Beyond the Horizon

Beyond the Horizon

by The Economist online

IN THE end, it was a statement of the obvious. “BP cannot move on as a company in the United States with me as its leader,” said the oil company’s outgoing chief executive, Tony Hayward, who will be replaced by Robert Dudley on October 1st. And moving on is very much the company’s intention. No oil has leaked into the Gulf from its Macondo well for more than a week. A permanent plug could be in place within a month.

With its second-quarter results, published on July 27th, the company took a pre-tax charge of $32 billion against the ultimate costs of killing the blown-out well which doomed the Deepwater Horizon rig, cleaning up the damage it has wrought, and paying the claims of those who have been affected and the fines that follow from releasing millions of barrels of oil into the sea. It also announced an asset-sales programme designed to raise more or less the same amount of money over the next eighteen months. There is no way to draw a line under what has happened in the Gulf: but with no oil in the water, no Mr Hayward in head office and no doubt in the markets that there is money coming in with which to pay the bills, the company hopes to convince the world that its problems are now merely grave, rather than life-threatening.

The company makes no claim to a broad strategic rationale for the specific disposals it will be making, which represent about 10% of what BP’s portfolio might be worth on break-up. Mr Hayward points to the sale of assets in Texas and elsewhere to Apache, an exploration and production firm, to illustrate the idea that the sales, though large, are not enough to change fundamentally the company, which is showing pretty good underlying performance. Apache paid $7 billion for about 2% of BP’s production. If that ratio holds for future disposals, Mr Hayward says, BP will be a somewhat smaller, but better focused, producer, with production of about 3.5m barrels a day rather than today’s 4m. (3.5m barrels is, as it happens, a reasonable guess for the amount of oil spilled into the Gulf to date.)

The company says it is not planning to prioritise the sale of American assets, and that it intends to continue playing a role in the Gulf. Nevertheless, in current circumstances it is a fair guess that the increase in value an asset would enjoy simply by no longer being associated with BP will be greatest in America, which suggests that may be where some of the best deals are to be done.

Saving up for some big bills
If the 18-month disposal plan goes ahead as envisaged, the company hopes to look reasonably robust over the next couple of years, as the assets will come in ahead of the liabilities (the escrow fund, agreed to in negotiations at the White House in June to pay for damages, is to be built up at a rate of $5 billion a year). BP has also increased the lines of credit it has available, from $5 billion in the previous quarter to $17 billion. It will re-examine its suspension of dividends early in 2011.

That desire to look strong points up the fact that, though large, the $32 billion charge may not be an end to the matter. The bulk of the charge is intended to cover the $20 billion escrow fund. On top of that are the costs of containing, killing and cleaning up the spill, restoring damaged environments, funding research into environmental impacts (a healthy $500 million in itself) and the creation of new barrier islands in the Mississippi delta, not to mention legal fees.

On top of that it should also cover fines under the Clean Water Act. Although BP is not breaking out the figure it expects to pay, it seems implicit in the $32 billion figure that the company expects the fines to be levied towards the bottom of the range of possibilities, which runs from $1,100 a barrel to $4,300. For a 3.5m barrel spill, a fine at the top end would represent an extra $10 billion in liabilities.

A finding of negligence, which would push the fines towards the top of the range, could also trigger various other liabilities. And it would make it harder for BP to recoup some of its costs from Anadarko and Mitsui Oil Exploration, its junior partners in the development of the Macondo well. BP has so far billed the two partners for $1 billion of costs related to the disaster, which they have not paid. If BP were found negligent, they might well not have to.

One inquiry after another
BP insists that it will not be found negligent, and says that it intends to get the money from its partners either though arbitration or the courts; it has not counted that money among its assets, though, citing accounting regulations. At a press conference on the 27th BP executives suggested that they thought evidence provided last week to the marine board inquiry run by the coastguard and the Bureau of Ocean Energy Management (the regulator formerly known as the Minerals Management Service) bolstered the company’s case. That evidence pointed to poor procedures on the part of Transocean, the company which owned the ill-fated Deepwater Horizon rig. A final verdict on negligence, though, is a long way off. Though BP says its internal investigations may be completed in a month or so, the presidential commission into the subject will not be reporting until after the November mid-term elections. The marine board inquiry is expected to take longer, as is that of the Chemical Safety Board. There is a wide range of further inquiries and lawsuits in the offing.

It all adds up to a lot for Mr Dudley, currently in charge of the relief operation. According to BP’s chairman, Carl-Henric Svanberg, Mr Dudley was one of a number of internal and external candidates considered for the post. A veteran oil man who worked for Amoco before its merger with BP, Mr Dudley was until this year best known for having been chief executive of TNK-BP, the company’s joint venture in Russia. During his tenure there was a fierce fight between BP and its Russian partners, who did not think the joint venture was being run in good faith. BP’s Moscow offices were raided by Russian security services and a court in Siberia imposed injunctions on its staff before Mr Dudley finally left the country amid some disarray, claiming personal harassment.

Mr Dudley’s departure cleared the way for a settlement between BP and TNK and allowed BP to keep its 50% share in the joint venture, a result for which Mr Hayward took much credit. BP now plans to nominate Mr Hayward to a non-executive directorship at TNK-BP. On American television screens and in front of congressional committee’s Mr Hayward may be a liability—but he apparently still has a good relationship with Igor Sechin, Russia’s energy tsar and Vladimir Putin’s deputy prime minister.