Opening Remarks

Obama and BP at Risk Over Oil Spill


With failure heaped upon failure in the Gulf of Mexico, the environmental disaster now threatens the viability of not only a vast corporation but also a U.S. Presidency. The buck stops with both—one financially, the other politically. Can either recover?

The markets sent ominous signals about BP's (BP) future once it became clear over the Memorial Day Weekend that the top-kill plugging maneuver had not worked. In the Gulf, hurricane season has arrived, bringing with it the prospect of fierce storms chasing rescue ships to shore and spreading the sickening oil slick farther along the southern coast. A long, grim summer seems all but certain.

Its shares sharply depleted, BP, the largest oil and gas producer in the U.S., suddenly seems vulnerable to a breakup or takeover. In Washington, the Obama team appears to be flailing. Trying to assert some form of authority, the President vowed to bring wrongdoers to justice. The promise seemed mostly like a distraction from frustrating reality: In the short term, President Obama can do little, if anything, to stanch the gushing well.

As much as any other challenge—Wall Street, health care, Afghanistan—the oil spill may define Obama as a leader. He either will find a way to rise to this occasion and make some broader use of the crisis in the Gulf, or it will permanently taint him.

Deficient Oversight

This is a moment to think big and creatively. As distant as risky drilling rigs off Louisiana may seem from the New York financial laboratories where wizard bankers synthesized subprime credit derivatives, Obama could explain the important connections: how, after decades of antiregulatory fundamentalism in Washington, the feckless Minerals Management Service became the Securities & Exchange Commission of the oil business.

It is no coincidence that staff members at both agencies watched pornography on government computers when they should have been monitoring their respective beats. Although corruption and incompetence seem to have run deeper at the soon-to-be-dismantled MMS, the zeitgeist of the two places was similar, according to investigations and congressional hearings: Industry was to be trusted, even when government overseers had no more idea what transpired on the trading floor at Lehman Brothers or Bear Stearns than they did on the ocean floor beneath the Gulf of Mexico.

The question is: What will Obama do about it?

One route to political rehabilitation would be to redefine how government interacts with business. The goal he should articulate is protecting capitalism—and the society it's intended to serve—from the tendency of the profit-minded to go to extremes.

Takeover Prospects

Profit-minded investors, meanwhile, have soured on BP. "We are very negative on the prospects for BP, and this situation has a real possibility of breaking the company," London-based investment bank Arbuthnot Securities said in a June 1 research note. That day the British energy giant's shares dropped as much as 17 percent in London, their biggest one-day decline in 18 years. The company's stock flattened on June 2, closing down 34 percent since the Deepwater Horizon exploded Apr. 20. That erased more than $58 billion (40 billion pounds) from BP's value.

Ivor Pether, who helps manage $9.2 billion at Royal London Asset Management, including BP stock, told Bloomberg News: "We're getting into share price territory where analysts speculate about takeover possibilities, because the loss of market value is much greater than the estimated 'worst case' costs." Buyers haven't surfaced yet, he added, "because the near-term uncertainty is so high." BP spokeswoman Sheila Williams declined to comment.

The company's woes grew worse when the Obama Administration announced June 1 that it will investigate potential criminal and civil violations related to the spill. "We will prosecute to the fullest extent of the law," U.S. Attorney General Eric Holder said. While Holder didn't get into particulars, troubling facts have already surfaced. The House Energy & Commerce Committee released internal BP e-mail showing that company employees had worried six weeks before the rig explosion that workers were struggling to control the well below. A criminal indictment of BP and other companies involved in the accident—perhaps for infractions of the Clean Water Act or other environmental laws—"is very likely," David M. Uhlmann, a former chief of the Justice Dept.'s environmental crimes section, told Bloomberg. Uhlmann, who now teaches at the University of Michigan Law School, pointed out that after the Exxon Valdez oil spill in Alaska in 1989, ExxonMobil (XOM) pleaded guilty to charges of that variety.

