BP's mounting troubles

by Suzanne Gould, BBC News Analyst, for the BBC's Biodun Iginla

Failure to stem the flow of oil into the Gulf of Mexico spells trouble for BP

Jun 3rd 2010 | From The Economist print edition

THE relief well with which BP is planning to put a definitive end to the oil spill polluting ever more of the Gulf of Mexico is drilling down into the sea floor at a rate of about 60 metres (200 feet) a day. The company’s share price is dropping considerably faster. On June 1st it plummeted by 13%. It had already declined by 24% over the six weeks since the loss of the exploration rig Deepwater Horizon and the start of the spill. All told the company has lost £42 billion ($62 billion) in value since the crisis started.

The latest drop was prompted by the news on May 29th that BP’s attempt to plug the leak with a “top kill” had failed. The company now plans to cut through the pipe from which oil is leaking and cap it with a fitting that will funnel oil to ships on the surface; it may also use equipment installed for the top kill to drain off oil. These steps may slow the flow of oil into the sea, perhaps substantially, but they will not stop it altogether, and carry a slight risk of increasing it. The funnel would also have to be removed if a hurricane were to strike.

A complete stop will have to wait for one of the two relief wells to get down to 5,500 metres, intersect with the leaking well and plug it. August is spoken of as the earliest date for this sort of success, hurricanes permitting. If numerous attempts have to be made, as they sometimes are, it is conceivable that the leak could continue for the rest of the year.

Barack Obama, under increasing criticism for his handling of the disaster, has promised to “bring those responsible to justice”. On June 1st his attorney-general, Eric Holder, visited Louisiana and announced that he was exploring both civil and criminal charges against BP and the other firms involved in the drilling. Criminal action could leave BP facing massive fines on top of the costs of the effort to stop the leak, the clean-up operations and claims for damages by companies and individuals that have been affected. So far BP has spent some $1 billion; that said, it made $6.1 billion in the first quarter of 2010. It is profitable enough to absorb $20 billion in spill-related losses while paying a $10 billion dividend, as it did last year. That would reassure anxious investors, but worry rating agencies (on June 3rd Fitch trimmed BP's ratings) and outrage politicians who want the dividend scrapped.

Robert Reich, a former secretary of labour, has suggested that BP’s American operations should be put under temporary receivership to allow the government to take control of plugging the leak. This seems unlikely. But the idea that the company as a whole might be taken over has become significantly more likely as its share price has plummeted. BP’s market capitalisation is now less than that of its rival, Royal Dutch Shell (see chart), which has discussed a merger before and may now be contemplating one again. The scale of the stock’s fall makes it possible that the foreseeable losses, huge as they are, have not only been priced in, but even overpriced.

Reputational loss, and the possibility of losing further access to the gulf, where BP is a large player, are harder to calculate while the spill and its attendant inquiries continue. When the waters finally clear, though, there could be some interesting sharks swimming in them.

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