Best of the Week
Most Popular
1. Five Charts That Show We Are on the Brink of an Unthinkable Financial Crisis- John_Mauldin
2.Bitcoin Parabolic Mania - Zeal_LLC
3.Bitcoin Doesn’t Exist – 2 - Raul_I_Meijer
4.Best Time / Month of Year to BUY a USED Car is DECEMBER, UK Analysis - Nadeem_Walayat
5.Labour Sheffield City Council Election Panic Could Prompt Suspension of Tree Felling's Private Security - N_Walayat
6.War on Gold Intensifies: It Betrays the Elitists’ Panic and Augurs Their Coming Defeat Part2 - Stewart_Dougherty
7.How High Will Gold Go? - Harry_Dent
8.Bitcoin Doesn’t Exist – Forks and Mad Max - Raul_I_Meijer
9.UK Stagflation Risk As Inflation Hits 3.1% and House Prices Fall - GoldCore
10.New EU Rules For Cross-Border Cash, Gold Bullion Movements - GoldCore
Last 7 days
Silver As Strategic Metal: Why Its Price Will Soar - 21st Jan 18
Stocks, Gold and Interest Rates Three Amigos Ride On - 21st Jan 18
Why Sometimes, "Beating the S&P 500" Isn't Good Enough - 21st Jan 18
Bunnies and Geckos of Sheffield Street Tree Fellings Protests Explained - 21st Jan 18
Jim Rickards: Next Financial Panic Will Be the Biggest of All, with Only One Place to Turn… - 20th Jan 18
Macro Trend Changes for Gold in 2018 and Beyond - Empire Club of Canada - 20th Jan 18
Top 5 Trader Information Sources for Timely, Successful Investing - 20th Jan 18
Bond Market Bear Creating Gold Bull Market - 19th Jan 18
Gold Stocks GDX $25 Breakout on Earnings - 19th Jan 18
SPX is Higher But No Breakout - 19th Jan 18
Game Changer for Bitcoin - 19th Jan 18
Upside Risk for Gold in 2018 - 19th Jan 18
Money Minute - A 60-second snapshot of the UK Economy - 19th Jan 18
Discovery Sport Real MPG Fuel Economy Vs Land Rover 53.3 MPG Sales Pitch - 19th Jan 18
For Americans Buying Gold and Silver: Still a Big U.S. Pricing Advantage - 19th Jan 18
5 Maps And Charts That Predict Geopolitical Trends In 2018 - 19th Jan 18
North Korean Quagmire: Part 2. Bombing, Nuclear Threats, and Resolution - 19th Jan 18
Complete Guide On Forex Trading Market - 19th Jan 18
Bitcoin Crash Sees Flight To Physical Gold Coins and Bars - 18th Jan 18
The Interest Rates Are What Matter In This Market - 18th Jan 18
Crude Oil Sweat, Blood and Tears - 18th Jan 18
Land Rover Discovery Sport - Week 3 HSE Black Test Review - 18th Jan 18
The North Korea Quagmire: Part 1, A Contest of Colonialism and Communism - 18th Jan 18
Understand Currency Trade and Make Plenty of Money - 18th Jan 18
Bitcoin Price Crash Below $10,000. What's Next? We have answers… - 18th Jan 18
How to Trade Gold During Second Half of January, Daily Cycle Prediction - 18th Jan 18
