SPECIAL REPORT – Last month, BP increased by $8 billion the financial provisions it was taking for the Gulf of Mexico oil spill; the company’s shares rose. Better-than-expected underlying profits and upbeat comments from new Chief Executive Bob Dudley were taken by the market as a sign the company would soon return to giving steadily rising dividends.

Key to this outlook is confidence that the new estimate of the total cost of the spill — $40 billion — will be sufficient.

That optimistic view may turn out to be true. BP executives have said this is their “best estimate” of costs, adding they could turn out lower. But history shows there is ample scope for nasty surprises from BP. The oil giant has so far consistently underestimated the scope and potential cost of the Gulf spill. It also has a track record of low-balling disasters, including the fatal Texas City refinery blast in 2005.

CEO Dudley has said a $20 billion fund BP created to compensate victims of the spill should cover all damages claims. The lawyers who are suing BP don’t think so.

“The total value of the claims already registered could exceed the amount of money that has been dedicated to pay the fund,” said Texas-based trial lawyer Brent Coon.

An analysis by Reuters of the potential fines, damages, costs related directly to the leak, compensation and the damage to BP’s business suggests the final spill bill could, over the long term, end up much higher than BP’s latest provision — perhaps even more than twice as much. Much hinges on whether U.S. courts find the company was “grossly negligent” in the run-up to the disaster, but there are other risks.

Changing costs

BP’s inability to gauge the scope of the spill in April is well-documented.

» April 2010: One week after the blast, the company said a relief well would take three months to complete and cost $100 million — but that would be the most expensive part of the whole response operation. Combining this with the daily expenditure that BP reported at the time suggested a total bill of $200 million. BP hinted then that even this calculation was pessimistic.
» June: BP tells analysts the cost of containing and cleaning up the spill would be $3-6 billion.
» July: The company said the likely cost of the spill would be $32 billion
» September: By mid-September, the response effort alone, excluding damages claims, had cost BP $8 billion.
» November: BP hiked its estimate by another 25 percent, or $8 billion. reuters

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