A4


Gulf Coast Oil Spill


BP to cut its U.S. tax bill by $10 billion


Oil company cites steep losses from disaster in gulf


by Jia Lynn Yang BP said Tuesday that it plans


to cut its U.S. tax bill by $9.9 bil- lion, or about half the amount pledged to aid victims of the dis- aster, by deducting costs related to the oil spill. A portion of that could be re- funded from taxes BP paid in earlier years. The company disclosed its in- tentions as part of its second- quarter earnings report, in which it said it would record a $32.2 billion charge to reflect the costs of the spill. Under U.S. corporate tax law, companies can take credits on up to 35 percent of their losses. The credit for BP could mean,


however, that taxpayers will in- directly foot part of the bill for the $20 billion fund that BP es- tablished to compensate people and businesses harmed by the disaster. On Tuesday, White House press secretary Robert Gibbs said U.S. taxpayers would not be responsible for the cost of the spill. When asked whether BP should be claiming a credit, Gibbs said, “I don’t think any- body would prefer that they do that.”


Gibbs would not say whether the president would press BP on the tax deduction. He said, though, that “there are tax laws in this country that have been written for quite some time.” Lawmakers called for BP to re- nounce any claim for a refund. “I call on BP to show, for once, a glimmer of humanity in this situ- ation and halt its claim for this tax break immediately,” said Rep. Eliot L. Engel (D-N.Y.). Policymakers crafted the tax code this way so that companies can spread their profits and loss- es over more than just one calen- dar year. Let’s say a company makes $100 billion one year and pays the U.S. corporate tax rate of 35 percent, or $35 billion. The next year, the economy goes south, and the company loses $100 billion. Over those two years, the company made noth- ing but still paid $35 billion in taxes. From the tax code’s perspec- tive, the company overpaid in previous years. To rectify this, companies can claim a credit, also at the 35 percent rate. Com- panies can seek a refund for tax- es paid from the previous two years or, if there’s money left- over, carry the credit forward up to 20 years. “What they’re trying to do is


take the arbitrariness of what you did this particular year over the life of the company, or over a long period of the life of the com- pany,” said Douglas Shackelford, a tax professor at the University of North Carolina. It’s how a company such as


General Electric, which reported $408 million in losses at its U.S. operations last year, not only paid nothing in U.S. corporate income taxes last year but also received a refund. Robert Willens, a corporate


tax expert, said it’s unlikely that BP will give up its tax credit, even if faced with public opposition. The company voluntarily estab- lished the $20 billion escrow ac- count for victims of the spill and never promised the government that it would not seek any deduc- tions associated with the spill, he said. This month, Goldman Sachs promised not to ask for tax cred- its associated with the $535 mil- lion it paid in penalties to the Se- curities and Exchange Commis- sion to settle a fraud charge. But as Willens says, that was specifi- cally negotiated in Goldman’s agreement with the SEC. “The cost associated with the cleanup and the damage and all that — that’s just another cost of doing business from the tax per- spective,” Shackelford said. “It’s viewed no different from paying salaries or other costs they might incur.”


yangjl@washpost.com


S


KLMNO A fleet’s worth of cleanup assistance


WEDNESDAY, JULY 28, 2010


CHRIS GRAYTHEN/GETTY IMAGES Ships aid the cleanup near the source of the Deepwater Horizon spill off the Louisiana coast. The damaged oil well has been capped for about two weeks after gushing for months.


