BP’s oil spill may not damage creditworthiness
Fitch Ratings says that while it anticipates BP will be negatively impacted by the containment and clean-up costs associated with the oil spill in the Gulf of Mexico, it is mindful that insurance coverage will likely cover the majority of these costs, limiting the cash outlay and potential related rating pressure for BP.
Fitch says it is currently too early to quantify other potential costs and liabilities, and as a result, the ultimate financial impact on BP will depend on how the environmental and economic impact develops when the spill reaches land, given its close proximity to the US Gulf Coast.
"Fitch estimates that containment and clean-up costs could be as much as two to three billion US dollars once the leak reaches land, and potentially more the longer it takes to arrest the flow of oil into the Gulf," says Jeffrey Woodruff, Senior Director in Fitch’s Energy Team in London.
On April 30, BP confirmed that it is self-insured for any costs related to the spill, so the company will have to absorb its full share of spending currently running about $6 million a day plus $100 million which it expects will be spent bringing in another rig to drill a relief well.
President Obama said that the US government is not in a position to assist with the cost of the containment and clean-up, despite having deployed the US military to the area to contain the rapidly moving oil spill. The president stated that the responsibility for bearing the cost will ultimately be BP’s, and Fitch anticipates the US government will attempt to reclaim its costs from this operation from BP.
Fitch notes that there are historical precedents for assessing the potential impact of this incident. In the case of the 1989 Exxon Valdez spill, around 250,000 barrels of oil were spilled into Prince William Sound, Alaska, with clean-up costs estimated to have been approximately USD $2 billion. Exxon was eventually found liable for actual damages of around USD $287 million and compensatory damages of around USD $500 million, following a series of appeals spanning nearly 20 years that began with a judgment of punitive damages of USD $5 billion. The final liability reduction was partly due to a US Supreme Court ruling passed in 2003 imposing limits on punitive damages.