More U.S. States Are Knocking Down Gold & Silver Barriers - 18th Jan 18
5 Economic Predictions for 2018 - 18th Jan 18
Land Rover Discovery Sport - What You Need to Know Before Buying - Owning Week 2 - 17th Jan 18
Bitcoin and Stock Prices, Both Symptoms of Speculative Extremes! - 17th Jan 18
So That’s What Stock Market Volatility Looks Like - 17th Jan 18
Tips On Choosing the Right Forex Dealer - 17th Jan 18
Crude Oil is Starting 2018 Strong but there's Undeniable Risk to the Downside - 16th Jan 18
SPX, NDX, INDU and RUT Stock Indices all at Resistance Levels - 16th Jan 18
Silver Prices To Surge – JP Morgan Has Acquired A “Massive Quantity of Physical Silver” - 16th Jan 18
Carillion Bankruptcy and the PFI Sector Spiraling Costs Crisis, Amey, G4S, Balfour Beatty, Serco.... - 16th Jan 18
Artificial Intelligence - Extermination of Humanity - 16th Jan 18
Carillion Goes Bust, as Government Refuses to Bailout PFI Contractors Debt and Pensions Liabilities - 15th Jan 18
What Really Happens in Iran?  - 15th Jan 18
Stock Market Near an Intermediate Top? - 15th Jan 18
The Key Economic Indicator You Should Watch in 2018 - 15th Jan 18
London Property Market Crash Looms As Prices Drop To 2 1/2 Year Low - 15th Jan 18
Some Fascinating Stock Market Fibonacci Relationships... - 15th Jan 18
How to Know If This Stock Market Rally Will Continue for Two More Months? - 14th Jan 18
Everything SMIGGLE from Pencil Cases to Water Bottles, Pens and Springs! - 14th Jan 18
Land Rover Discovery Sport Very Bad MPG Fuel Economy! Real Owner's Review - 14th Jan 18
Gold Miners’ Status Updated - 13th Jan 18
Gold And Silver – Review of Annual, Qrtly, Monthly, Weekly Charts. Reality v Sentiment - 13th Jan 18
Gold GLD ETF Update.. Bear Market Reversal Watch - 13th Jan 18
Stock Market Leadership In 2018 To Come From Oil & Gas - 13th Jan 18
Stock Market Primed for a Reversal - 13th Jan 18
Live Trading Webinar: Discover 3 High-Confidence Trade Set-Ups - 13th Jan 18
Optimum Entry Point for Gold and Silver Stocks - 12th Jan 18
Stock Selloffs Great for Gold - 12th Jan 18
These 3 Facts Show Gold Is Set to Surge in 2018 - 12th Jan 18
How China is Locking Up Critical Resources in the US’s Own Backyard - 12th Jan 18
Stock futures are struggling. May reverse Today - 12th Jan 18
Three Surprising Places You See Cryptocurrency - 12th Jan 18
Semi Seconductor Stocks Canary Still Chirping, But He’s Gonna Croak in 2018 - 12th Jan 18
Land Rover Discovery Sport Panoramic Sunroof Questions Answered - 12th Jan 18
Information About Trading With Alpari And Its Advantages - 12th Jan 18

