Here's What's Wrong With BP's Trust Fund

President Barack Obama's forceful demand that BP accept liability for the damage it caused in the Gulf was a highlight of the administration's handling of the BP disaster.

Yet, like virtually everything else connected with the BP catastrophe, it looks like the initial positive reports obscured troubling realities.

Yes, BP is creating a $20 billion trust fund. But with the trust fund terms now public, it is evident that there are serious problems that the administration must demand be fixed.

BP's scheme enlists the government as a virtual partner in its Gulf oil and gas production, and the company uses that partnership to shield itself from punishment. It is likely to give the government a financial incentive to become an even bigger booster of offshore oil drilling in the Gulf -- the Minerals Management Service's fatal flaw at the time of the BP disaster. BP seems to have structured the fund largely to limit its liability in civil cases and escape accountability.

First, the trust fund appears to be capped at $20 billion -- contrary to what fund administrator Ken Feinberg has said was his understanding of BP's plans.

Even worse, the $20 billion is to be drawn down not just by Feinberg-ordered payments to those suffering economic harm from the oil gusher, but by reimbursements for state and local response, natural resource harms and payments pursuant to class action and other civil action awards.

This arrangement leaves substantially less than $20 billion to compensate individuals and businesses for their economic losses -- most likely leaving them shortchanged.

Second, BP aims to make a subsidiary with no apparent assets other than Gulf oil leases the party responsible for paying all costs of the oil gusher. The company making payments to the trust fund is BP Exploration & Production, Inc., a wholly owned subsidiary of BP America Production, which in turn is a subsidiary of BP Company North America, which is a subsidiary of BP Corporation North America, a subsidiary of BP America, Inc., which is a subsidiary of the ultimate parent company BP p.l.c.

Our research indicates that BP Exploration & Production, Inc. is involved only in Gulf of Mexico offshore oil and gas exploration and production. In other words, BP proposes to pay off its liabilities from the Gulf disaster exclusively with revenue from Gulf oil and gas production.

BP Exploration & Production Inc. is the subsidiary that was operating the Deepwater Horizon exploration rig. The Justice Department and other federal and state agencies are most likely to focus criminal and civil proceedings against this unit. Now, those criminal probes could be inhibited by the fact that this same subsidiary is responsible for paying into the trust fund.

The government will be reluctant to mete out harsh sanctions to BP -- like banning it from all federal leases in the Gulf -- if the victims' fund relies on BP's Gulf revenue.

In addition, the arrangement creates a conflict of interest with the government's obligation for tough enforcement of safety rules at BP wells in the Gulf of Mexico. Whistleblowers have already identified serious safety problems at other BP wells in the region. But cracking down on BP's recklessness may imperil the ability of BP Exploration & Production Inc. to make payments into the trust fund.

Third, the trust fund is due to expire on April 30, 2016, and its trustees have only limited opportunities to extend the deadline. Such a short expiration date is likely to preclude adequate assessment of long-term health, economic and natural resource damages. Victims shouldn't be coerced to take a deal before they know how badly they have been harmed.

Fourth, the trust agreement lacks any disclosure requirements. In fact, it specifically states that trustees "shall not be required to render any annual or other periodic accounts" other than those mandated by Delaware trust law. Feinberg can partially address this problem by being transparent about his actions.

But Feinberg is not likely to have some relevant information -- including data on payments made for purposes other than satisfying the claims he resolves.

There's no excuse not to build a high degree of transparency into the trust agreement. There has been more than enough secrecy around BP's mismanagement of this crisis.

BP has sought to maintain control over the crisis response at every stage. Though it seems to have spared no expense congratulating itself with TV advertisements about its good efforts and deep concern for the Gulf ecosystem and the people who rely on it, BP has bungled just about everything it has touched here.

Things improved only when the government insisted that it supervise what's going on.

Now BP aims to control the terms of payout and penalty. Like everything that came before, this is a public problem. It demands engagement by the administration.

There's no easy way to clean up the Gulf. But it's easy enough to clean up the trust agreement mess.

It's time for the administration to act.