Time is fast running out for ailing BP

Allister Heath
BP will be destroyed by US litigation – that, at least, was the shocking message forcibly conveyed to me by several senior US business executives at a high-powered dinner party last night. Guests were starkly divided by nationality: the Brits (correctly, in my view) highlighted the point that several US firms are deeply involved in the catastrophe yet have been unfairly let off. The Americans, however, were of the view that we simply don’t understand the way the US legal system works and the dreadful reputation the oil giant has acquired in the US, where it is seen as careless when it comes to safety. They were adamant: BP will be forced into bankruptcy by the massive lawsuits that will be filed against it; the litigation will take place in localities where the firm’s name is mud to maximise payouts (this was a prediction, not an endorsement of the system). Shareholders and bondholders will be wiped out; the firm’s assets will end up under the plaintiffs’ control to pay for the largest awards in corporate history. Trial lawyers will do their best to make sure BP is responsible not only for the clean-up but also for all sorts of loosely defined economic damage. The best parallel is not the Exxon Valdez disaster – which was bogged down in billion-dollar litigation for a much smaller tragedy – but asbestos, which destroyed all the firms that were involved in that tragedy.

Even I was gobsmacked by this comparison, which strikes me as completely unfair: it implies the $20bn that senators are demanding BP put into an escrow fund will just be the start. I remain slightly more optimistic. Its survival will depend on how fast the firm is able to stem the oil flow. If it manages reasonably soon, I still think it will just about pull through. The longer the oil spills out, the nearer we will be to the mid-term elections in November – and the more extreme the politicians will be, especially now that Obama is saying he wants to use the tragedy to reduce the US dependency on fossil fuels. If the spills are still ongoing in September, let alone any later, BP will be toast.

Under a fair and proportionate system, BP would be punished for the spill and forced to hand over several billion dollars in compensation; any individuals that had broken the law would be criminally prosecuted. But the entire firm would not be shut down; its investors would not be expropriated; there would be no shakedown. The kind of punishment that many in the US are now planning for what was once Britain’s biggest company – and its millions of ordinary shareholders and pensioners across the UK – would be closer to theft than to justice.

On top of what we report in the rest of the paper, here are a few more interesting findings from yesterday’s Office for Budget Responsibility report. The “trend”, long-term rate of growth is closer to 2.35 or even a pathetically low 2.25 per cent per annum – dramatically less than Gordon Brown’s assumption of 2.75 per cent. The degree of spare capacity in the economy was thus 4 per cent at the end of 2009, not 6 per cent.

The Debt Management Office’s financing needs for 2010-11 have been cut by £28.2bn to £154.4bn – fewer gilts will have to be printed, with just 44 auctions instead of 52.

Finally, Nick Clegg declared war on public sector pensions yesterday – expect some long-overdue reform on this front before the year is over.