Gulf of Mexico a Turning Point for BP and Oil Industry

Chernobyl cast a lasting shadow over nuclear energy and its consequence for the industry is still felt today, deservedly so, despite possible special and extenuating circumstances. Due to a catastrophic leak of chemicals from a plant in the Indian town of Bhopal in 1984, 2,260 people were killed instantly, while about 500,000 were exposed to toxins and suffered different levels of injury and disablement, which often caused death (about 20,000 deaths related to the leak). A long-lasting trial involving the workers at the plant directly responsible for the disaster has ended just recently. India was enraged ((»Anger at Bhopal Judgement«) by light sentences, amounting to a maximum of two years in jail and a 2,000-dollar fine for causing death by negligence. The main culprits who allowed a reduction of safety regulations, the management of the US company Union Carbide, avoided a trial, while the company compensated those harmed in the incident with a minimal amount.

What happened in the Gulf of Mexico?

At the Deepwater Horizon drilling rig oil was drilled at a depth of 4,000 m below the seabed in waters 1,500 m deep. Nowadays this is a standard procedure. All wells in water depths of more than 300 m are considered deepwater, while the maximum depth so far is nearly 3,000 m. The Deepwater Horizon drilling rig was capable of operating in waters up to 2,400 m deep, to a maximum drill depth of 9,100 m.

Before a drilling rig starts operating, the well is strengthened with concrete and valves are installed to prevent spilling if a pipe breaks. This was where a number mistakes were made, which eventually caused an explosion and the sinking of the drilling rig on 20 April 2010. 11 workers working at the rig were killed instantly.

The owner of the Deepwater Horizon drilling rig was Transocean, a company registered in a tax haven of Marshall Islands. The rig was leased to BP. Since mid April, about half a million cubic metres of oil flowed into the sea, posing a threat to shores of all US states around the Gulf of Mexico, and to the ecosystem of the entire gulf. It is possible oil also reaches the Atlantic Ocean.

Who is BP?

British Petroleum (BP) is a global oil company based in London. Its beginnings go back to the early 20th century, when its predecessors (operating under various names, the last one of which was Anglo-Iranian Oil Company, AIOC) acquired exclusive rights to exploit Iranian oil. In 1953, lead by Anglo-American oil-related and other strategic interest, the American intelligence agency CIA carried out a coup d'etat, overthrowing the government of the Prime Minister Mosaddegh. After the political change, foreign entities divided the Iran's oil wealth among themselves, with 40 percent coming under AIOC, which changed its name to British Petroleum in 1954. At the time, the global consortium of "seven oil sisters" was formed.

In the spotlight nowadays are mostly six largest private companies, along with state-owned companies in the biggest producer countries. The Chinese oil company PetroChina has recently beat Exxon-Mobile in becoming the world's most valuable company by market value, topping the FT Global 500 list. Both of these are oil companies. BP has had to, also because of what happened in the Gulf of Mexico, give up its place on the top ten list of the biggest global corporations.

(Un)safe BP business etiquette

In the public, BP wants to convey an impression of an environmentally aware company. In one of its advertising campaigns it interprets BP as "Beyond Petroleum", saying it makes large investments in sustainable energy sources. The company also takes part in some activities aimed at fighting climate change.

In reality, there are a number of safety issues and politically questionable etiquette concerning the functioning of the company. One of the biggest incidents before the Deepwater Horizon disaster was an explosion in an oil refinery in Texas City in March 2005. 15 people were killed in the explosion, while 180 were injured and people living nearby were exposed to poisonous gasses. An investigation into the accident showed that the company had failed to heed or implement 270 safety recommendations made before the blast. Over 400 other safety hazards were revealed after the accident. The U.S. Occupational Safety and Health Administration (OHSA) has revised the company's operation and published a devastating report about insufficient measures into health and safety at work in the company's entire business chain from Texas to London. The company was fined 87 million US dollars for failing to correct safety hazards and 50 million dollars for breaking federal environmental law. There are a number of other incidents in the history of the company, which was assessed as one of the worst big companies in the USA. However, it is clear after the recent hearing in the US congress that this is not the only company negligent in designing a rescue plan in case of an oil spill.

Like all other major catastrophes, the disaster in the Gulf of Mexico was a result of a number of factors, from an "economical" business plan and general negligence to safety issues and, last but not least, a mistake of those directly responsible for the drilling rig functioning. The accident was caused by bad cementing and a failure in the rig's blowout preventer, a fail-safe valve fitted at the base of the well. The reason the cement plug was too weak was probably that not enough centralisers had been placed in it (!). The cement plug was therefore not proportionate and failed in its weakest section. Three months were not enough to close the well.

The media published the e-mail sent by one of the people involved in the fatal cementing to his colleague: "Who cares, it's done, end of story, will probably be fine." Unfortunately, it was not!

Collision of two giants: the USA and BP

Luckily, if we may say so, the oil giant BP faced another giant in the Gulf of Mexico story: the USA. Obama will not be able to do away with "his Katrina" so quickly, nor will BP. This, however, could have easily happened in a colonial territory.

For Obama, the disaster was the central topic of his Oval Office Address on 15 June this year. He promised to make the ones responsible pay for the damage caused. He also pledged to require stricter safety measures and proposed to reduce USA's dependence on oil in the long run. Even before that, the US authorities called for a moratorium on all deepwater drilling.

As Obama was unable to ensure an end to oil spill or a quick restoration of previous conditions, people were not completely satisfied. The next day he met the unpopular CEO of BP, Tony Hayward. The latter assured the company would create a USD 20 billion spill response fund to pay for the damage, including the business loss in the affected region. A further USD 100 million was allocated for immediate relief to the people who can no longer live from fishing or tourism.

Results

A direct consequence for BP owners is a plunge in share value. Its price was reduced by half, while the total market value dropped from about USD 185 billion to about USD 95 billion from mid April, when the disaster happened, to early July. The cost of stock price insurance went in the opposite direction. The stock market value fell deeper than the estimated damage, which means BP shares are now far below the suitable price. To restore the stock market position, the BP management went on a tour of the Middle East to attract new buyers. The share value has already started to increase.

This year, BP will suspend its dividend due to a promise made to Obama. With "only" USD17 billion net income in the 2009 turnover of USD 248 billion, the company's financial position is not very favourable at the moment. The additional cost of 20 billion and the cost of a direct restoration of the drilling rig will exceed the available funds, so the corporation will need to get into debt. Analysts are ruling out both a takeover and bankruptcy, because the corporation still has a number of profitable investments and chances to recover (The Economist, 17 June 2010).

Consequence and the problem with disasters

Oil spill in the Gulf of Mexico and the problem of insurance in case of a disaster remain. The fortunate aspect to the catastrophe is that with its assets the culprit, BP with its partners in the Deepwater Horizon project, will at least be able to accept financial responsibility, and on the other hand, that the plaintiff is the USA. There are a lot of smaller and weaker companies that take on risky business. Even the Soviet Union, which should guarantee to take care of the consequences of the Chernobyl disaster, collapsed, and with it all responsible economic and political entities. Union Carbide, the owner of the plant in Bhopal, was taken over by Dow Chemicals, which denied any responsibility for liabilities arising from the Bhopal accident.

Those involved in big and risky projects clearly still think consequences will be taken care of by those affected, and the state.

Measures resulting from this disaster, aiming to prevent new ones, will probably lead to stricter safety regulations and requirements for a more responsible management. As a further step, the insurance system relating to third parties and the environment should be improved in a way that is becomes incorporated in operational costs as a form of internalisation of external risk.

This way, energy will not get cheaper, but it will become less risky.