The Gulf’s Uncontrolled Money Spill

The failed Macondo well in the Gulf of Mexico has stopped gushing oil, but the flow of money resulting from the disaster is still uncontrolled.

Rep. Joe Barton, R-Texas, had it right when he apologized to BP’s former CEO Tony Hayward for the government’s response. Barton called the White House’s decision to demand $20 billion from the company “a shakedown.”

Barton later retracted his comments after party leaders pointed out to him that they were, as a reporter from The Dallas Morning News put it, “politically indelicate.” In an apology for his earlier apology, Barton said, “I want the record to be absolutely clear that I think BP plc (BP) is responsible for this accident, should be held responsible and should, in every way, do everything possible to make good on the consequences that have resulted from this accident. If anything I’ve said this morning has been misconstrued in opposite effect, I want to apologize for that misconstruction.”

But, as politically indelicate as it may be to say so, the White House’s $20 billion money grab was a shakedown. On June 16, BP announced that following a meeting with the president, “Agreement was reached to create a $20bn claims fund.” Months later it is still unclear what share of the blame for the disaster can reasonably be assigned to BP, and there is still no evidence that the figure of $20 billion is in any way related to the actual costs of the damages.

BP was the only company pushed to contribute to the $20 billion fund. However, recent inquiries have revealed that Halliburton (HAL) may have used faulty cement to seal the well and may even have known in advance that the cement mixture could lead to problems. Tests performed before the blowout on mixtures similar to what was used for the Macondo well showed those formulas to be unstable and incapable of holding back oil and gas. Since the disaster, independent tests have been conducted on samples of cement made with the same recipe as was used by Halliburton at Macondo. The samples have repeatedly failed to pass the tests.

An internal investigation by BP also found that Transocean (RIG), the company which operated the rig, failed to maintain “critical components” of the systems designed to prevent blowouts.

None of this, least of all its own examination, exonerates BP. But the only rationale for having forced BP to ante up before all the facts were available is that BP had the deepest pockets and was most susceptible to White House pressure.

Meanwhile, Kenneth Feinberg, who was appointed to oversee the distribution of the claims fund, is busy trying to sort out the costs. As of Oct. 1, only $1 billion had been paid out of the $20 billion fund. Many outstanding claims come from businesses outside of the immediate area affected by the blowout, making the correlation between the spill and lost business questionable. Many claims also have been filed by businesses that say they operate primarily in cash and therefore lack records to demonstrate the magnitude of damages they suffered. Translation: “We cheated on our taxes, but you can trust us when we tell you we lost business because of BP.”

Other claims, including those from commercial fishers, depend upon the extent of the spill’s long-term damage to the Gulf, which is not yet knowable. Because of this uncertainty, Feinberg has suggested that it may make more sense to make interim payments, rather than “having to decide on a hunch.”

That’s fine, as long as the interim payments relate to damages that have already been suffered and which can be reasonably verified and measured. The politics of the oil spill, however, put pressure on Feinberg to err on the side of paying too much too soon. That way, people who actually suffered damages do not have to wait for relief, while the burden of any errors falls on BP and its shareholders – who get little sympathy, no matter the merits of their case.

The Gulf spill was a multi-dimensional crisis that demanded immediate response. But crisis is no reason to short-circuit investigation and reason. If the government felt that providing a relief fund was necessary to meet the needs of businesses and individuals along the Gulf coast, it should have created the fund itself, with its own money. It had no right to ask BP, or any other company, to front $20 billion based on guesses, hunches and the president’s political imperatives.

As the sole sponsor and administrator of the fund, the government would have been responsible for ensuring that the money was appropriately distributed. Then, when all the analysis and evidence was in, it could have gone to the companies responsible to collect reimbursement.

If, in retrospect, investigations revealed that Feinberg, as the plan’s administrator, had rushed through claims to quiet the demands of Gulf residents and ended up handing out too much money, the government would have had to bear those costs. There is no reason BP shareholders should have to pay for this potential waste. BP may or may not have botched the job of designing the well, but if the distribution of the claims fund is botched, that will be the fault of the government, not BP.

The Macondo well made a mess in the water and on the Gulf shoreline. The administration’s response has made a longer-lasting mess in Washington. Between expropriation of $20 billion in private funds and the unjustified drilling moratorium, the administration has reinforced the private sector’s perception that it is prone to grab first and ask questions later. President Obama’s economic team then wonders why it’s having so much trouble boosting business confidence and getting companies to start hiring again.

If Obama really wants to earn the trust of businesses, he should start by admitting that the BP fund grab was a mistake. He should then issue an executive order promising that nothing like it will happen again. He could do this in a single afternoon. But I’m not holding my breath.

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