BP May Owe U.S. $1 Million a Day in Royalties on Spilled Oil
BP Plc, already facing billions of dollars in clean-up costs and liability claims, may owe the U.S. government as much as $1.1 million a day in royalties on the oil gushing from its leaking well in the Gulf of Mexico.
The drilling lease with the Minerals Management Service for the Macondo well that blew up last month calls for BP to pay a royalty fee of 18.75 percent on the value of oil or natural gas “lost or wasted” if a leak is due to the company’s negligence.
BP may face $8.5 billion in clean-up costs and payments to affected businesses as a result of the spill, Neil McMahon, a London-based analyst for Sanford Bernstein & Co., said in an April 30 report. The leak began after an April 20 explosion aboard the Deepwater Horizon drilling rig, which BP leased from Transocean Ltd. Royalties on the oil spilled, as well as any that’s recovered, would add to the list of costs.
“Mark my word, the royalty will be paid here,” said David Pursell, a managing director at the investment bank Tudor Pickering Holt & Co. LLC in Houston. “If I had a ranch in South Texas and a company came in with a massive blowout they couldn’t control, I’d have them in court to collect royalties.”
Mark Salt, a BP spokesman, didn’t immediately respond to phone and e-mail requests for comment.
BP’s net income last year was $16.58 billion, or an average of $45.4 million a day.
The Deepwater Horizon rig sank two days after the explosion, sending oil gushing into the Gulf. Eleven workers were killed.
The estimate that BP could have to pay $1.1 million a day in royalties is based on the upper end of projections by scientists such as Steve Wereley, associate professor of mechanical engineering at Purdue University, who say 25,000 to 100,000 barrels of oil are spilling into the gulf daily.
Estimates of Flow
BP and the Obama administration had estimated the flow at 5,000 barrels (210,000 gallons) a day, the amount the company said yesterday it was capturing with a mile-long pipe that is collecting only part of the oil. BP said the capture rate fell today to 2,200 barrels a day. The company said it will cooperate with a government team assigned to ascertain the leak rate.
The government will pursue royalty payments if BP is found at fault in the spill, MMS spokeswoman Carol Fagot said today.
“The Department of the Interior and the Minerals Management Service are currently conducting an investigation into the incident to determine the cause,” Fagot said in an e- mail. “If that investigation determines that the accident was avoidable, or the result of negligence, royalties will be due on the estimated volume of oil and gas lost.”
The leaking well is 5,000 feet below the surface about 130 miles (209 kilometers) southeast of New Orleans. Heavy oil has reached wetlands in the Pass a Loutre area of Plaquemines Parish, Louisiana, Governor Bobby Jindal said on May 19.
The federal government and four Gulf states are assessing damage to coastlines and wetlands, and more than 130 private lawsuits have been filed by fishermen, property owners and tourist businesses.
Royalty fees are based on the sale price of oil, which generally tracks the value of crude oil futures traded on the New York Mercantile Exchange. Futures closed at $68.01 a barrel yesterday, and have averaged $79.50 this year.
The value of oil lost from the well would be reduced somewhat under MMS rules. Assuming a value of $60 a barrel after such an adjustment and a flow rate of 100,000 barrels a day, BP would owe royalties of about $1.1 million for the crude escaping into the Gulf every day if negligence is found.
Oil that BP manages to capture is also subject to government fees. BP is moving equipment in place for an attempt to plug the 18,000-foot (5,486-meter) deep well from the sea floor, known as top kill, according to Doug Suttles, chief operating officer of exploration and production for London-based BP.
The company also is drilling two relief wells, each aimed at intercepting the damaged well about 13,000 feet (3,962 meters) below the ocean floor, an effort that may take about three months. Cement would then be poured into the well to plug it permanently.