Monday, June 14, 2010 0 comments ++[ CLICK TO COMMENT ]++

What's the worst that could happen to BP?

USA is lucky that a supermajor caused the oil spill in the Gulf of Mexico. If it were caused by an independent E&P, it is likely the company wouldn't be able to pay more than a few billion and taxpayers would be footing most of the bill. I think "reasonable" damages shouldn't cause any financial problems for BP given that it is one of the largest companies in the world (and hence one of the most profitable in terms of raw dollar profits.)

However, the big risk for BP shareholders would be special penalties that may be levied by the US government. For instance, if the US government takes some operating licenses or disallows BP from bidding on future leases, it would likely cause permanent destruction of shareholder value. I don't know which ones will stick in a court of law but Bloomberg speculates on some penalties:

BP Plc may lose control of its U.S. oil and natural gas wells and be barred from doing business with the federal government as punishment for the worst oil spill in U.S. history, industry and regulatory analysts said.

President Barack Obama and lawmakers are debating penalties that would cripple the company’s ability to do business in the U.S. as public outrage intensifies. In addition to BP’s culpability in the Gulf of Mexico spill, a 2005 explosion at BP’s Texas City refinery that killed 15 workers and a 2006 pipeline leak that dumped 200,000 gallons of crude at Prudhoe Bay, Alaska, will figure in the debate, said Michael Wara, associate professor of environmental law at Stanford University in Palo Alto, California.

“The government weighs whether there is a pattern and practice,” Wara said. “They’ll consider whether BP runs these incredibly complicated systems, where accidents can and sometimes do happen, or whether the company has a culture that disfavors safety and environmental compliance.”

The U.S. may revoke BP’s status as operator of producing wells in the Gulf of Mexico, such as Thunder Horse, or of leases at Prudhoe Bay, said David Pursell, a managing director at Tudor Pickering Holt & Co. LLC, a Houston investment bank. Separately, Congress is considering measures to bar BP from contracts with the Department of Defense and Environmental Protection Agency.


“We think there’s a good chance the government not only doesn’t allow BP to operate going forward, but could rescind operating control,” Pursell, an oil specialist, said in an interview. “It’s a way to keep BP alive and a way for the government to say we’ve really done something to penalize BP.”

Such a move would force BP to sell part or all of its interest in some of its most profitable oil and gas fields, said Michael McKenna, president of MWR Strategies, a consulting firm in Washington. Other partners in a lease are unlikely to take on the risk of being the operator without also taking the lion’s share of profits, McKenna said. Even if BP breaks even on the sale of its stake, it would lose the profits from future oil production.


The EPA can disqualify companies convicted of Clean Water Act or Clean Air Act violations from receiving federal contracts or financial assistance, according to an agency e-mail responding to questions. Those penalties apply to individual facilities, not an entire company, it said.

BP’s facility in Prudhoe Bay and its Texas City refinery are already under EPA sanctions. Negotiations to lift them were suspended after the Deepwater Horizon explosion and leak, the agency said.


Last month, Gutierrez successfully pushed through an amendment to a broader Defense Department bill requiring the secretary of defense to review whether BP is a “responsible” contractor.

If BP doesn’t meet that standard, which includes having a “satisfactory record of integrity and business ethics,” the legislation would require Secretary Robert Gates to bar the oil giant from defense contracts, according to Gutierrez’s office.

BP has six contracts with the Pentagon worth a combined $2.1 billion, mostly for fuel.
The damage caused by this deepwater drilling operation makes me wonder about the risk with Brazilian supermajor, Petrobras, who is set to drill far more complicated, and deeper (if I'm not mistaken) wells off the coast of Brazil.


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