BP looks for short-term loan to cover costs in oil spill cleanup

oil spill cleanup workers

BP is looking for a short-term loan to help cover its liabilities for the oil spill in the Gulf of Mexico, and the banks are holding the company over a barrel. Flickr photo.

A short-term loan comes in handy for a lot of people for unexpected expenses such as car repair, a crown at the dentist or a traffic ticket. But when you’re the culprit in the 2010 oil spill in the Gulf of Mexico, a short-term loan comes in handy — in spades. Oil giant BP is talking with banks to raise about $5 billion in short-term loans to help finance liabilities arising from the oil spill in the Gulf of Mexico, the Financial Times newspaper reported Thursday. By the end of last week BP had already raised about $20 billion in cash and credit to tackle costs from the spill, according to the report.

Short-term loans are easy — unless you’re BP

For most people, getting a short term loan is easy. with a little online research some pretty reasonable rates can be found, but if you run an oil company with a criminally negligent sales record that’s trying to buy its way out of an epic economic and environmental disaster it’s a little tougher. Investment Week reports that in seeking its $5 billion in short-term loans, BP is having to pay more than commonly charged by banks in margins and fees, people close to the transactions said. They noted that the banks are holding the cards in this deal. BP, regardless of how big and rich it has become, will soon be desperate for cash. As the undersea gusher continues unabated, banks have grown more concerned over the potential size of BP’s liabilities — so they’re going to hold the oil company over a barrel.

BP looks for fast cash

A short term loan or a payday loan provides the fast cash most people need to prevent credit problems like missing a credit card payment, preventing a bank overdraft fee, or simply getting the car out of the shop to get to work. But BP definitely has a bigger problem on its hands. To solve it, Reuters reports that BP is looking at various debt-financing options, which include extending bank credit lines as much as $7 billion. Earlier this year, the oil spill company had considered a corporate bond offering and additional asset sales. But those ideas are on hold for now. Even though it is angling for short-term loans, BP has said it has enough cash resources to meet oil spill clean up costs without having to resort to these options.

BP needs more than a short-term loan

For most people a short term loan or payday loan for quick cash solves their financial dilemma and they move on. But BP’s costs will continue to mount. The Street reports that BP said this week the costs of cleaning up the oil spill in the Gulf of Mexico had reached $2.65 billion. This figure, which will continue to grow, is already more than $300 million more than its estimate from the week before. On June 16, BP agreed with the Obama administration to create a $20 billion fund to compensate for the environmental and economic damage being wrought by the oil spill.

BP needs debt management

It’s not known whether $20 billion will be enough. The Associated Press reports that on July 1 BP’s oil spill became the largest-ever in the Gulf of Mexico. Its damaged oil well has been pumping out oil for about two and a half months now, surpassed the formerly record-setting 140 million gallons spilled by the Ixtoc I spill near Mexico’s coast from 1979 to 1980. It’s doubtful that BP’s short term loan strategy will be adequate to deal with the long-term debt that lies ahead for the Gulf of Mexico.