10 percent this year and next, saving an additional $2 billion in 2010 and $2 billion or so in 2011. The company expects to generate $5 billion or more a year in extra cash from operations.

The deal lets BP spread out payments to the fund. The biggest chunks will come upfront: $3 billion in the third quarter, $2 billion in the fourth quarter and $1.25 billion a quarter until the full amount is paid in three years. As collateral, the company said it is "setting aside" $20 billion of U.S. assets; as it makes payments, those assets will be freed up. BP will continue to earn money on those assets, but the government effectively will have a lien on them.

The escrow fund, to be administered by Kenneth Feinberg, who oversaw a similar fund for victims of the Sept. 11 attacks, leaves many uncertainties. Fines and penalties won't be covered by the fund. Many plaintiffs will continue to pursue lawsuits.

If any money is left over, it will be returned to BP.

Grote said the plan should "give more comfort to those on the Gulf Coast of the United States, give more comfort to government, and we hope it will give more comfort to our shareholders."

He said he hoped shareholders who will not be receiving their dividends would understand "it's an extraordinary thing for the company to do, but this is an extraordinary situation we find ourselves in."