Global Investing

Investors wary of BP oil spill cost estimates

April 27, 2010

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BP’s CEO Tony Hayward reckons the $100 million cost of drilling a well to divert the flow from a leaking oil well in the Gulf of Mexico  is the biggest hit the oil major will take in the Deepwater Horizon tragedy.

The Deepwater Horizon rig exploded last week, and sank, with the loss of 11 workers, who are now presumed dead, while the well it was drilling is leaking 1,000 barrels of crude a day into the sea.

Investors will hope Hayward is right but BP’s record on estimating the costs of major accidents gives rise for concern.

In 2005, when an explosion at BP’s Texas City refinery killed 15 workers, BP initially scoffed at analyst estimates the cost of repairs, lost profits and damages could hit $1 billion. Spokespeople predicted the impact would be a fraction of that. In the end, compensation claims cost over $2 billion while repair costs and lost profits cost over $1 billion more.

Investors may have this in mind when they pushed BP’s shares down around 3 percent in the past 2 days, wiping over $5 billion off the company’s market capitalisation, despite the company reporting a forecast-busting first quarter earnings rise.

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