Photo via Autoblog Green
So far in its coverage of the BP Gulf spill, the media has made much of the fact that the company's daily profits are higher than its daily cleanup costs, and that after raking in $17 billion in profits last year alone, such costs are but a drop in the bucket. But that's changing fast -- and if a few other factors come to pass, it's possible that the Gulf spill will end up bankrupting the oil giant. Speculators are calling this possible outcome the "Texaco scenario." Here's how it would work. Andrew Ross Sorkin details the possibility in his New York Times Dealbook column:
BP's costs for the cleanup could run as high as $23 billion, according to Credit Suisse. On top of that, BP could face an additional $14 billion in claims from gulf fisherman and the tourism industry. So while conservative estimates put the bill at $15 billion, something approaching $40 billion is not out of the question. After all, little about this spill has turned out as expected.And such a verdict is far from unlikely -- as you're likely aware, the US Justice Department has already opened a criminal investigation into BP's actions leading up to the spill. Analysts are calling this outcome the 'Texaco scenario' after the case in 1987 where that oil company lost a $1 billion lawsuit and had to file Chapter 11 after being unable to raise the cash. Sorkin continues with this what-if scenario:
The company has about $12 billion in cash and short-term investments, but there is already a debate about whether it should cut its dividend out of fear that it could run out of money ... But all those numbers don't account for the greatest possible threat: a jury verdict against BP. Such a verdict might push the cost of the spill into the hundreds of billions. If that happened, even BP might buckle.
Imagine the BP case playing out in a Louisiana courtroom, against the backdrop of an oil-choked local economy, high unemployment and an angry public. How high can you count?In which case, BP could feasibly go bankrupt. And then the poor, overworked BP CEO would finally get his life back -- just probably not in the manner in which he hoped.
Under the Oil Pollution Act of 1990, BP's liability for economic devastation -- above the cost of the cleanup -- is capped at $75 million, a number Mr. Hayward has already said he plans to blow through. But if BP is found to have violated safety regulations, which seems likely, that cap becomes irrelevant.
And even if the company doesn't go bankrupt, it will still likely be a major acquisition target for other larger oil companies like Shell and Exxon, who are reportedly already eying the falling company.
More on the BP Gulf Spill:
Obama Speech Links BP Gulf Spill to Need for Clean Energy
The Political Impact of the BP Gulf Spill So Far