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BP will pay its record setting settlement over the course of the next 18 years

BP (ticker: BP) will pay $18.7 billion in settlements to the U.S. and the five states along the Gulf of Mexico to resolve the Deepwater Horizons oil spill that took place in 2010. The agreement is “the largest settlement with a single entity in American history,” U.S. Attorney General Loretta E. Lynch said.

BP’s U.S. upstream subsidiary, BP Exploration and Production (BPXP) will pay $5.5 billion to the U.S. government under the Clean Water Act (CWA) over the next 15 years, according to a BP press release. $7.1 billion will be paid to the U.S. and the five Gulf states over the next 15 years for natural resource damages (NRD) in addition to the $1 billion already committed for early restoration. The company will set aside an additional $232 million to be added to the NRD interest payment at the end of the payment period to cover any further natural resource damages that are unknown at the time of the agreement. A total of $4.9 billion will be paid over 18 years to settle economic and other claims made by the five Gulf States, and up to $1 billion will be paid to resolve claims made by more than 400 local government entities.

“This agreement will resolve the largest liabilities remaining from the tragic accident,” BP Chief Executive Officer Bob Dudley said. “For the United States and the Gulf in particular, this agreement will deliver a significant income stream over many years for further restoration of natural resources and for losses related to the spill.”

The company’s pre-tax charge associated with the Deepwater Horizon accident will rise by about $10 billion from $43.8 billion at the end of the quarter, the company said in its press release.

NRD and CWA payments are scheduled to start 12 months after the agreements become final. Total payments for NRD, CWA and state claims will be made at a rate around $1.1 billion a year for the majority of the payment period.

BP Payment Schedule for Gulf of Mexico Settlement

Source: BP

“For BP, this [decision] will provide certainty with respect to BP’s financial obligations for the matters settled, particularly with the ability to spread payments smoothly over many years,” said BP Chief Financial Officer Brian Gilvary. “The impact of the settlement on our balance sheet and cash flow will be manageable and enables BP to continue to invest in and grow its business.”

Impact: on BP and the Gulf

Jim Harden, Hein & Associates

Jim Harden, Hein & Associates

Oil & Gas 360® spoke with experts and residents in Gulf of Mexico states who were affected by the blowout  to get their perspectives on the settlement payment. One thread was common among responses:  things can start moving forward again.

When asked how the record payment would affect BP, Jim Harden, Principal with Hein & Associates, said that this would not have a tremendous effect on BP moving forward. “Is it a large amount? Yes. Is it going to destroy their balance sheet? No. I don’t want to call it a non-event, but certainly this is not the ruination of BP.”

Harden noted that while the amount BP is paying per barrel of oil exceeds the $3,000 per barrel limit set by Congress, it can still be easily absorbed by a company of BP’s size. “BP has over $30 billion in cash on their balance sheet … they aren’t going to be worrying about bankruptcy because of the settlement.”

Harden went on to say that BP’s biggest concern right now is the same as every other E&P: oil prices. “Their refining sector is still doing well, but their upstream [sector] is still worried about commodity prices.”

Investors seemed to agree with Harden, with stock prices for the company rising on news that the company had reached a settlement. “This settlement brings clarity and certainty for the future payments so that is sort of a relief,” Jean-Pierre Dmirdijian, analyst at London-based Liberum brokerage told EuroNews. This gives the company the ability to focus on what it does best: producing oil and gas.

Jeff Collier is mayor of Dauphin Island, Alabama, a beach, boating, deep sea fishing destination in the Gulf of Mexico near Mobile. Dauphin Island was hit hard by the Deepwater Horizon spill. Collier told OAG360 that he thought the settlement would help Dauphin Island move forward.

Gulf of Mexico

Dauphin Island

“[When the spill happened] it was devastating. That’s the best way to put it,” Collier said. “But if you asked me five years ago where I thought we would be today, I would have painted a much less rosy picture for you then we’re seeing now.” Much of Dauphin Island’s economy is dependent on eco-tourism, meaning the economy there was hit especially hard following the 2010 oil spill.

“People will argue over the dollar amount, but this way we will be receiving payments for the next 15 to 18 years instead of paying for litigation and having nothing to show for it. We can start looking forward … and hopefully be better off for it in the long term.”

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