Financial Times- Spill costs to cut BP tax bill by $10bn

July 13, 2010

By Ed Crooks

BP is forecast to pay about $10bn less tax over the next four years as it meets the costs of its huge oil spill in the Gulf of Mexico, hitting the revenues of Britain and the US which receive hundreds of millions of dollars from the company each year.

The shortfall, representing a drop of more than a quarter in BP’s tax payments, is a particular concern for the British government attempting to cut the country’s budget deficit.

Money spent plugging the well, cleaning up the oil and compensating people who have lost out because of the spill can be written off against tax, the company believes, reducing the net cost to BP.

Of its principal expected liabilities, only the fines that might be imposed by the US authorities would definitely not be tax-deductible.

The company yesterday reiterated the possibility that by the end of the week its leaking Macondo well could be shut off, or all the oil could be captured, using the new cap now being fitted to the well head.

The suggestion sent BP’s shares surging, closing 9.11 per cent higher in London, but the company still faces huge and uncertain liabilities, estimated by analysts at about $50bn.

If BP manages to seal the leaking well as planned by August, analysts have estimated that its total spending in the Gulf region could be about $30bn. That would represent about $10bn of clean-up costs and $20bn compensation for losses suffered by fishing, tourist and other industries covered by the fund agreed with the US administration last month.

With a tax rate on profits of 33 per cent in a typical year, that would cut BP’s tax bill by about $10bn.

BP paid $8.4bn in worldwide tax on profits last year, down from $12.6bn in 2008 because of the fall in oil and gas prices.

Of that 2009 payment, £930m went to the British government: about as much as is paid by the UK’s entire transport and communications industries.

The company does not give a full geographic breakdown of its taxes, but its payments to the US are likely to have been of a similar size.

Irene Himona, an analyst at Exane BNP Paribas, estimated that before the Deepwater Horizon accident, BP was set to pay about $37.5bn in tax during 2010-13, but the costs of the disaster would cut that to $27bn.

Doug Suttles, BP’s chief operating officer for exploration and production, said yesterday that the company’s “confidence is growing” in the new cap, which is expected to allow all the oil from the leaking well to be captured.

He added that the relief wells drilled to allow the Macondo well to be sealed would be effective at the “very end of this month” at the earliest.

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