Deepwater Horizon Oil Spill Caused By BP Company: Analysis Of Actions Taken By The US Government And Financial Implications

Abstract

Describe the Deepwater Horizon Oil Spill caused by BP Company and how actions were taken against this company by the US Government ?
 

This study covers a number of theories that are basically applicable in accounting. Some of the theories discussed include; Positive Political Theory, Public Interest Theory and the Legitimate Theory. These theories are discovered in the context of a case study of BP Company.

BP Company is a global Company that falls among the world’s integrated gas and oil companies.  A case study is the reputations (financial) of the response of BP to the Deepwater Horizon Oil Spill. Deepwater Horizon Oil Spill is also known as the BP Oil Spill or Gulf of Mexico Oil Spill happens to be the largest marine oil spill in the history of the United States. BP Company happened to be the initiators of a project known as Macondo Prospect oil field, where an oil spill occurred accidentally. Transocean Ltd, contracted BP Company to drill an exploratory well, in the process an explosion causing the oil spill occurred. The US Government tagged BP Company Responsible for the oil spillage.  BP accepted the responsibility to ensure cleanup costs while blaming the disaster on Halliburton and Transocean Companies. However, all the charges in relation to the spillage were treated as non-operating items and thus, deduced from BP’s taxable Company.  This raised a number of issues regarding the positive, public and legitimate theories.

The study compares the incident and how it was handled to the standards and requirements of the new accounting standards. The study weighs between the negativity and positivity of the action that was taken against this company.  A summary is then made on the new accounting standards with a précised conclusion. 

The main focus of the study is the aspect of  The theories help in creating a good rapport between the two parties either the government and its citizens or the society and the organizations. Some of these theories are;

This theory is famously known as the explanatory political theory. This theory entails political study using the formal methods which include; the game theory, statistical analysis, and social choice theory. Positive Political Theory can also be summed up as formal aggregation preference theory for joint choices. It was established by William H. Riker.

The social choice theoretic strategies are used for description and analysis of the performance of rules or institutions. The analyzed rules or institutions undergo further analysis under the game theory.  Here, the parties involved in an interaction are termed as rational agents who are actually in a game and these parties are guided by self-interest. The outcome can, therefore, be predicted as the equilibrium of the game, easily by basing on the critiques and assumptions.

Positive Political Theory

The Public Interest Theory is an economic theory that is famously known as the public choice.  The Public Interest Theory was established by Arthur Cecil Pigou. This actually, involves using economic tools to handle the previous problems of political science. This theory holds that the regulators will always tend to find markets that are efficient economically.

Public Interest Theory holds that regulation is available to respond to the demand for public rectification or imbalanced or inefficient market practices. The body that does this (regulatory body) is concerned to make a fair representation of society’s interest.

The Public Interest Theory assumes that markets tend to be fragile and it is assumed to operate with less efficiency. The government is assumed to be a neutral party by this theory.

Legitimacy is a generalized concept that actions of an organization are appropriate within some norms or rules that have been set. Legitimacy theory actually helps in expounding on the behavior of institutions in developing and implementing objectives that enable their survival in their environment (Walker 1993).  The society will always tend to view the organization in accordance with what they expect from such organizations. The organization’s activities, therefore, should respect the social and moral values of the society.

These theories actually help in guiding the existence of businesses and organizations within societies as they give the codes of conduct each party should possess. For instance, in the case study BP Company need to be in good rapport with the society in order to continue offering their services effectively. 

It is considered as the largest marine oil spill to happen in the United States.  The oil spill occurred in the Gulf of Mexico on April 20, 2010. This led to a lot of debate among different stakeholders. The exact location of the spillage was at Deepwater Horizon that was owned by Transocean and British Petroleum (BP) had been contracted to drill an exploratory well (Liu, MacFadyen & Weisberg 2013). At the time of the explosion, the two companies had had agreed to close the well with the intention of carry out productions later, and Halliburton had been contracted to make cemented casings in the well.  Based on the public interest theory, the US decided to hold BP responsible for the spillage. Even though BP accepted to take up the responsibilities and had to issue cleanup costs, it recently stated that the other two companies that were involved in the production that is, Transocean and Halliburton were also to be accountable for the oil spill. In this case, BP acted based on the legitimate theory to protect its reputation. 

Public Interest Theory

With BP agreeing to take up the responsibility of the oil spill, it had to incur some costs which had a great impact on its finances. Some of the financial implications include;

• BP had to pay a pre-tax of US$40.9 billion that was related to the Deepwater Horizon oil spill, the pre-tax included the cleanup costs of US$17.7 billion. All the charges were considered as non-operating items and thus were calculated based on the taxable income.
• BP also agreed to open a US$ escrow account that was to be established in a period of 3.5 years through the sale of assets in the United States. The escrow account was a way of responding to the claims raised by various stakeholders.
• In addition, BP gave out US$500 to be used to spearhead a 10-year project on the impact of the oil spill.

