Counting the cost of the BP disaster one year on

0
212

19 April 2011 Last updated at 20:05 ET

By John Mervin New York business editor, BBC News

A year after the explosion on the Deepwater Horizon the cost of the human and environmental disaster is still being counted.

For BP, the company at the heart of the disaster, the effects have had a deep and widespread impact.

On the eve of the explosion BP’s chairman Carl-Henric Svanberg had a letter for shareholders.

It was all about “a revitalised BP”, with the company trumpeting better finances than its rivals, but also big improvements in, of all things, its safety record.

No one has celebrated BP’s safety record since.

This year’s annual letter to shareholders had Mr Svanberg strike a very different tone.

He said that “after a very troubled and demanding 12 months BP is a changed company” .

Continue reading the main story

Start Quote

The Gulf of Mexico is the most profitable part of the world for BP”

End Quote Fadel Gheit Oppenheimer

In fact the company has become synonymous with everything that is dangerous about oil exploration.

And that is just the beginning of the damage to its reputation.

Immediate harm

Never mind the mud. In America, BP’s name sometimes seems to have been dragged through each one of the four to five million barrels of oil that were spilled into the ocean, live on TV.

Such was the immediate harm to its reputation that many began to question whether the company could survive in America in its existing form.

A former cabinet secretary called for BP’s US operations to be nationalised.

Congress passed legislation restricting BP’s business here and many assumed that a sale of its assets in the Gulf of Mexico was on the cards.

So what will this eventually cost?

Well, like the effects of the oil spill itself, there are different ways of counting.

One might start with the loss of one boss.

Before the spill BP’s CEO, Tony Hayward, was getting plaudits for BP’s financial strength and its improved safety record.

‘Smile and bonhomie’

The Wall Street Journal wrote articles contrasting the “well-tanned” Tony Hayward who “welcomed press…with a smile and bonhomie” with his more uptight counterparts at other, less profitable oil companies.

By the time Deepwater Horizon had finished dumping its toxic load onto America’s shores Mr Hayward was the most vilified business leader anyone could remember.

His eventual resignation was no surprise.

Then there’s the financial cost – BP’s accounts for 2010 put aside $41bn to pay for the spill, two and a half times more than BP’s entire profit in 2009.

While it’s true it might cover all the costs, it very well might not with the meter is still running, particularly on the legal fees.

One of the biggest costs could be the fine levied by the Environmental Protection Agency as the EPA sets its fines on a per-barrel basis.

So BP will be fined between $1100 and $4300 for every barrel that was spilled.

Once everyone’s agreed on how many barrels that was then the fine will be set according to how negligent BP is deemed to have been.

In short, if the company is found to have been grossly negligent and something like 4.5 million was spilled, that’s a fine of over $19bn.

Endless bills?

Another year’s profit lost?

Admittedly that’s a worst-case scenario for the biggest single civil case, but with hundreds of other cases behind that, the company itself admits it has no useful way of forecasting the total legal bill.

So with a shattered reputation, a lost CEO and costs in the untold billions, it’s hardly surprising BP describes itself as a changed company.

But in certain crucial respects BP has not changed, because it never did get out of the US oil exploration business.

The breathless talk of leaving the US from last summer has gone, BP executives always knew as they fought the gruelling PR battles of 2010 is that the Gulf of Mexico is just too lucrative to leave.

As oil analyst Fadel Gheit from Oppenheimer says: “The Gulf of Mexico is the most profitable part of the world for BP.”

Mr Gheit offers a simplified calculation to illustrate this.

He says that if, for the sake of round numbers, you assume BP sells oil at $100 per barrel, a barrel from the Gulf can be broken down as follows:

BP pays $20 of the $100 to the US government in royalties – i.e. for the right to extract the oil in the first place.

It then spends something like $25 getting the oil out of the ground (in truth, Mr Gheit says, BP is much more efficient than this.)

The US government then taxes BP’s earnings at a rate of 34%.

All of which means that BP is left with a little over $36 dollars of profit for every $100 barrel it gets from the Gulf of Mexico.

Contrast that with Russia where BP is so energetically trying to secure its future.

Mr Gheit says that if BP gets $15 a barrel from Russian oil it is “extremely lucky”.

Bitter arguments

It’s also clear from such arithmetic that billions of dollars are at stake for the US government.

Given the bitter arguments over spending and debt, the US government needs all the billions it can find.

Then there’s the other pressing economic problem of unemployment.

A jobless rate of 8.8% does not give politicians any reason to turn down an industry that’s ready to hire thousands, in the region that suffered the worst hardship.

The government has every incentive for the big oil companies to get back to work in the Gulf.

Drilling permits there are being issued again, albeit slowly. BP hasn’t been granted any yet, but analysts expect it will be by the end of 2011.

So fast forward another year and the “changed” company that is BP may be in a strikingly similar position to the one it was in on the eve of the Deepwater Horizon explosion.

It will doubtless once more be emphasising the safety of its operations.

The most lucrative part of its business may well be in the Gulf of Mexico.

Thousands of people on the Gulf Coast may rely on it for their livelihoods, and it will again provide a vital source of revenue and energy for the US.

In most vital respects, as a business, it turns out that BP might not be that changed by the Deepwater horizon disaster.

That doesn’t belittle the scale of the human and environmental catastrophe so much as it reflects the size and importance of BP.

See more here:
Counting the cost of the BP disaster one year on