BP is digging in for a long legal battle over the Gulf of Mexicooil spill, Chief Executive Bob Dudley said on Tuesday aftercompensation costs soared for a second straight quarter.

The payouts, the scale of which BP is disputing even though theyare one part of the case that was settled last year, have been thefocus of attention in recent months in a wider legal process thathas saddled BP with a $42.4 billion clean-up, fines andcompensation burden and could yet cost billions more.

BP has said some of claims being paid are “absurd” and“fictitious” and that the terms are being misinterpreted to allowbusinesses which had no spill-associated loss receive payment. Ithas so far failed in all its attempts to stop them.

“As we continue to fight these absurd (compensation) outcomesand as the likelihood of extended litigation on other mattersincreases … we want everyone to know that we are digging in and arewell prepared for the long-haul on legal matters,” Dudley said atBP's quarterly results news conference.

The door is open to a wider legal settlement, he said, but “it'sin the interest of our shareholders now to play it long”.

The 2010 oil spill killed 11 men and despoiled the Gulf ofMexico coastline in the United States' worst offshore environmentaldisaster.

The second quarter saw BP take another $1.4 billion inprovisions on claims against a $20 billion fund that finances them,leaving the fund with just $300 million left unaccounted for, eventhough the deadline to claim by Gulf coast businesses is not untilApril next year.

BP has said claims beyond what the fund can pay will be takenstraight off future profits.

MISSES PROFIT FORECASTS

The company revealed the extra cost in its second-quarterresults, which missed profit forecasts due to the tax effects inRussia that the company said would even out over time, and othercurrency-linked tax effects.

BP's shares were down 4.5 percent in early afternoon trading,having tumbled to their lowest in a month.

Adjusted net profit for the quarter fell to $2.71 billioncompared with expectations of $3.41 billion and with $3.6 billion ayear ago. Profit was also hit by lower prices and by lowerproduction – partly the result of asset sales to pay for the costsof the spill.

The extra $1.4 billion of spill compensation costs come on topof a $500 million addition in the first quarter and bring BP'sestimate of the cost of claims so far to $9.6 billion.

Some $900 million is for extra claims, while about $500 millionis for the costs of the claims administrator, BP said.

BP is locked in a legal battle over the compensation payoutswith the administrator, Patrick Juneau. It says Juneau is payingout “fictitious” and “absurd” claims due to a misinterpretation ofthe settlement.

Last week, though, its legal campaign had appeared to receive aboost when Halliburton Co, which was involved in preparing thedoomed Macondo well for production, abandoned one of its argumentsthat tried to paint the British oil company as unconcerned aboutwell safety.

FINAL BILL

BP also faces a resumption of its trial on civil charges inSeptember. It increased its overall provision for the cleanup,fines and compensation for the spill to $42.4 billion from $42.2billion. Analysts expect BP's final bill to be billions bigger.

The quarterly result was the first to include a contributionfrom its 19.75 percent stake in Rosneft, the state-controlledRussian company, which BP acquired in part-exchange for its 50percent holding in Russian oil group TNK-BP.

Analysts had expected a bigger contribution from the Rosneftstake. They said the tax-lag factor and the impact of a weakerrouble looked to have accounted for about $450 million of the $700million shortfall.

A broader tax and currency effect of a stronger dollar raisedthe company's tax rate to 45 percent from 35 percent last year,accounted for the remainder.

“I think people will have to listen to what BP's got to say onthat (Russia) and try to digest how to forecast it,” said Santanderanalyst Jason Kenney. “The 45 percent tax rate was also a bit of asurprise … they're saying a stronger U.S. dollar versus a basket ofcurrencies, but we've not seen this kind of swing in effective taxrates before.

“The core upstream division was actually ahead of consensus andthat's still going great guns. The refining and marketing divisionis probably as expected,” Kenney said. “Fundamentally, I think BP'sstill moving forward.”

Underlying production of oil and gas excluding Russia – adjustedfor divestments and production-sharing agreements – grew by 4.4percent compared with the same period last year, as production frommajor projects in Angola and Norway ramped up.

Upstream production in the third quarter is expected to be loweras a result of planned seasonal turnaround activity and continuingdivestment impacts, BP said.