Oil -- the new Tobacco

Has the Obama administration decided to partner with the oil industry the same way the government has a partner in the tobacco industry? Looks that way. How long will it take for Obama to expand its new revenue-raising rules to include the entire oil industry?

U.S., BP Near Deal on Fund

Gulf of Mexico Oil Production Would Secure Company's $20 Billion Recovery Plan.

WASHINGTON—The Obama administration and BP PLC are close to a deal to use future revenues from the oil giant's Gulf of Mexico operations to guarantee its $20 billion cleanup and compensation fund, a move that would give both sides an incentive to continue production in the Gulf, scene of the U.S.'s worst-ever offshore oil spill.

The Justice Department and BP announced Monday they had completed talks to establish the fund, which is designed to cover damage claims from residents and businesses hurt by the oil spill. At the same time, BP paid $3 billion into the fund ahead of schedule.

Discussions continue, however, on how BP will guarantee its remaining obligation of $17 billion. At one point in the negotiations, the two sides discussed securing the fund with BP's oil fields in the Gulf, but the government didn't want to end up owning wells, said one person familiar with the situation.

BP has said it expects to be able to make the required payments to the $20 billion fund through its ongoing operations and asset sales. However, the administration wanted security in the form of collateral in the event that BP couldn't meet its obligation due to financial or legal problems.

The issue of collateral is the last detail to be ironed out. It is a prickly political issue because it could make the administration and BP partners of sorts in developing the Gulf.

Such a deal could provoke a backlash on Capitol Hill, where some lawmakers are moving to bar BP from operating in the Gulf. Legislation approved by the House of Representatives in July would effectively prohibit the government from issuing new offshore oil leases or drilling permits to the oil company by adding a roster of requirements BP couldn't satisfy.

BP currently is the operator of 89 producing wells in the Gulf and a stakeholder in 60 other wells operated by other companies. Of these 149 producing wells, BP's share of the production is 400,000 barrels a day. BP isn't currently drilling any new Gulf wells, other than a relief well for the plugging operation.

Under the latest negotiations, BP would use production payments from its producing Gulf wells as collateral for the fund, and would provide quarterly production updates to the government. The collateral requirements would be reduced as BP pays money into the fund.

A White House official called the oil revenue "one option" for collateral, adding that the administration needed to do more work on the "financial reliability of well production" in BP's Gulf operations. The Gulf region accounts for about 10% of BP's production of oil and gas and is one of the company's most profitable areas of business.

The two sides met Monday at the White House. BP's soon-to-be chief executive Robert Dudley and another BP executive sat down with White House Chief of Staff Rahm Emanuel and the White House energy and climate change adviser Carol Browner. The administration officials "impressed upon BP the importance of living up to their commitment to long-term recovery, and underscored that the Administration will remain vigilant in ensuring that promise is met," the White House said in a written statement.

It's unclear how any agreement on collateral would affect the administration's moratorium on exploratory deep-water drilling in the Gulf. The Interior Department issued a new ban in July after its initial order was struck down by a federal judge. The Obama administration estimates the ban has idled 33 drilling rigs; the oil industry says it has resulted in millions of dollars in lost wages. Rigs currently producing oil aren't affected.

If this unusual collateral arrangement is inked, it would represent a new level of interaction between BP and the federal government. Both sides have been tied together, for good and bad, since the Deepwater Horizon rig sank in April.

The escrow fund has become a focus of both the White House and BP now that the runaway well is close to being permanently sealed. President Barack Obama, who announced the $20 billion fund earlier this summer after meeting with BP executives, wants to show he's holding the oil giant responsible for the environmental and financial mess caused by the spill.

BP, for its part, wants to dispel rumors it's dragging its feet on helping the Gulf. "Establishing this trust and making the initial deposit ahead of schedule further demonstrates our commitment to making it right in the Gulf Coast," said Mr. Dudley, the recently named BP chief executive, in a written statement.

In a written statement Monday, Associate Attorney General Tom Perrilli said: "We have made clear that the company still needs to ensure that the necessary funds will be available if something happens to the subsidiary that established the trust, and we look forward to completion of an appropriate security arrangement in the near future."

In setting up the escrow fund Monday, BP named two individual trustees, a former federal judge and a law-school dean. It also selected Citigroup as the corporate trustee. BP also has retained former Deputy Treasury Secretary Roger Altman to advise on how the oil giant can pledge oil revenue to the U.S. government as collateral.

BP is scheduled to make the next payment into the fund of $2 billion in the fourth quarter of this year. After that, $1.25 billion will be deposited per quarter until the total $20 billion has been paid.

Separately, BP said early this week that an operation to plug the troubled well, called a "static kill," was successful. Now BP is in the final days of drilling a relief well as a precaution. This "bottom kill" operation will pour heavy drilling fluid and cement into the well to ensure that it never again spills oil into the Gulf.