BP Will Pay, One Way or Another

by Stuart Burns on
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Commodities

The loss of the drilling rig contracted to BP and the resulting oil spills could prove to be an example of the difference between fault and responsibility. It may not turn out to be BP’s fault but it is most definitely BP’s responsibility. The drilling rig Deepwater Horizon that exploded and caught fire on April 20 and sank April 22, was owned and operated by a Swiss company Transocean Ltd, global leaders in their field. The rig was drilling an exploratory well about 42 miles southeast of Venice, Louisiana and workers were in the process of capping and sealing off the well when the pressure suddenly rose and the explosion occurred according to a newswire release. The workers do not appear to have been largely BP’s either. At the time of the accident, Haliburton was in charge capping the well by injecting cement in a sophisticated operation to seal the bore following completion of the drilling operations.

The costs will be immense. The Deepwater Horizon was valued at $560m according to a Financial Times article while the Macondo well that it had been drilling at the time of the accident (and now useless) cost about $100m typical for the industry even though the reservoir is thought to hold only a few tens of millions of barrels of oil. BP only owns 65% of the license partnership anyway, the rest is owned by Anadarko of the US with 25% and Mitsui of Japan with 10%. In keeping with many large corporations, BP does not insure against such risks, carrying the costs on its own books.

The latest solution to stop the leaking oil is a four story steel dome being constructed onshore nearby and said to weigh some 70 tons. The dome is to be lowered over the largest of the three leaks by this weekend and will pump oil to the surface to be taken away in tankers – if it works, this is the first time the technique has been used at such depths. The cost of the attempts to close off the three leaks caused by the accident have not been quantified but are probably only the tip of the iceberg as to what the final bill will be. One estimate in a separate FT article says BP is spending $6m per day and puts the figure for the clean-up, compensation and damages at about $8bn two-thirds of an estimated $12.5bn total cost. BP has lost $23bn off its share price since the explosion which is probably a reasonable estimate of the long-term damage to the firm.

The deep water drilling market was one part of the drilling industry that was looking like it was on the up following a drop in onshore gas drilling activity as a result of a saturated market. President Obama had indicated the administration was willing to accept an increase in offshore drilling prior to this accident. The industry was expecting to spend $167bn on deep water development during 2010-14, up 37% from the previous five-year period, according to Douglas-Westwood, a consultancy.

In the long run, the costs could be spread across the whole industry in the form of greater regulation, reduced access to drilling rights and by the population at large paying more for oil if sources are not developed. Deep water domestic off shore oil is seen as an alternative to reliance on imported overseas sources of oil.

What exactly went wrong? Who was to blame and what can be done to ensure both the original explosion and the subsequent failure to shut off the flow of oil is avoided in the future will take some time and hugely expensive lawyers fees to establish. In the meantime, there are no winners from this disaster, only losers.

–Stuart Burns




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