BP FACES CHOPPY WATERS AFTER HUGE OIL SPILL

The Deepwater Horizon sank following an explosion and fire

By Michael Hirst and David Walker
BBC News Online
Stopping a potentially devastating slick from a damaged oil well in the Gulf of Mexico is only part of the headache currently facing BP.

The company also faces a massive clean-up bill, plus legal action from those affected and possible damage to its global brand.

It is not the first time BP has faced controversy and anger in the US.

An explosion at a refinery in south Houston in 2005 killed 15 people and injured 170, the worst US industrial accident since 1990.

BP was fined a record $87m (£53m) after US health and safety experts cited 270 violations at the refinery.

It was also fined $50m by the Department of Justice in 2007 to settle criminal charges stemming from the explosion.

BP leases the Deepwater Horizon rig that suffered a huge explosion on 20 April and later sank. Eleven workers are still missing, presumed dead.

As a huge slick heads for the US coastline, the company is now braced for what could be the oil industry's biggest disaster in history.

The oil spill was found to be far worse than initially feared

The British-owned firm will be hit by the cost of building a dome-like device that could be lowered over the leaking pipe while a $100m relief well is drilled.

It is also footing the bill for efforts to stem the leak using robotic submarines.

While some legal experts say that Transocean, which owns the rig, was responsible for safety on Deepwater Horizon, BP also faces costly litigation over the accident.

A lawsuit has already been filed against BP and Transocean on behalf of the 11 missing rig workers.

Two Louisiana shrimpers have also filed a lawsuit for damages against all those operating the rig, including BP.

Others named in the action include Transocean and Cameron International, a Houston-based oil well services company.

As alarm spread through US coastal communities most at threat from the giant spill, White House spokesman Nick Shapiro said on Thursday that the cost of cleaning up the spill would fall on BP.

Tony Hayward, BP's chief executive, was quick to grasp the gravity of the situation, flying to the US shortly after the accident, and saying his company was being “very aggressive” in its approach to the problem.

“This is the biggest response by anyone in the industry ever, and we're able to do it because we planned for it,” he said. “We will be judged by our response.”

Doug Suttles, BP's chief operating officer of exploration and production, said the company was spending $6m a day trying to clean up the spill and stop the leak.

It is more likely to prompt a gut feeling [in the markets] that the crisis will be expensive and damaging for the company

Russell Corn, corporate analysis firm Diligence
But he said it wasn't clear what had caused the spillage.

He told US broadcaster ABC: “The company that owned the drilling rig and that owned the blow-up preventer was Transocean and they were actually operating the rig.

“At the time the accident happened, the safety devices, we would have believed would have stopped the flow of oil, they didn't do that. We don't know why they didn't do that and ultimately we will find out.”

BP's share price has already taken a big hit – dropping by 6.5% on Thursday after the US Coast Guard said five times as much oil as previously estimated was pouring into the gulf.

In all, BP stock has fallen by about 4.5% since the explosion.

'Wave of litigation'
Oil industry expert Michael Lynch, writing on the website of Gerson Lehrman Group, said containment and remedial costs could easily exceed $500m – and a wave of litigation seems sure to follow.

“Control of the well is without question the responsibility of BP,” he said.

“Should an investigation reveal some fault on the part of Transocean, it is possible they could be held jointly responsible. But all of the indications are that the explosion was the result of a 'kick' – abnormal pressure from the crude oil reservoir at the bottom of the well driving a volume of natural gas to the surface.

“In any event, the total cost to BP is likely to exceed $1bn and could rise to double that. With crude oil prices at their present levels, BP could earn perhaps $20bn for 2010 before the disaster charges,” he added.

BP and Transocean officials are working with the US Coast Guard

Russell Corn, Deputy CEO of corporate analysis company Diligence, told the BBC the disaster “will be preoccupying senior management to an increasing degree”.

“It is more likely to prompt a gut feeling [in the markets] that the crisis will be expensive and damaging for the company and will therefore result in some form of negative sentiment around the stock,” he said.

Stephen Cheliotis, of The Centre for Brand Analysis in London, told the BBC that environmental disasters can badly affect the image of oil industry giants.

“It can have a major impact on a brand, and it can damage a brand in the long term,” he said. “A lot of people would link, for instance, Exxon with the Exxon Valdez disaster.”

He added that the oil spill had come at a bad time for BP, in a week when it was announcing substantial profits.

“In the eyes of the public this might be seen as crass and might affect their opinion of the company,” he said.

Tom Zara, of brand consultancy Interbrand in New York, said BP had worked to be associated with alternative energy and this incident will remind the world of the “negative associations” of fossil fuels.

There could therefore be an erosion of the goodwill of the brand overall, he said.

How BP responds will be crucial, he added.
“If the brand responds in the wrong way, it may be that long-term damage will be done to their ability to influence governments, NGOs and regulators. But people won't stop buying from BP gas stations,” he said.

Although BP has emphasised its speedy response to the disaster – and its co-operation with US investigations into the accident – its reputation in the US has suffered following previous incidents.

In December 2009 a Texan jury awarded $100m (£62m) in damages to 10 workers at a BP oil refinery who said a leak in 2007 had made them ill.

BP maintained that any toxic substance had come from outside the refinery – the same plant that had suffered the explosion in 2005 – and the source of the leak was never identified.

But lawyers for the workers described BP as “a serial polluter” – and the jury backed their case.