Despite the above financial implications, there were no fines or penalties that imposed on BP. The case study demonstrates the lack of necessary regulations to control the oil and gas activities and as such the politicians failed in regulating the operations of BP hence, failing to protect the interests of the public. The existing Clean Water Act formulated by the politician outlines that in such a case, an organization is supposed to be fined up to US$4,300 per barrel of the oil spilled (Rubin 2012). However, in the quest of protecting its reputation, BP argued that it was difficult to estimate the amount of spillage. 

The damages resulting from the Deepwater Horizon oil spill are difficult to quantify in terms of space and time. Additionally, it is difficult for the government to determine in measurable terms the ecological losses that resulted from the oil spill as due to a lot of disagreements from different stakeholders. However, some agencies have resorted tpo using the resource replacement costs approach to estimate the damages. And since, the measurement of ecosystem services is yet to reach maturity, the scale of the penalties that an organization such as BP can receive are determined politically rather than through scientific or technical calculation. And as a result of such a loophole, BP is yet to release the details of the damages caused by the oil spill to the ecosystem. In addition, the methods that were used to calculate the pre-tax of US$40.9 are not disclosed. With BP failing to disclose such vital information, it becomes hard to determine the impact of the oil spill on the ecosystem.

Deepwater Horizon oil spill led to a variety of ecological damages and hence the need to formulate strict regulations that govern the oil and gas activities. The regulations need to focus more specifically on environmental, health and safety protection controls. Additionally, there is the need to emphasize on the environmental accounting and reporting mechanisms so as to regulate the corporate environmental performance. With such strict regulations, the use of disclosure mechanism by BP to protect its reputation after the Deepwater Horizon could not be tolerated instead heavy penalties and fines could have been applied.

In general, the arguments raised in the publication concerns the lack of strict regulations that governs oil exploration. Thus, the government should formulate the necessary policies that are aimed at protecting the public. Also, BP took advantage of the institutional loophole to protect its reputation and in so doing it was able to evade penalties involved. Based on these arguments I tend to agree that there is the need for formulation of policies to govern the oil and gas activities so that in the event that incidents such as the Deepwater Horizon oil spill occurring, the organization (s) involved will have to shoulder the total environmental, health, and safety damages caused. 

Legitimate Theory

Conclusion

In conclusion, there are a lot of theories that outlines how various organizations operate in an environment (Walker 1993). An example is a positive theory which describes the outlined policies for testing the institutional performance. Applying this theory to the case study, it is clear that there are loopholes in the Clean Water Act as there are no methods of measuring the damages caused to the ecosystem by the oil spill hence, no fines or penalties applicable. Another theory is the legitimate theory that BP has used to cover its legitimacy with regard to the oil spill. This includes outlining the pre-tax charged from its income tax but has not revealed how it was calculated. Lastly, it is the public interest theory that outlines the importance of the government in protecting the public through the formulation of policies.

From the case study, there is a need to formulate strict policies governing oil and gas activities so that the corporate environmental performance is regulated.

Accounting standards are used to in governing the preparation of financial reports. They can also be referred to as the legal requirement or procedure that sets out the accounting required for a given transaction (Scott  2014). In general, they are referred to as the acceptable principles of accounting (GAAP).  The principles provide guidelines on how the various transactions and events should be measured and be presented in a financial statement.

1. Update 2016-12

This is based on revenue from contracts with customers. It is geared towards narrowing scope improvements the practical expedients.

2. Update 2016-11

This basically includes the following features; revenue recognition, derivatives, and hedging. It provides guidelines on the rescission SEC due to the updates are done on2014-09 and 2014-16 standards. It is pursuant to the announcement of staffs that was done at EITF Meeting on SEC update.

3. Update 2016-09

This mainly focuses on Compensation. In general, the standard emphasizes on stock compensation. It aims at improving the employee share-based payments.

4. Update 2016-08

This update is done on revenue that is obtained from having contracts with customers. It involves the comparison of the principal and agent considerations in making these amendments. Comparison, in this case, is between the gross revenue and the net revenue.

5. Update 2016-07

The topic of this accounting standard is on investment. This standard is based on the equity methods and joint ventures. Generally, it aims at improving and simplifying equity method transition.

6. Update 2016-06

This standard is also based on derivatives and hedging. It describes the various options of the debt instruments. 

References

Liu, Y., MacFadyen, A., Ji, Z.G. and Weisberg, R.H. eds., 2013. Monitoring and Modeling the Deepwater Horizon Oil Spill: A Record Breaking Enterprise (Vol. 195). John Wiley & Sons.

Rubin, C.B. ed., 2012. Emergency Management: The American Experience 1900-2010. CRC Press.

Scott, W.R., 2014. Financial accounting theory. Pearson Education Canada.

Walker, R.B., 1993. Inside/outside: international relations as political theory (p. 2). Cambridge: Cambridge University Press.

Wenger, E. and Lave, J., 1991. Situated Learning: Legitimate Peripheral Participation (Learning in Doing: Social, Cognitive and Computational Perspectives) by. Cambridge University Press, Cambridge, UK.