BP shaping up as Lehman Brothers in the oil patch
BP’s deepwater debacle is shaping up as Lehman Brothers in the oil patch. The toxic ingredients that led to that Wall Street firm’s implosion are abundantly present in the British energy giant’s Gulf of Mexico fiasco: flawed risk management, systemic hazard and regulatory incompetence.
And as in the financial industry, the policy response will almost certainly lead to energy’s biggies getting even bigger.
At first blush, the tricky business of drilling oil a mile below the ocean would seem light years from the pin-striped work of investment banking. But fundamentally, the failures of BP’s management to prepare for, and then handle the current crisis, evoke striking parallels with those of the bust securities firm.
Nowhere is this more evident than in the realm of managing their respective risks. BP’s failure to prevent — and so far stop — the leak on the Deepwater Horizon suggests the company did not adequately prepare for the possibility of a spill — a risk that Chief Executive Tony Hayward put at “one in a million.”
Lehman — and many other banks — made similar mistakes forecasting risk. Few of their financial models took account of the possibility for “25-standard deviation moves,” to use the words of Goldman Sachs Chief Financial Officer David Viniar. The blowout of BP’s well, like a 20 percent dip in the housing market, was just such an event.
Similarly, while Lehman’s fallout created a shock to the financial system, the hundreds of thousands of barrels of oil leaking from BP’s broken well are oozing noxiously throughout the ecosystem of the Gulf, causing untold environmental and economic damage. And the U.S. government has had to intervene to try and contain the oil’s spread, just as it did to prevent the impact of Lehman’s collapse on the financial system.
Finally, like the Securities and Exchange Commission that failed to ensure Lehman did not take on excessive risk, the regulator overseeing BP in the Gulf, the Minerals Management Service, flopped. The president has broken up the MMS, fired its director and attributed its failings to its “scandalously close relationship” with oil companies.
Again, the industries are dramatically different. But there is at least one instructive lesson to draw from Lehman. After its bankruptcy sparked a financial panic in September 2008, regulators permitted the strongest banks to eat the weakest. That allowed big institutions like Bank of America, Wells Fargo and JPMorgan to get even bigger.
That will almost certainly be the result for the deepwater drilling business. BP is on the hook for up to $27 billion in clean-up costs and legal claims, according to Credit Suisse. That’s a liability no investor will be comfortable taking, even for a company the size of BP, much less Anadarko Petroleum or other, smaller independent drillers.
Equally, when the government hands out permits to drill, it will only want to deal with counterparties with pockets deep enough to take on such potential liabilities. Add it all up, and the biggest players in the oil industry will just have to get bigger.