BP offers new CEO, scaled-back strategy Dudley named as first


non-British chief; firm posts $17 billion loss


by Steven Mufson


BP gave investors a glimpse of its future Tuesday, one that will feature a new American chief ex- ecutive, slimmed-down opera- tions, and $32.2 billion or more in payments to clean up and com- pensate people affected by the massive oil spill in the Gulf of Mexico. In announcing its second-quar- ter earnings, the London-based oil giant tried to walk a line be- tween reassuring bankers and in- vestors about its vast assets and fi- nancial strength, and avoiding the appearance of being a rich, pow- erful company insensitive to the plight of the Gulf Coast. “We have much to do to make it


right,” BP Chairman Carl-Henric Svanberg said in a conference call with investment analysts Tuesday, referring to the spill. But he added that BP’s directors are also “deter- mined to restore value to our shareholders.” In mapping out plans to pay for


damage and cleanup, BP said it will sell $25 billion to $30 billion in assets over 18 months, shed- ding about 10 percent of its oil and natural gas output. That should enable it to shrink its out- standing debt and reinstate divi- dends next year for shareholders while still covering payments to the massive escrow fund for spill damage claims. “It’s still going to be the second-


largest oil and gas producer among international oil compa- nies,” said Fadel Gheit, oil analyst with Oppenheimer & Co. “Smaller than Exxon Mobil but bigger than Royal Dutch Shell.” In a sign of how difficult it will be for BP to turn the page on the crisis, however, Rep. Edward J. Markey (D-Mass.) lashed out Tuesday at the company for con- cealing its estimates of the rate at which oil had flowed into the gulf. Markey released a letter from BP Chief Operating Officer Douglas Suttles to the Coast Guard in early July in which Suttles estimated that oil was pouring forth at a rate of 53,000 barrels (2.23 million gal- lons) a day. The BP briefing for investment analysts was a somber one, as Svanberg announced that the board had picked Robert Dudley, a BP managing director and for- mer Amoco executive, to replace chief executive Tony Hayward, a British geologist who had spent his entire career with BP. Dudley, 54, who grew up in Mississippi and spent summers boating with his family in the Gulf of Mexico, will become the first foreigner to lead the century-old company. “Today is a very sad day for me,”


Hayward said. “I love the com- pany and everything it stands for.” He said, however, he realized that for BP “to move forward, partic- ularly in the United States, it should do so under new leader- ship.” Hayward’s compensation pack- age includes a pension valued at


Chiefs’ compensation


Here is where BP chief executive Tony Hayward’s executive compensation stands among that of other top U.S. and European oil executives.


about $17 million and a severance of $1.6 million, or a year’s salary. Without costs from the spill, the company would have declared a profit of $5.6 billion for the sec- ond quarter. Spill charges turned that into a $17.2 billion loss. The appointment of Dudley, who will take charge Oct. 1, comes at a turning point in the calamity. After gushing for three months, the damaged oil well in the Gulf of Mexico has been capped for the past 12 days. Kenneth Feinberg, the master for the $20 billion es- crow fund, is taking over the task of scrutinizing and processing claims and proposing settle- ments.


Still, Dudley’s task will be im- mense. Congress is set to raise lia- bility limits for oil spills and to im- pose tougher regulations on off- shore drilling. Some lawmakers want to prevent BP, the largest producer of oil and gas in the United States, from acquiring new federal leases. The Justice Department is investigating crim- inal charges against the company, which could complicate its ability to do business with the federal government or bid for leases. Asked how BP would be viewed


in five years, Dudley said in “a per- fect world” people would realize that “BP met its commitments to restore the Gulf Coast and as a re- sult of that BP has restored its reputation” and it would be al- lowed to grow its U.S. business. He said, “Five years from now, I hope that people look back and say that was a quite incredible re- sponse to a quite tragic accident.” Although BP’s provision for claims and cleanup is unprec- edented in size, some analysts questioned whether it is big enough. If found to be “grossly negligent” in the way it was dril- ling the Macondo well that ex- ploded on April 20, BP could wind up paying an additional $12 bil- lion in fines alone and nearly twice as much overall, said Gheit of Oppenheimer. BP’s chief financial officer, By- ron Grote, said that in calculating the size of anticipated federal fines under the Clean Water Act, BP assumed that it was not guilty of negligence. By doing so, it pegged its fines at $1,100 per bar- rel spilled. If found negligent, BP would have to pay $4,300 a barrel. It would also have to pay 100 per- cent of the fines, while Anadarko