Market Oracle FREE Newsletter

6 Critical Money Making Rules

BP's Risky Business

Companies / Oil Companies Jul 19, 2010 - 08:13 PM GMT

By: Jennifer_Barry


Best Financial Markets Analysis ArticleAn oil company ignores standard safety procedures and fails to fix crucial equipment, and a huge oil spill occurs. The corporation minimizes the environmental impact and reacts slowly to the accident. The local community is infuriated by the lack of response. The company is stingy about giving out information and data on the spill. The CEO seems arrogant, and aloof. Instead of appearing concerned about the accident, his statements plead for public sympathy. The Chairman seems unprepared to deal with the emergency and uninformed about the workings of his own company. The corporation seems unable to demonstrate they would avoid this problem in the future, or have a more effective response next time.

While this is an accurate description of the BP disaster, it also applies equally to the Exxon Valdez spill in 1989. Although Exxon spent approximately $2 billion on the cleanup, their reaction was roundly criticized as slow and inadequate. The fisheries in Alaska have still not rebounded 21 years after the Exxon Valdez spill, with the 100% loss of the herring catch costing the economy US$400 million over that time period. Today, the beaches in Prince William Sound are still highly contaminated, and the impact to local fauna is expected to continue for about a decade longer due to residual toxins. 

Sudden Impacts

When the Deepwater Horizon rig exploded, 11 workers were killed and 15 were injured. In addition to the human tragedy, this accident has become an ecological disaster. Admiral Thad Allen is leading the government response to the spill, and some National Guard troops have been mobilized to help with the cleanup. Approximately 35% of the Gulf of Mexico has been closed to fishing by the National Oceanic and Atmospheric Administration (NOAA) due to the poisonous flow of petroleum. In addition to the thousands of birds and other animals confirmed dead, one captain reported that endangered sea turtles were corralled by booms into burning fields and then incinerated along with the oil.

The damage from the leak was apparently worsened by the use of the very toxic dispersant Corexit, which may hide the magnitude of the problem, and was later banned by the Environmental Protection Agency. Cleanup workers have been hospitalized with serious illnesses apparently related to chemical fumes from the spill, which BP CEO Tony Hayward blamed on “food poisoning.”

The economic effects effects of this disaster are also widespread. Gulf Coast tourism has taken a hit as travelers cancel vacations, even to destinations untouched by oil. Many hotels, restaurants, and entertainment venues that depend on the influx of visitors will go bankrupt. Seafood prices have jumped sharply as many fishing boats are sitting idle. Potential homebuyers are shying away from properties that could be contaminated. Oil industry workers remain unemployed as the battle to ban offshore drilling winds through the courts.

Naturally, any company in this situation will have a conflict between remediating the spill, and protecting its bottom line by doing the least amount of work possible. In fact, some residents of Louisiana have alleged that BP is engaging in a farce they call “ponies and balloons,” or only demonstrating an adequate response when officials are present to observe.

Remembering the lessons of the Valdez disaster, where the ecosystem was devastated by the petroleum spill for years, why is BP still in charge of cleanup and containment? Shouldn’t a more neutral third party decide what is an appropriate response and give BP the bill, rather than allowing the company to police itself?

Keeping BP in charge of fixing the problem is even more ludicrous once you look at the company’s attitude towards safety. The oil conglomerate has a culture of silencing whistleblowers and ignoring hazards. Their horrific safety record includes using equipment too long - a corroded pipe was the cause of the 2000 Prudhoe Bay pipeline leak. In 2002, the company settled a lawsuit for $100 million for allegedly falsifying fuel storage tank inspection records.

Even more disturbing was the 2005 explosion at their Texas City refinery that killed 15 workers due to systemic safety violations. Despite promises to remediate the situation, management did nothing and was subsequently fined $87 million by the Occupational Safety and Health Administration (OSHA).

   Black Swans and Risk Management

At first, I assumed that BP had considered a blowout a “black swan” event, and and didn’t consider the repercussions if a remote possibility occurred. After all, the federal agency Minerals Management Service (MMS) which regulates resource drilling agreed that a blowout was so unlikely that an emergency plan wasn’t needed.

However, my research indicates that accidents of this type are unusual but not that rare. During the last decade, there were 72 offshore blowouts which caused significant spills, compared to 15 the previous decade. Although blowout preventers are considered “fail-safe,” a 2009 study commissioned by Transocean, the owner of Deepwater Horizon, found that deep sea BOPs had a failure rate of 45% during an emergency. Naturally, the more wells that are drilled, and the farther underwater that equipment must operate, the more likely an accident is to happen. This makes a blowout a “grey swan” rather than a black one. Despite these facts, BP was so confident that industry risks were overblown that they foolishly cancelled their accident insurance three years ago.

Some critics see anti-British bias in the focus on BP’s mistakes. They point to Transocean’s recent safety record, owning 33% of the deep water rigs but investigated by MMS for 73% of the incidents. The company was also cited in 2006 for using BOPs too long without proper maintenance.

