• Wednesday, 16 May, 2012

BP must prepare for smaller-scale future

 09 July 2010 01:49 GMT

Big can be beautiful but also bad, especially if you are an oil group trying to fend off an army of lawyers wanting to launch class suits.

One wonders what would have happened in the case of the Deepwater Horizon if the rig had been hired out to a smaller player.

While it is certain that mistakes were made by the BP, and potentially others, many in the industry will await for the official inquiry reports before passing final judgement.

However, the BP board does not have the luxury of waiting for anything. The company is in the middle of a crisis — a small cash confidence one, a fair management one as well as an enormous environmental one.

So how to stabilise the sinking ship? The Macondo well has got to be capped and fortunately the evidence so far suggests that stage could be reached before the end of this month.

The relief well drilling has gone according to plan and should hit the target soon. BP is rightly determined not to say this publicly for fear of raising further expectations that cannot be met.

It already has a history of wrong predictions, given it underplayed the amount of oil leaking in the early stages repeatedly.

Meanwhile, a new containment cap should be in place any day now which should halve the amount of oil leaking out of the well.

Management has got a problem because public goodwill in the US towards chairman Carl-Henric Svanberg and chief executive Tony Hayward is non-existent.

Could it have been any different with their predecessors, Peter Sutherland and John Browne? Well, you do feel they would have vastly more experience to handle a public relations catastrophe such as this one.

Svanberg was a second or third choice for the chairmanship in the first place.

Hayward has gamely stepped up to the plate and taken all the political and public fire, but this is still a relatively inexperienced chief executive.

He may be knowledgeable about exploration — which raises a lot of questions about the Macondo well drilling details itself — but he was green on the high politics of Big Oil disasters.

Both will have to go at some stage when the crisis ends and the company sets about rebuilding some semblance of order.

Investors generally have not been pressing for a management shake-up, despite some media claims. However, there is an acceptance both inside and outside the energy group that top level personnel changes will come in time.

Meanwhile, along with capping the well comes the need to ensure the balance sheet is strong enough to avoid credible questions being asked about BP’s potential bankruptcy.

Although the wildest estimates of its possible claims and liabilities are 
$70 billion, the more realistic figure could be a little over half this amount.

BP is bringing in a lot of cash from its normal operations due to the relatively high price of crude, but its share price has been hammered by the uncertainty.

It is being forced to inject $20 billion into an escrow account to deal with future claims and has also suffered credit rating downgrades.

BP is busy trying to sell off at least $10 billion of peripheral assets — such as the gas business it jointly owns in Argentina — as a way of making a hostile takeover bid harder to mount.

Some analysts very speculatively mooted a merger with ExxonMobil, but BP clearly fears a predatory move from China or Russia.

The latter is unlikely to happen without Washington forcing BP to sell its major US business to a separate local buyer.

BP’s future remains extremely difficult to predict, but this big company is almost certain to become smaller.



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