BP Oil Spill Fund May Use Drilling Revenues as Collateral

BP may use revenues from its oil and gas drilling operations here in the US as collateral for its $20 billion compensation fund. Some critics are already bashing the proposed agreement between BP and the Obama administration, saying it gives the government incentive to allow the company responsible for the worst oil spill in US history to continue drilling offshore.

According to a fact sheet detailing the 40-page-agreement that was released by the White House yesterday, the $20 billion compensation fund will be used to pay damage claims filed by businesses and individuals who suffered economically because of the spill through the Gulf Coast Claims Facility, as well as judgments and settlements reached with those who decide to file damage claims with the courts. It will also be used cover natural resource damage costs and state and local response reimbursement. However, BP will not be able to use the fund to pay any fines the federal government assesses to it over the spill.

According to a report on NOLA.com, some critics raised concerns that the fund would be diminished quickly because it will cover natural resource damage and response reimbursement, as well as economic loss claims.

“While BP should absolutely pay these costs to restore our valuable natural resources they should make those payments separate from this fund which is intended to compensate Gulf Coast families and small businesses impacted by this disaster,” Rep. Steve Scalise, R-Jefferson, told NOLA.com.

The Obama administration has said that if the fund is depleted before all claim are paid, BP would add to it.

As we reported earlier this week, BP has already deposited $2 billion into the trust fund. According to an Associated Press report, under the agreement it negotiated with the US Justice Department, the company will pay $2 billion more this year and continue in installments of $1.25 billion. The trust requires that a collateral fund be established to ensure that all the necessary money will be available if something happens to the BP subsidiary that established the trust. Details still have to be worked out, the Associated Press said, but unless another agreement is reached, the trust will be given first priority to production payments from the BP’s US oil and gas production as collateral.

That’s not sitting well with environmentalists. “The proposed arrangement is wildly inappropriate, as it will make the government and BP virtual partners in Gulf oil production,” said Tyson Slocum, director of Public Citizen’s Energy Program, said in a statement released yesterday. “It will give the government a financial incentive to become an even bigger booster of offshore oil drilling in the Gulf – which was the fatal flaw of the Minerals Management Service at the time of the BP disaster.”

“The proposal would inhibit the government’s ongoing criminal probes of the company,” the group wrote in a letter to President Obama “The government would be reluctant to mete out harsh sanctions to BP – such as banning the company from federal leases in the Gulf – if the victims’ fund relies on BP revenue from the Gulf.”

David Pettit of the Natural Resources Defense Council told NOLA.com that he dependence on continued BP drilling operations “casts a shadow on the legitimacy of future regulatory authority.”

BP’s largest single-producing region in the US is the Gulf of Mexico, the site of its massive oil spill. It operates 89 producing wells there and has a share in 60 others. Since the disaster began, some have questioned whether or not BP should be allowed to drill in the Gulf at all. But for this collateral agreement to work, it would seem the US government would have no choice but to allow BP to continue operations in the Gulf.