Ray R. Irani Occidental Petroleum $31,401,356


James T. Hackett Anadarko Petroleum $27,466,777


Rex W. Tillerson Exxon Mobil $27,168,317


Aubrey K. McClendon Chesapeake Energy $18,551,296


D.J. O’Reilly Chevron $16,550,745


James J. Mulva ConocoPhillips $15,000,000


David J. Lesar Halliburton $12,434,666


Peter Voser Royal Dutch Shell $4,390,000 Tony Hayward BP $4,107,168


Christophe de Margerie Total $3,477,400


— Madonna Lebling


Figures are for 2009 or the most recent fiscal year and include annual salary, bonuses and other compensation. Voser became chief executive of Shell in July 2009, but his earnings are for all of 2009. O’Reilly retired as chief executive of Chevron on Dec. 31. SOURCE: Annual reports and proxy statements


Petroleum and Mitsui, its part- ners in the lease, would not have to share the cost of the penalties. Critics in Congress decried the company’s failure to say precisely how much oil it thinks has spilled into the gulf. Hayward said only that BP had used a number around the middle of published estimates, which most recently have been 35,000 to 60,000 bar- rels a day. In addition, BP’s financial state- ment reflected an offsetting tax benefit from lower earnings. Be- cause the reserve for claims is de- ducted from profit, BP will not pay $9.9 billion in taxes that it would have otherwise owed. Bracing for unknown costs, BP also said that it would shrink its outstanding debt to $10 billion to $15 billion, from its current $23.2 billion. Dudley assumed his new title with modesty. He said he has the “greatest respect” for Hayward. “I did not seek out this job,” he said in a conference call with jour- nalists. “I was asked to step into these shoes.”


mufsons@washpost.com The oil spill: The latest developments


 Oil from the BP blowout is degrading rapidly in the warm waters of the Gulf of Mexico and becoming increasingly difficult to find on the water surface, the director of the National Oceanic and Atmospheric Administration said Tuesday. “The light crude oil is biodegrading quickly,” Jane Lubchenco said. “Significant oil has been dispersed and broken down by bacteria.”


Both the near- and long-term environmental effects of the release of several million barrels of oil remain serious and to some extent unpredictable. “The sheer volume of oil that’s out there has to mean there are some pretty significant impacts,” Lubchenco said. “What we have yet to determine is the full impact the oil will have not just on the shoreline, not just on wildlife, but beneath the surface.”


 Five boats are patrolling for sea turtles, scores of which have been found dead on shorelines. Lubchenco said the rescue teams had caught 180 turtles that appeared to be stressed by oil, and that 170 are now in rehabilitation.


— Marc Kaufman


For photos and updates on the cleanup, the struggles of residents and wildlife, and BP’s situation, go to washingtonpost.com/oilspill.


Nine inquiries in play into worst spill in U.S. history


oil from A1


One emerging line of inquiry, sources said, is whether inspec- tors for the Minerals Manage- ment Service, the federal agency charged with regulating the oil industry — which is itself inves- tigating the disaster — went easy on the companies in exchange for money or other induce- ments. A series of federal audits has documented the MMS’s close relationship with the in- dustry. “The net is wide,” said one fed-


eral official who spoke on the condition of anonymity because he was not authorized to speak publicly. The Justice Department in-


vestigation — announced in June by Attorney General Eric H. Holder Jr. and accompanied by parallel state criminal probes in Louisiana, Mississippi and Al- abama — is one of at least nine investigations into the worst oil spill in U.S. history. Unlike the public hearings held last week in Kenner, La., by a federal investigatory panel, the criminal probe has operated in the shadows. But it could lead to large fines for the companies and jail time for executives if the government files charges and proves its case. Justice Department officials declined to comment Tuesday. Holder, in an interview with CBS News this month, confirmed that investigators are conduct- ing a broad probe. “There are a variety of entities and a variety of people who are the subjects of that investigation,” Holder said. In an additional avenue of in-


quiry, BP disclosed in a reg- ulatory filing Tuesday that the Justice Department and the Se- curities and Exchange Commis- sion are looking into “securities matters” relating to the spill, al- though no more details were in- cluded. Scott Dean, a spokesman for


