US: Oil Spill's Blow to BP's Image May Eclipse Costs

Publisher Name: 
New York Times
U.S. Coast Guard, Petty Officer 2nd Class Prentice
Danner, via Associated Press

A high volume skimming system skimmed oil from the
Gulf of Mexico near Venice, La.

BP says
that the offshore drilling accident that is spewing
thousands of barrels of oil a day
into the Gulf of Mexico could cost the company several hundred million

Nobody really knows whether the London-based oil giant is being too
conservative about the cost for the April 20 accident, which some
experts say could end up as the biggest oil spill in history. The 1989
grounding of the Exxon Valdez off Alaska, for example, cost Exxon
more than $4.3 billion, including compensatory payments,
cleanup costs, settlements and fines.

But regardless of the out-of-pocket costs, the long-term damage to BP's
reputation - and possibly, its future prospects for drilling in the Gulf
of Mexico - is likely to be far higher, according to industry analysts.

The magnitude of the Deepwater Horizon disaster seems to be finally
sinking in with investors. BP's stock plunged more than 8 percent
Thursday in American trading in an otherwise strong day for stocks.
Since the accident, the American depositary receipts of the company have
fallen about 13 percent, closing Thursday at $52.56.

For Tony Hayward, who has led BP for the last three years, the accident
threatens to overshadow all of the efforts he has made to burnish the
tattered reputation of the company after a refinery explosion in Texas
in 2005 and a pipeline leak in Alaska in 2006.

As Mr. Hayward said to fellow executives in his London office recently,
"What the hell did we do to deserve this?"

A BP spokesman said no executives were available for an interview
Thursday. But in response to a written question, Mr. Hayward said,
"Reputationally, and in every other way, we will be judged by the
quality, intensity, speed and efficacy of our response."

So far, the company's failure to stop the seepage from the underwater
well has frustrated government officials. On Thursday, President
offered the assistance of an array of government agencies,
including the military, while noting that, under federal law, "BP is
ultimately responsible for funding the cost of response and cleanup

Mr. Hayward, who has blamed the rig's owner and operator, Transocean,
for the accident, said that it was nevertheless BP's responsibility to
deal with the immediate problem. "We take it with the utmost
seriousness," he wrote. "Nothing else matters right now."

Wall Street experts say that while the company is spending an estimated
$6 million a day on fixing the mess, it is impossible to accurately
estimate how much the incident will eventually cost.

BP, which leased the platform from Transocean, has said that drilling
and operating relief wells to plug the runaway well may cost as much as
$300 million, but those same wells will eventually be used to produce
profitable oil.

The cost of an environmental cleanup will depend largely on how much oil
reaches shore. The government could assess fines or other penalties.
And lawyers have already filed a flurry of suits on behalf of commercial
fisherman, shrimpers and injured oil workers against BP; Transocean;
Cameron, the company that manufactured the blowout preventer; and other
companies involved in the drilling process.

Cleanup costs will be divided among BP, which has a 65 percent
ownership of the field, and minority partners Anadarko and Mitsui.

Transocean's stock price fell nearly 7.5 percent Thursday, and is down
more than 14 percent since the accident. The company has insurance that
covers the rig that was lost, but any broader assessment of Transocean's
liability will be determined after investigators understand what caused
the accident.

Regardless of the final assessment of blame, Wall Street analysts warned
that everything BP does from now on will come under increased scrutiny
by regulators and that potential partners in drilling ventures may well
look elsewhere.

"In the last two years, it seemed BP had really cleaned up their act,"
said Fadel Gheit, a managing director and oil analyst at Oppenheimer
& Company. "Now it looks like a house of cards that has totally

Under Mr. Hayward's predecessor, John Browne, BP rebranded itself as
"Beyond Petroleum," a company that was environmentally conscious and
wanted to develop alternative energy sources like solar and wind power.
Its insignia of a blooming flower was intended to portray the company as
one that was responsive to growing public concerns about climate change.

But the company seemed to lose its focus on maintenance and safety, BP
executives later acknowledged. The 2005 explosion at a refinery in Texas
City, Tex., killed 15 workers and injured hundreds more. The Occupational Safety and Health
fined BP a record $87 million for neglecting to
correct safety violations.

Only a year later, a leaky BP oil pipeline in Alaska forced the shutdown
of one of the nation's biggest oil fields. BP was fined $20 million in
criminal penalties after prosecutors said the company had neglected
corroding pipelines. Soon after the incident, Mr. Browne quit amid
tabloid headlines about his private life.

Mr. Hayward, a geologist who had been in charge of exploration and
production, took over and promised to refocus the company and change
the culture, emphasizing safety.

He also expanded the company's already aggressive exploratory efforts in
the deep waters of the gulf. Last year, the same platform that has now
sunk to the sea floor drilled the deepest well in history, opening one
of the largest new fields in the world.

Despite the accident, BP says it remains committed to its gulf drilling
program, which contributes 11 percent of the company's worldwide

Senior executives insist that the explosion that sank the Deepwater
Horizon rig and killed 11 workers does not reflect the company's safety
standards or Mr. Hayward's management.

"This accident took place on a rig owned, managed and operated by
Transocean," said Andrew Gowers, a BP spokesman. "It involves the
failure of a piece of equipment on that rig. So the unfolding events do
not arise from a failure of BP's safety systems."

But critics in Congress and elsewhere have questioned BP's commitment to

Last year, when the federal Minerals Management Service proposed a rule
that would have required companies to have their safety and
environmental management programs audited once every three years, BP and
other companies objected. The agency is also investigating charges by a
whistle-blower that the company discarded important records from its
Atlantis Gulf platform.

Henry A.
of California, chairman of the House Energy and Commerce
Committee, is demanding documents from BP and its drilling contractors
in what looks likely to be a full-blown investigation. "A striking
feature of the incident is the apparent lack of an adequate plan to
contain the spreading environmental damage," he said in a letter to
company officials.

The faltering cleanup effort comes at a time when the company's business
is otherwise going well. Continuing the excellent performance of recent
years, BP just announced earnings of $5.6 billion for the first
quarter, more than double the profit during the same quarter a year ago.

"Certainly, BP will survive this," said Cathy Milostan, an oil stock
analyst at Morningstar. "This will test Tony and his ability
to respond to this situation. We will see if we are seeing a new BP."

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