How Much Worse Can It Get for BP?
The share price of BP (BP) dropped by another dizzying 13 per cent yesterday, causing alarm far beyond the oil industry, as the company worked desperately on yet another untried strategy to stem the devastating oil leak in the Gulf of Mexico.
The beleaguered group's shares collapsed even before the US authorities announced the launch of a criminal investigation. Efforts to plug the leak with a "top kill" of ultra-heavy drilling failed and BP admitted the catastrophe has cost it $990m (£674m) so far. BP has now seen a total of £42bn wiped off its value since the explosion on the Deepwater Horizon oil rig in April killed 11 people and unleashed the biggest oil slick in US history.
Yesterday BP engineers were manoeuvring robots 5,000ft down on the sea floor in yet another scheme to shut off the well that has flooded at least 20 million gallons of oil into the Gulf of Mexico so far. The latest plan is to saw off the top of the leaking pipe from the broken "blow-out preventer" on the top of the well, temporarily increasing the flow of oil before fitting a "top hat" containment dome which can be used to capture the majority of the leaking oil.
But each new scheme is trickier than the last and hopes of success are wearing thin. BP is also running out of options. And given that the company's stock is a cornerstone of British pension portfolios and, with Shell (RDS-A), accounts for a quarter of all FTSE 100 annual cash dividends, the group's future is an issue that reverberates far beyond the walls of a single corporation.
If the top hat fails, BP may be forced to rely on entirely new "relief" wells drilled nearby to shut off the pressure behind the spill. And although drilling has started, the wells will not be finished before August. In the meantime, with ever-more oil washing up on the fragile Louisiana cost, BP's position is increasingly perilous. The White House has taken a tough line with BP and the relationship is getting more fraught with each failed attempt to stem the flow. Yesterday President Obama's administration looked to be distancing itself still further by refusing to take part in any further shared briefings with BP.
BP's plummeting share price, although an alarming index of sentiment, poses no immediate danger either for BP or for long-term investors. More worrying are the costs of the catastrophe, for which BP is liable. The $990m price tag for the clean-up and containment attempts so far is easily manageable. And even if costs run as high as $25bn – the top estimate – BP will not go under. The group generated nearly $30bn last year, and oil prices are expected to carry on rising.
"At the present moment these costs can be sustained. The question is what happens if it gets much worse and there is an exponential rise," Malcolm Graham-Wood, an analyst at Westhouse Securities, said.
That oil may continue to gush into the Gulf until August is bad enough in itself. But there are bigger dangers still. The first is the hurricane season, which will start within days. Meteorologists are predicting a tumultuous 2010 after two relatively quiet years. The timing could not be worse. Not only will storms put a stop to clean-up operations, they will also endanger the rigs drilling the relief wells, and, worse still, could spread the slick way beyond its existing extent. Compensation costs for the Louisiana fishing industries may be high. But if the oil interrupts Florida's tourism, BP's bill will go through the roof.
Worse still for BP, President Obama would be forced to take measures against the group. At the moment, BP has more leases in the Gulf of Mexico than any other oil company. While the administration may be loath to confiscate them as a "nationalisation without compensation," it could make a case that BP failed in its "stewardship of the environment," and invite a syndicate of other oil companies to take the leases over in its stead. And given that the region accounts for some 25 per cent of BP's total production, the impact on the company would be devastating.
The other major risk for BP is the inquiry into the explosion itself. BP's own initial internal investigation has suggested that warning signs may have been overlooked in the hours before the explosion. The US Attorney General, Eric Holder, yesterday visited the Gulf Coast to talk to federal and state prosecutors, and said a criminal and civil investigation had been opened into the spill, raising the possibility that BP could face a prosecution and a punitive fine.
The good news for Britain's pension holders is that even in the worst-case scenario it is almost unthinkable that BP – until recently the UK's largest company – could cease to exist. It is too big a component of British industry for it to be feasibly forced into bankruptcy by the US government. But the doomsday scenario could see BP forced to split off its US operations to absorb the costs, or even the loss of its Gulf of Mexico operations. Such drastic outcomes are still far from being a reality. But they are real enough risks to have wiped nearly £2bn off the value of the company in a single day.
BP highs and lows
1909 The Anglo-Persian Oil Company – as BP was first known – is formed, a year after oil is discovered (by William Knox D'Arcy) in Persia.
1914 Winston Churchill persuades the British government to become a major shareholder in the company by investing £2m in it, in order to ensure that the Royal Navy has a dependable supply of oil.
1935 Company becomes the Anglo-Iranian Oil Company (AIOC).
1951 Iran decides to nationalise oil operations, resulting in the company stopping production in the country. Following the 1953 coup (overthrowing the nationalist prime minister Mohammed Mossadeq), an international consortium, including the AIOC, resumes oil production in Iran.
1954 The company is renamed British Petroleum.
1965 BP becomes the first company to discover gas in the North Sea.
1970 The Forties field, the largest oilfield in the North Sea, is discovered by BP, and production begins five years later.
1987 The British government sells its final stake in the company.
1992 BP is forced to initiate significant cost-cutting measures after posting a loss.
1998 BP merges with the US oil company Amoco, becoming one of the top three producers in the world.
2005 An explosion at the company's refinery in Texas kills 15 workers and injures nearly 200; BP is fined around $21m.
2006 Ruptured oil pipeline on Alaska's North Slope causes spill of 200,000 gallons of crude oil.
2009 The Occupational Safety and Health Administration in the US fines BP around $87m for failing to correct safety issues at the company's Texas plant. Profits for the year: £8.75bn (down 45 per cent on previous year).
2010 (20 April) Explosion on the Deepwater Horizon drilling rig kills 11 workers and leads to disastrous oil leak.
from London, for Independent minds