Is Obama Getting Into Bed With BP?

The White House and BP are working on a plan to use BP assets in the U.S. as collateral for its $20 billion oil spill escrow fund, provoking outrage from some quarters.
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(BP, White House escrow fund story updated for federal oil spill bill, BP refinery deal)

WASHINGTON D.C. (

TheStreet

) -- The White House is getting into bed with oil spill villain

BP

(BP) - Get Report

to ensure the British oil company's continued success drilling for oil and gas in the U.S. Or ... so claims criticism launched late on Wednesday after the White House released details of a plan to use BP's U.S.-based oil and gas assets as collateral for the $20 billion escrow fund that BP set up to cover Gulf of Mexico oil spill liabilities.

BP already paid an initial $3 billion into the escrow fund, and will contribute another $2 billion before the end of the year, and $5 billion annually through 2013. To make sure that BP has enough money to fund this oil spill commitment, the agreement released by the White House on Wednesday proposes using BP's U.S. oil and gas production wells as collateral.

With the BP Macondo well seemingly capped for good and no more oil flowing into the Gulf of Mexico, the focus rightly has turned to the liability phase of the BP oil spill.

In this phase of the oil spill saga, should public outrage turn to this White House-BP deal? The public outrage at BP was consistent throughout the oil spill crisis that began on April 20, but public anger at the federal government grew as it seemed helpless to stop the flow of oil, and its main oil industry watchdog, the former Minerals Management Service, became a poster child for a "too cozy" relationship between regulators and Big Oil. The Minerals Management Service has seen its two top officials leave, and has been reformed as the Bureau of Ocean Energy Management.

Watchdog group Public Citizen thinks that the White House has made a deal with the devil -- or, at least, a deal that will compromise the government's ability to effectively regulate BP. There are criminal charges pending against BP, with the investigation coordinated by the Justice Department, Federal Bureau of Investigations, and state attorney generals, and the potential for BP to be barred from conducting oil and gas operations in the U.S., in a worst case scenario.

In a letter sent to President Obama, Public Citizen says of the White House plan, "It threatens to inhibit ongoing criminal probes of the company's probable negligence. A criminal investigation resulting in sanctions imposed against BP -- including banning the company from federal leases in the Gulf -- will be at odds with the government's agreement to use BP's leases as collateral for the fund."

The watchdog group called the arrangement between the White House and BP "wildly inappropriate."

Most importantly, with the oil spill demonstrating that Big Oil's record on safety and the environment remains a major concern, Public Citizen argues that the Obama administration might be less likely to address those problems if it means the company can't continue its "profitable business-as-usual style." Tough sanctions against BP won't be possible if revenue generation from BP U.S. operations is a requirement of funding the oil spill liabilities.

The Justice Department, which is hammering out the details of the plan with the White House and BP, said negotiations were ongoing.

At issue is not just the rhetoric expressed by the watchdog group that BP and Obama are entering into another "too cozy" relationship between the government and Big Oil. Rather, the crux of the issue is that the liabilities from the BP oil spill will be huge, and it's in the government's best interest to make sure BP has the money to pay for years into the future.

At the time of the original agreement between BP and the White House, President Obama made clear that a financially secure BP was in the best interest of the residents and businesses of the Gulf of Mexico. It's a point that has also been made by Kenneth Feinberg, who President Obama appointed to run the $20 billion fund and BP oil spill claims process.

For all the talk of barring BP from operating in the U.S., the publicly stated position of the U.S. government has always been that a bankrupt BP is in no one's best interest.

It's not as if Obama hasn't been making sure BP receives a big bill for the oil spill, or is letting BP slide on paying for past violations. On Thursday, the Obama administration sent its latest bill to BP, for $168 million, the fifth bill to cover federal costs incurred during its oil spill response effort. Approximately $222 million has already been paid to the federal government by BP covering the previous bills.

Also on Thursday, BP agreed to pay a record $50.6 million fine for safety violations from the deadly 2005 explosion at its troubled Texas City, Texas refinery, the U.S. Department of Labor announced.

As part of the Texas refinery deal, BP agreed to allocate $500 million for safety improvements at the refinery and to allow safety inspections and review by the U.S. Occupational Safety and Health Administration.

The federal penalties from spilled oil alone could reach $21 billion. Gulf coastal communities may accrue $22.7 billion in lost revenue over the next three years, according to testimony recently provided to the House Energy and Commerce Subcommittee on Commerce, Trade and Consumer Protection. BP has already paid $6 billion to clean up and contain the oil spill, separate from the escrow fund and looming liabilities.

BP shares, which had finally risen above the $41 mark on Monday, have stalled, and some analysts think that even with the well plugged, BP shares will be range-bound as long as the legal situation remains a stock overhang.

BP's US oil and gas assets represented 26.6% of total annual production last year. BP's biggest presence in the U.S. is in the Gulf of Mexico, where it serves as operator on 89 producing wells, and has stakes in 60 additional wells.

Another issue to watch is the exact wording of the agreement related to BP's commitment to fund the escrow account. The White House release stated that additional BP assets could be used as collateral, if necessary. By breaking out the U.S. assets of BP as the collateral, could the deal with the White House have the unintended consequence of helping to shield a bigger part of BP from being on the hook for claims resulting from the oil spill?

The latest chapter in the BP oil spill raises the question,

Does it make the most sense to tie BP's big interest in the U.S. to its big responsibility to pay all oil spill liabilities, or is this just the latest example of a flawed government policy for regulating the oil and gas industry?

-- Written by Eric Rosenbaum from New York.

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