Battered BP seeks a way forward

June 18, 2010

BP shares  jumped almost 9 percent at the opening of the London market on news the firm would pledge cash and assets worth $20 billion to meet future claims arising from the Macondo well blowout (excluding federal and state fines and penalties).

Investors hope the $20 billion sets an informal cap or target for how much the company may eventually be forced to pay (though the announcement makes clear it does not in fact cap the company’s legal liabilities — as in fact it could not do by law).

It is also a bridge-building gesture towards the Obama administration. The company must hope the president will reciprocate by turning down the political heat and avoiding off punitive sanctions designed to cripple the company “pour encourager les autres”.

Finally, the penalty is sufficiently large it is meant to be an act of expiation. Quarterly dividends for Q1-Q3 2010 have been cancelled. BP shareholders and managers are being seen to pay a steep political and economic price, necessary as the first step for the company’s eventual rehabilitation.

IDENTIFYING WHAT WENT WRONG

Now comes the tricky part for BP and the rest of the industry. The firm, its rival operators and contractors need to be able to agree on an explanation for what went wrong and how to prevent it happening again. Until they can agree what went wrong at Macondo, and how to avoid the same problem in future, they cannot credibly resume drilling.

The Energy and Commerce Committee of the U.S. House of Representatives has sent BP Chief Executive Tony Hayward a detailed letter listing five decisions it claims were made for “economic reasons that increased the danger of catastrophic well failure”.
Members will press Hayward today about the rationale behind these decisions when he appears to testify before the subcommittee on oversight and investigations.

No doubt lawyers will urge the company not to admit its well operation was flawed for fear of opening the floodgates to vast claims and fines that could potentially sink it in the long term.

But if Hayward insists the company did nothing wrong, and this was merely a freak accident that could not have been foreseen or prevented, it will be hard to make a case for drilling resumption.

In any event, the company cannot simply present the loss of 11 human lives as part of the price of doing business. It must come up with an answer that reduces or eliminates the risk to human life.

Exxon Chief Executive Rex Tillerson  has already testified to Congress “We would not have drilled the well the way they did”, while Shell President Marvin Odum  said “It’s not a well we would have drilled”.

Tillerson noted if oil companies properly designed offshore wells, built in layers of protective redundancy, properly inspected equipment and focused on safety, incidents like Macondo “should not occur”. It was “a dramatic departure from the industry norm in deepwater drilling”.

Hayward will therefore be walking a tightrope. The company needs to find some way to admit what went wrong so it can promise to do things differently in future, while at the same time not opening itself up for unlimited claims that could ultimately sink it.

The House investigation might be a good place to start. Beneath the inevitable BP-bashing theatre at the hearing, as Hayward enters the gladiatorial arena, the subcommittee appears to be conducting a thoughtful investigation into what caused the well to blow and why this well failed when others were drilled safely.

CULTURE PROBLEM OR UNLUCKY

If the wider industry needs to agree what caused Macondo so it can promise to do better in future, and the health and safety regime can be tightened, BP itself must answer an additional question about why the company has been at the centre of a string of incidents in North America over the last decade — the Texas City refinery blast (2005), pipeline leaks at Alaska North Slope (2006), the partial sinking of the Thunder Horse platform (2005) and substantial civil penalties for trying to manipulate the propane market (2004).

Even before Macondo, the Environmental Protection Agency (EPA) was scrutinising BP for violations of the Clean Air and Clean Water Acts that could have resulted in some or all parts of its operations being barred from doing business with the federal government.

BP must answer the question of whether these were isolated, unconnected incidents or whether they reflect a deeper problem with the corporation’s management, systems or culture.

The temptation is to dismiss a connection. But if the company is eventually to draw a line under the crisis and promise to do better in future, it will have to admit there was some systems or governance failure so it can then propose ways to improve.

Most companies in most cases are advised not to admit liability or systemic failings. But BP’s problem is so serious the company does not have much choice. Trying to tough it out is not an option. The only way for the company to turn the corner is to admit (quickly) what went wrong and why, and then come up with a credible programme to ensure this particular problem and pattern of incidents is not repeated.

The $20 billion compensation fund is a start. But more important will be what Hayward says today and in the days ahead about why Macondo failed and how the company can change to ensure it does not happen again.

3 comments

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I do not for one minute believe the CEO of Exxon that they would not do it the same way as BP. If they knew what was being done was dangerous why did they not raise this as being a disaster waiting to happen. Amazing what hindsight and the decision to distance one self from this issue and indicate that he is squeaky clean.
My experience when I was in industry that with any major projects especially one taking place in difficult and sometimes in unknown situations and often using untried technologies one would evaluate the risks.
Having reviewed the risks one would apply a risk/cost/time evaluation applying the relevant factors of an event and type that may occurr.
One then applies additional safety etc measures if considered neccessary or one proceeds with the known possible risks. If one gets it wrong it may be a minor incident but sometimes it may become a disaster and one pays the penalty.
Does not the CEO of Exxon apply the same processes to what they do or is he so brilliant that they do not ever make a mistake and perhaps he could shed more light on their own disasters and why full clean up and compensation are still outstanding.

Posted by GROCK | Report as abusive

Look here: accidents happen. We are a desperate nation for energy, driven to the depths of the ocean floors. Bush opened the door but left out regulations and federal supervision. That was our fault. The company like all companies put the profit before everything. It’s all about money everywhere isn’t it?

Now this accident will change things for the better. The beaches will be cleaned and by next year this will be a faded memory. Only two more months to go.

The real issue is the President. He has acted like a fool trying to put out a fire by throwing gasoline on it. The implications for BP and international companies are devestating. Firstly, BP pledges to make things right. That should be enough to put a cap on payments and indemify further federal punitive action. But instead, the government wants to finish this company off. In the end, this company will be bankrupted.

This is a bad precedent. How about Bhopal? Thousands dead and what is the remunitive figure? Only 500 per person. Surely Barat realizes that an indian life isn’t worth less than an american life(theoretically at least). That means the Indians will be wanting more money and perhaps also seize assets. We are moving away from capitalism rapidly towards asset confiscation.
No court in America could give BP a fair treatment after the President’s remarks. How could a Harard trained attorney be so callous about handling this matter.

Baret isn’t a genius that is for sure. He is a PR front for leftist theology which will ruin the business community forever and impoverish us all.

BP is obviously negligent and this is an unfortunate problem with the company–but that is history now. The idea that after 20 billion or more the EPA could fine the company 250 million per day is crazy.

Posted by Odysseus221 | Report as abusive

Unfortunately for BP, from an economic standpoint, this is probably one of the worst times in history for this to happen. All they need now is a hurricane to see the lawsuits fly.

The US is probably the most litigious countries in the world. There will be an ocean of lawyers filing suits once that $20 billion starts to dry up.

This company is sure to eventually file for bankruptcy to avoid all civil claims.

There’s no way that BP will pay all the claims after the $20 billion runs dry.

That’s why they threw that out as a carrot, but once that money is gone, they will file for and receive protection from any further claims.

What amazes my is that people are still buying this stock and online magazines are calling it a “good buy.”

Let’s see how they all feel a year from now when the other shoe falls. I think Moody’s and Fitch did the right thing to downgrade BP before they could issue their worthless bonds and commercial paper.

I guess Haywood thought the bankruptcy news would sound more valid and reasonable coming from an American, rather than a Brit.

If these investors were really smart, they would ignore the “buy buy buy” crap and see BP as the poison pill that it really is.

Posted by Jones22 | Report as abusive