Nevertheless, as BP purchased the underwater lease and was in charge of operations on the rig, it was ultimately their responsibility to drill safely. However, they clearly decided to save time and money at the expense of safety precautions. If management didn’t feel comfortable with the amount of emergency equipment, they could have insisted that Transocean install more. Their contractor Halliburton recommended using 21 centralizers to secure the casing in the well, but BP overrode this advice and only used 6. Schlumberger was supposed to test the quality of the cement bond but BP didn’t want to spend the 12 hours necessary so the contractors were sent away. Tragedy resulted from the confluence of these bad decisions.

A Cloudy Future

Although BP originally reported the crude leak at 5,000 barrels per day, current government figures estimate it could be as high as 60,000 barrels. Considering that BP has minimized the spill from the beginning, the problem is likely to be even worse. Now that the cap has failed, the relief wells are not expected to have any effect on the flow until early August, if they work at all.

BP's clean up spending has skyrocketed to $4 billion so far. However, the price tag could get much higher should powerful storms stir up the Gulf of Mexico and deposit contaminated water far inland. Although Hurricane Alex tracked west of the oil slick, we are still at the beginning of a hurricane season that’s predicted to be more severe than normal.

Already, BP’s stock has fallen more than 40%. The corporation’s credit default swaps remind me of failed banks like Washington Mutual, not a strong company having a bad summer. Gaffes from CEO Hayward like “I’d like my life back” are only putting another nail in the coffin, and should lead to his replacement before August is out.

Despite BP’s strong cash position as a producer of a resource everyone needs, no corporation can survive this level of bleeding from the balance sheet. I expect the cost of remediation, penalties, and litigation will far surpass their $20 billion claim fund. As Matthew Simmons said, “There isn't enough money in the world to clean up the Gulf of Mexico.”

I expect BP will file Chapter 11 bankruptcy later this year to gain some relief from creditors. I wouldn’t be surprised if a reorganization of the company is arranged by the US government which caps BP’s liability for the spill. This would avoid a messy liquidation of assets which would be very disruptive to petroleum production. It would also pave the way for another oil company to merge with or take over BP’s assets, which are sizable.

With the reckless disregard for safety, the conflicts of interest, and the arguments between contractors foreshadowing a dramatic explosion, the oil spill would make an excellent movie. Unfortunately, it’s a waking nightmare we are all living through.

Even if the relief wells are successful, there is plenty of pain to go around. Pension funds and other shareholders will watch their investment in BP evaporate. If the spill is pushed into the Gulf Stream, pollution could end up on the shores of the Eastern Seaboard and even the UK. The inevitable limits on offshore drilling will cause higher unemployment for oil workers and higher fuel prices for everyone. Seafood prices will continue to rise as a massive amount of ocean life dies. Finally, most of the Gulf Coast will have its economy and environment suffer for decades.

by Jennifer Barry
Global Asset Strategist

Copyright 2010 Jennifer Barry

Hello, I'm Jennifer Barry and I want to help you not only preserve your wealth, but add to your nest egg. How can I do this? I investigate the financial universe for undervalued assets you can invest in. Then I write about them in my monthly newsletter, Global Asset Strategist.

Disclaimer: Precious metals, commodity stocks, futures, and associated investments can be very volatile. Prices may rise and fall quickly and unpredictably. It may take months or years to see a significant profit. The owners and employees of Global Asset Strategist own some or all of the investments profiled in the newsletter, and will benefit from a price increase. We will disclose our ownership position when we recommend an asset and if we sell any investments previously recommended. We don't receive any compensation from companies for profiling any stock. Information published on this website and/or in the newsletter comes from sources thought to be reliable. This information may not be complete or correct. Global Asset Strategist does not employ licensed financial advisors, and does not give investment advice. Suggestions to buy or sell any asset listed are based on the opinions of Jennifer Barry only. Please conduct your own research before making any purchases, and don't spend more than you can afford. We recommend that you consult a trusted financial advisor who understands your individual situation before committing any capital.

Jennifer Barry Archive

© 2005-2018 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules