Gulf oil spill: how will BP cover its costs?
Updated on 16 June 2010
US senators want BP to put an initial £20bn into an escrow account to ensure the oil company will cover the expenses of the Gulf spill. Channel 4 News explains how an escrow account works.
What is an escrow account?
An escrow account is an account or fund held by an independent, third party - usually a law firm - that is based on a written agreement to deposit money in monthly or annual instalments in trust for others (in this case for victims of the oil spill).
How much could the fund be worth?
54 Democratic senators have called on BP to put an initial $20bn into an escrow account. They have demanded a response by Friday, 18 June.
Credit Suisse estimates that total costs of the oil spill could mount to as much as $37bn. BP has already paid out $85m worth of claims, while total costs - including the clean-up and claims - have ballooned to $1.6bn, the company said on Monday.
Will BP agree to it?
BP has yet to comment on the possibility of setting up an escrow account. However, it has hinted that it may redirect this quarter's shareholder dividend of about £1.75bn. It also continues to maintain full responsibility for the spill, and cover all clean up costs.
In a statement following President Obama's televised address last night, the group confirmed it was meeting Obama "to discuss his proposal for arrangements to ensure that all legitimate claims in respect in the Gulf of Mexico oil spill are paid out in a fair and timely manner".
Can BP afford it?
In a move to soothe investor fears, the group has listed its available firepower in the face of rising costs.
The company effectively described itself as a cash cow, outlining the $30bn of cash it had generated in the last four quarters off high demand for oil. Of that, it said $5bn was available cash on hand, while the company said it had another $5bn lined up in already agreed banking facilities and another $5bn in standby lines of credit. In other words, it can lay its hands on $15bn if necessary.
On top of that, BP said its current level of borrowings stood at 19 per cent - the bottom end of its 20-30 per cent so-called gearing target, the ratio of its debt to total capital.
The group said today: "BP will continue to keep the market fully informed of further developments in compliance with its listing obligations."
What if BP says no?
BP has shown willing to cover the cost of the spill to date, however if the company refuses to bow to Obama, the US president has the legal authority to force the oil giant out of the claims handling process.
A White House official said: "The president has the authority under existing law to assure that the legal obligation of the responsible party have been satisfied.
"We are satisfied that ... the president can use this authority to accomplish the purposes served by an escrow fund and independent claims payment procedure."
