The meeting between Barack Obama and Carl-Henric Svanberg, chairman of BP, has changed the mood music surrounding the oil leak in the Gulf of Mexico. For the US president, the $20bn claims fund and suspension of BP's dividend are vindication of his tough stance on holding the company to account. For BP, the fund establishes a framework, endorsed by the Obama administration, within which it can deal with the claims. That should give the oil group a greater measure of clarity on its exposure for the next three to four years.
No wonder BP's shares surged yesterday. The amount of cash it has been forced to commit seems in line with market estimates. The suspension of the dividend for the first three-quarters of 2010 – amounting to $7.5bn – had become a foregone conclusion as well as a diplomatic necessity. The agreement is a price that must be paid to protect BP's US interests and to try to repair some of the extreme damage to its reputation.
Costed over four years – $5bn each year – the claims fund looks affordable: BP is forecast to make a replacement cost profit of $20bn this year. The company will cut $10bn from capital expenditure, which was about $20bn last year. It will also ready $10bn of non-core assets for disposal, not material for a company with assets of $240bn. Further, some legal uncertainties may yet resolve in BP's favour, as it seeks to reclaim some of the cost from its partners in the Deepwater Horizon misadventure.