London-based BP, said the com- pany “will cooperate with any in- quiry the Justice Department undertakes, just as we are doing in response to other inquiries that are ongoing.” Brian Kennedy, a spokesman


for Transocean, a former U.S. firm now based in Switzerland, declined to comment, as did Te- resa Wong, a spokeswoman for Houston-based Halliburton. Halliburton informed its shareholders about the Justice Department probe in its July 23 quarterly report to securities regulators. It also noted that the department warned the com- pany not to make “substantial” transfers of assets while the mat- ter is under scrutiny. The probe is in its early stages, with investigators digging through tens of thousands of documents turned over by the companies, beginning to inter- view company officials and try- ing to determine the basics of who was responsible for various operations on the rig. Although lawyers familiar with the case expect that envi- ronmental-related charges — which have a low burden of proof — will be filed, some doubted that investigators can


prove more serious violations such as lying or falsifying test re- sults. “That’s hard to prove,” said


one lawyer, who spoke on the condition of anonymity because details of the investigation are not public. “It’s hard to show that somebody who could have died on the rig was malicious and reckless and intentionally did something that jeopardized their own life.” The emerging focus creates potentially awkward interac- tions on several levels. Investi- gators are probing companies, especially BP, which the govern- ment has been forced to work with in cleaning up the oil that cascaded into the gulf. And the former Minerals Management Service, which sources said has attracted the attention of crimi- nal investigators, is helping to lead the federal panel that con- ducted last week’s hearings in Louisiana. Federal auditors have in re- cent years documented a culture at the MMS in which inspectors improperly accepted gifts from oil and gas companies, moved freely between industry and gov- ernment and, in one instance, negotiated for a job with a com- pany under inspection. After the most recent investi-


gation was released in May, In- terior Secretary Ken Salazar said he had asked his department’s acting inspector general, Mary Kendall, to expand her inquiry to include whether MMS failed to adequately inspect the Deep- water Horizon rig or enforce fed- eral standards. One law enforcement official said criminal investigators will look for evidence that MMS in- spectors were bribed or prom- ised industry jobs in exchange for lenient treatment. “Every in- stinct I have tells me there ought to be numerous indictable cases in that connection between MMS and the industry,” said this official, who spoke on the condi- tion of anonymity because the investigation is unfolding. Melissa Schwartz, a spokes- woman for the former MMS (now called the Bureau of Ocean Energy Management, Regula- tion and Enforcement), declined to comment. FBI agents and other investi-


gators are working with pros- ecutors from the environmental crimes section of the Justice De- partment, along with local U.S. attorney’s offices. Officials would not provide details about the new squad starting in the FBI’s New Orleans office. Sourc- es said it is known internally as “the BP squad,” though it will ex- amine all companies involved with the Deepwater rig. After learning what is in the thousands of documents, inves- tigators plan to “start trying to turn one witness against the other, get insider information,” said the law enforcement offi- cial. The official said that no deci- sions on criminal charges are imminent and that “you can bet on it being more than a year be- fore any kind of indictment comes down.”


markonj@washpost.com


Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24  |  Page 25  |  Page 26  |  Page 27  |  Page 28  |  Page 29  |  Page 30  |  Page 31  |  Page 32  |  Page 33  |  Page 34  |  Page 35  |  Page 36  |  Page 37  |  Page 38  |  Page 39  |  Page 40  |  Page 41  |  Page 42  |  Page 43  |  Page 44  |  Page 45  |  Page 46  |  Page 47  |  Page 48  |  Page 49  |  Page 50