Another potential line of prosecutorial inquiry, and one that could have more severe effects on BP, would focus on whether executives lied in formal statements to the government. Depending on how high up the chain of command the probe went, a cover-up investigation could seal the fate of Chief Executive Tony Hayward and underscore questions about BP remaining independent. The company has said it will cooperate with investigators.

White House in Control?

While the FBI explores the nuances of pollution law, the White House promises daily to stem damage to the Gulf coastline and economy. "I'm confident people are going to look back and say this Administration was on top of what was an unprecedented crisis," Obama has told reporters. That seems increasingly doubtful. However the destructive gusher is stopped, Obama will have been the man in charge when we all realized that the White House isn't "on top of" much of anything when it comes to deep-sea oil.

The federal government that Obama inherited in 2009 had been more or less uninterested in keeping up with business over the course of three decades. "Industry has developed technology the government doesn't understand," says Richard B. Stewart, a professor of environmental law at New York University Law School.

As happened in the wake of the collapse of some of Wall Street's most storied investment banks, we are already beginning to learn that BP's internal communications show a reluctance to address what should have been dire warning signs. BP e-mail obtained by the House Energy Committee reveal that anxiety about the safety and soundness of the BP well was intensifying more than a month before the Apr. 20 blowout. This evidence, while fragmentary and inconclusive, may cast doubt on BP's contention after the explosion that the company was caught entirely by surprise.

A Mar. 10 e-mail from BP executive Scherie Douglas to Frank Patton, an MMS drilling engineer, said the company planned to sever the pipe connecting the well to the rig and then plug the hole. "We are in the midst of a well control situation on MC 252 #001 and we have stuck pipe," Douglas wrote, referring to the subsea area Mississippi Canyon 252. "We are bringing out equipment to begin operations to sever the drillpipe, plugback the well and bypass." BP received verbal approval from an unnamed MMS official at 11 p.m. on Mar. 11 to insert a cement plug at a shallower depth than normally would have been required after the hole caved in on the drilling equipment, the e-mail showed. Asked about these exchanges, a company spokesman said: "We have always said it was a complex accident. We await a full report."

The Myth of Industry Infallibility

As investigators reconstruct events leading up to Apr. 20, Sarah S. Elkind, an historian of politics and the environment at San Diego State University, warns against focusing on minutiae to the exclusion of the big picture. Within the MMS, she says, "The employees followed cues from political appointees during the Bush Administration and earlier Administrations, going back to 1980, and including Democrats as well as Republicans. The message was that government doesn't work, and industry always knows what it's doing. What did we expect the employees to do?"

Industry, of course, doesn't always know what it's doing, NYU's Stewart notes. He headed the Justice Dept.'s environmental division in March 1989, when the Exxon Valdez dumped 250,000 barrels of crude into Alaska's Prince William Sound. For 21 years, until BP, that was the record U.S. oil spill. After the Valdez ran aground, it became clear that the industry lacked the plans or equipment to contain a spill of that magnitude, Stewart says. "Government had delegated most cleanup responsibility to the oil companies, and their response capability was in mothballs."

Congress responded belatedly with legislation in 1990 that required safer supertankers and a mechanism for the U.S. Coast Guard and other agencies to coordinate a cleanup—on the water's surface. That didn't help prepare for a blowout a mile below. Once again, government had deferred to the oil industry, and the giant company in question wasn't ready for a monumental snafu.

Obama has spoken expansively about restoring respect for government service. His occasionally populist rhetoric aside, he has been solicitous of corporate interests, too. Recall the astonishing bailout of General Motors. Just three weeks before the Deepwater Horizon exploded, the President had proposed expanding offshore oil exploration, in part as a bid for Republican votes for stalled energy and climate legislation. At the time, Obama praised advances in drilling technology.

"Where I was wrong," he said on May 27, "was in my belief that the oil companies had their act together when it came to worst-case scenarios." By his own admission, this product of Harvard Law School and liberal South Side Chicago politics was mesmerized, along with everyone else, by the myth of industry omnipotence.

