Why BP should survive

On Wednesday, BP agreed to put aside about $20 billion for oil spill claims.

This announcement came one day after President Barack Obama recommended the company set aside a large reserve to cope with what is expected to be, almost literally, an ocean of damage claims and after several days of volatile BP stock prices that inspired analysts and television pundits to consider assorted BP bankruptcy scenarios.

But if BP were allowed to go bankrupt, would it help or hurt environmental recovery in the Gulf?

The mountain of evidence that BP and the U.S. Minerals Management Service underestimated the risks - and had no plan in place to handle a disaster of this magnitude - doesn't change the fact that BP can still play a positive role in the outcome. We must be mindful of future risks, not just at BP, but throughout the industry. If BP or a subsidiary were to go bankrupt, it likely would impede the lessons learned and probably mean bad news for everyone except its competitors. Here's why:

First, the businesses and coastal users who currently bear the economic costs of the spill could become less likely to receive compensation in a bankruptcy. News reports have treated bankruptcy scenarios inconsistently, both before and after Wednesday's announcement of the $20 billion set-aside - an indication of how speculative the conversation is right now. What's not speculative in any scenario is this: Spill victims are not just another creditor. The news last week mitigates this fear but doesn't eliminate it.

Second, BP is the world's largest deepwater oil producer and rounds out the top three biggest private oil producers overall. If BP survives to pay the full costs of this environmental disaster, these costs would be passed on to energy users. This effect is, to some extent, desirable from an economic standpoint because the only way to reduce our insatiable demand for environmentally hazardous energy is to make us pay its true cost.

Third, the decades-long history of U.S. oil spill disasters suggests that the industry copes poorly with improbable, catastrophic risk. Rightly or wrongly, BP is now the poster child for this syndrome - charged as it is with failing to take adequate precautions in the Gulf and in previous calamities in Alaska and Texas. One would hope that the Deepwater Horizon spill changes the risk psychology of BP's future operations so it becomes one of the more environmentally conservative energy companies on the planet.

That becomes even more likely if the public, media and federal government provide the kind of scrutiny they have for other equally risky endeavors, such as nuclear power generation or space flight.

Going forward, all firms doing business in offshore oil should be capable and prepared to pay the full costs of potential spills and environmental disasters. As we learned from a House Energy and Commerce hearing Tuesday at which oil company executives testified, they might not be.

There are ways to address this risk. Performance bonds - advanced security deposits that reflect the worst-case cost of a spill - could be posted by offshore oil companies. Like requiring banks to hold sufficient capital to cover financial crises, the federal government should require the same of firms in which environmental crisis is a likely part of doing business. Big companies like BP could post bonds out of their already large capital accounts.

Quickly, we would expect to see a market for performance bonds. Smaller companies could buy performance bonds the same way people buy bail bonds or other types of insurance. Companies that can demonstrate risk-reduction practices and can show they are well prepared to deal with an environmental disaster would pay lower rates on performance bonds - just like good drivers pay lower insurance rates.

The U.S. has suffered several major "teachable moments" the last several years, and the Deepwater Horizon is providing another one. The BP Oil Spill Commission could teach us a lot about avoiding this kind of catastrophe in the future by, among other things, putting in place better systems to ensure that the oil industry not only analyzes risk, but also takes appropriate steps to reduce it.

BP could teach the industry far more about responsible energy production through economic survival and corporate sacrifice than through bankruptcy. But before that, BP has to survive long enough to learn from this moment.

Linwood Pendleton is the director of Ocean and Coastal Policy at Duke University's Nicholas Institute for Environmental Policy Solutions.