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BP Business Economic Loss Claim Appeal 2016-1985:Lease Bonus Spread Over 3-Year Lease Term Denying Causation Under Exhibit 4B

The following is an Appeal Panel Decision issued pursuant to Section 6 of the BP Deepwater Horizon Economic & Property Damages Settlement Agreement and the Rules Governing the BP Appeals Process. Links may have been added to assist the reader. The original decision may be found here, as well as a glossary of BP Settlement terms.

The BEL claim of Claimant was denied for failure to satisfy causation under Exhibit 4B of the Settlement Agreement. Claimant appeals, arguing the Settlement Program erroneously re-allocated a $3,000,000 lease bonus over the 3 year term of the lease, causing the company’s inability to meet causation. Claimant contends the circumstances are inapposite to a scenario where advance payments are spread over the life of a commercial property lease because the bonus herein was paid “in consideration for granting an exclusive right to explore for minerals which was earned on the day payment was made.” Claimant argues strenuously that it doesn’t make sense to spread the lease bonus over the life of the lease.  Claimant suggests the spreading of the revenue is not how the payment is accounted for or how it is treated by the IRS. Additionally, Claimant points out the company keeps all payments regardless of whether there is ever any production and the bonus payment “is in no way inextricably linked to a primary 3 year term of the mineral lease,” especially since the lease can be held in place for decades by continuing production.
Unfortunately for Claimant, this Panelist finds these arguments unpersuasive. Although the lease bonus may be made in one payment, the compensation is paid in exchange for the 3rd party obtaining the right to explore for minerals over the 3 year period. It is true that, if there is production, the lease may be extended but this does not obviate the fact that the compensation is for the authority to exercise a right over a 3 year period, at the least. This is, in fact, directly analogous to the property lease scenario, where advance rental payments have consistently been spread over the lease period. This treatment by the Program with property leases has been
approved by numerous Panel Decisions, as well as by the District Court, and there is no basis to distinguish the present circumstances from the property lease situation.
Claimant has, in fact, at some point referred to the income as ” lease income.” Additionally, how this revenue might be handled by the IRS is not determinative when Policy 495 requires adjustments to the timing of revenue. Further, it is also not relevant that royalty payments are considered earned when paid. Royalty revenues correlate to monthly production which occurs in close relation to the timing of the monthly revenue payments. In contrast, where exploration rights are granted for a minimum 3 year period, there is no close correlation to the timing of a bonus payment and the time period attributable to that revenue.
The reallocation of the revenue is appropriate pursuant to Policy 495 and, therefore, Claimant’s appeal is dismissed.

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