Interior Dept. Lapses

The President also acknowledged that his Interior Secretary, Ken Salazar, who oversees the MMS, hadn't moved quickly enough to root out favoritism and laxity. In 2009, BP was granted a "categorical exclusion" that allowed the Deepwater Horizon to operate without analysis required by the National Environmental Policy Act. Obama said changes had been planned at Interior. "If they were happening fast enough, [BP's safety glitches] might have been caught."

In congressional testimony, Salazar has blamed the environmental lapse on a statutory 30-day deadline on the permitting process. The Administration says it will seek to extend that time limit to 90 days. Salazar exacerbated his department's bumbling image by repeatedly boasting about having a "boot on the neck" of BP. He even suggested that the company would be pushed "out of the way" if it didn't move faster. The tough-guy talk wasn't convincing. The government lacks the necessary engineers, undersea robots, and scientific expertise. This remains BP's show.

The director of the MMS is gone, and the agency has been divided in three, so that its collection of oil royalties won't undermine its policing function. Obama has imposed a six-month moratorium on new permits for deepwater wells. The sale of exploration leases in the Gulf of Mexico and off Virginia has been suspended. A big Arctic energy project will be delayed. The government will require tougher certification of the sort of equipment—the notorious "blowout preventer"—that failed on the Deepwater Horizon.

That's not stopping some Republicans from equating Obama's response to the crisis to President George W. Bush's lack of urgency in reacting to Hurricane Katrina in 2005. The National Republican Senatorial Committee is running a Web video juxtaposing candidate Obama's words about Katrina—"Never again"—with those of liberal commentators castigating him for acting "lackadaisical" about the Gulf crisis and seeming as ineffective as "a Vatican observer."

More measured critics recognize that neither party has covered itself with glory. "The truth of the matter is nobody knows how to fix this damned thing," Senator Lindsey Graham, a South Carolina Republican, told reporters, "and if they know how, they need to step up."

The Case for Better Regulation

Until someone figures out how to fix BP's leak, the idea the President should stress is how to reframe the debate about oil, investment banking, and other technologically sophisticated industries. Obama should argue that we need better government oversight of business, not to harm it, but to nurture it. He could invoke the memory of the New Deal regulatory revolution, which shielded industry and finance from calls for socialism after the Great Depression.

He won't win over Tea Partiers who see the New Deal (and the income tax and civil rights laws) as constitutional infringements. But a majority in America may well be receptive to an appeal that Democratic pollster Douglas E. Schoen described this way in a roundtable on the politics of the spill on washingtonpost.com: "We are all in this together—not as corporations or populists, not as Democrats or Republicans, but as Americans working to solve the problem collectively." In a speech in Pittsburgh on the afternoon of June 2, Obama started in this direction, then swerved toward partisanship. The Republican agenda, he said, "basically offers two answers to every problem we face: more tax breaks for the wealthy and fewer rules for corporations."

For the foreseeable future, we need an oil industry. It should be one that worries about tough inspections so it avoids another Deepwater Horizon. For the longer term, as Obama argued in Pittsburgh, we need a comprehensive climate and energy bill that will create incentives to find alternatives to oil retrieved at great expense from the ocean depths or purchased from pernicious foreign sources.

In the same spirit, pending financial reform legislation aims to insulate Wall Street from its worst instincts and make it less of a threat to the rest of us. Bills waiting to be reconciled by the House and Senate would give regulators more authority to monitor complex securities, simple mortgages, and all manner of transactions in between. Financial firms would come under pressure to reduce debt and hold more capital in reserve. If a financial outfit began to fail, regulators would have more tools to disassemble it before a traumatic collapse.

Obama ran for President emphasizing results. Businesspeople like to talk about results, too. After a generation of operating according to a simplistic notion that defined government oversight as essentially poisonous to corporate success, now would be an opportune time to rally the country around an ideal of tough, fair regulation for the good of business and the customers it serves.

Barrett_190
Barrett is an assistant managing editor and senior writer at Bloomberg Businessweek. His new book, Law of the Jungle, tells the story of the Chevron oil pollution case in Ecuador.

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