Daily Archives: June 18, 2010

FT timeline on BP oil spill disasterThe Financial Times looks back at the key events in BP’s struggle to contain an oil spill following an explosion on the Deepwater Horizon oil rig, off the coast of Louisiana.

This interactive timeline charts the discovery of the oil leak, to the subsequent environmental and economic damage. The graphic also looks at the cost to BP and the estimated number of barrels leaking as the disaster progressed.

Related reading:

The BP oil spill

Sheila McNulty

Royal Dutch Shell recognizes that the industry has ground lost in public perception of safe drilling by the oil spill in the Gulf.

Marvin Odum, head of Shell’s business in the Americas, said in an interview that the past few years of educational outreach by the industry – and its own safety record – had started to pay dividends.

People in the US were getting a clear picture of oil and gas and its importance to the energy mix and energy security. That is why, he said, President Barack Obama had moved toward opening more areas to offshore drilling when the disaster in the Gulf struck:

The progress we made on that point was very significant. This accident and this spill in the Gulf has clearly set that back. The industry has a tremendous amount of ground to be gained back with the public. We understand that.

He intends to do that by telling and showing regulators, politicians and others that Shell’s global drilling standards and operating procedures and culture of safety first allows for protecting the environment while meeting energy needs. Shell’s global standards, he argues, often exceed regulatory requirements.

This is an argument everyone has been making, but Shell recognizes decision makers must see and understand the effectiveness of this approach and he intends to show it to them.

Specifically, Mr Odum’s pitch for Shell to get back into the deepwater of the Gulf is that it has developed a rigorous training program for well engineers. Its contractors are required to take a systematic view of risk in drilling operations, and to put management system and mitigation plans in place for these risks before work begins.

Those plans require robust, multiple barriers between pressure regimes and the surface. And to make sure everything is being done correctly, Shell requires 24-hour/7 day-a-week remote monitoring in real time from a global network of real time operating centres.

This ensures oversight on critical issues, such as well pressure changes, and technical support to the drilling superintendent on the rig — who would be a Shell employee. Of course it is one thing to say all this and another thing to demonstrate it:

We really are an open door. I know it will be important for regulators to have a look and verify. I welcome this and transparency here is particularly important.

The pitch is certainly a step in the right direction. But perhaps more is needed. Outreach is something Shell is particularly good at.

Indeed, the company was probably most responsible for changing public perception about the oil industry in recent years when Mr Odum’s predecessor at Shell, John Hofmeister, spent from mid-2006 to early 2008 visiting 50 US cities.

The point was to meet with locals and give them a chance to air their views, ask questions of the industry and hear first hand why prices were high, why the majors were still pushing oil instead of renewables and whatever else was on their mind. ConocoPhillips launched a similar campaign, but Shell was considered the leader.

Nobody has said they will begin such an undertaking again.

But, given the protests against BP in different cities across the US and the whipping Big Oil got from Congress this week, it might not be a bad idea to take private conversations in the backrooms of Congress and the White House back into the town halls of America.

When BP finally resummes dividend payments after the 2010 moratorium how much can cash are shareholders expect to receive?

The answer, via the dividend swaps market, is a lot less than the 56 cents (or 14 cents a quarter) BP has paid for the past couple of years.

Tables and graphics from Citigroup.

Based on the pixel time share price of 372p that implies a prospective dividend yield of 4 per cent for 2011 and 5.3 per cent in 2012.

So how does that compare with BP’s peers?

Well, Royal Dutch Shell offers a prospective dividend yield of 6.3 per cent for 2011 based on consensus forecasts from Reuters, while Total stands at 5.9 per cent. (We will update the post with a dividend swaps forecast when available).

The good news for BP shareholders it that Citi believes BP will certainly be able to afford the dividend implied by the swaps market. And it thinks a payment of 7 cents a quarter in 2011 is possible, against the 5.25 cents forecast by the USD swaps market.

Management will consider restarting dividend payments with its Q4 2010 results in Feb 2011, at which point they should have a better understanding of the extent of the leak, clean-up costs, litigation risk etc; elements which at this stage are unquantifiable. However, management appears to be taking a very prudent approach with its balance sheet, while also being politically pragmatic – i.e. planning to sell $10bn of assets and suspending dividend payments. It is reasonable to assume that BP will be in a position to resume dividend payments with its Q4 2010 results, and that a dividend set around half the current level (i.e. c$0.07/sh), its yield would be comparable to its peers.

Related links:
Macondo, in historical Hollywood context – FT Alphaville
As the execs turn themselves in, BP turns itself over… – FT Alphaville
Who’s not trading with BP? – FT Alphaville
BP has nothing to fear… – FT Alphaville

With BP planning $10bn of “non core” asset sales many of its rivals are likely to be licking their lips.

The question is, what counts as “non core”?

The BP golden rule

For BP, as for many of the majors, a logical first step would be to put its low growth European and US downstream operations on the block.

The problem is that there are very few buyers, meaning the company would struggle to derive value from a sale, let alone be able to find a willing buyer.

- China to step up deep water exploration – FT

- UK investors sanguine on BP’s predicament – FT

- Shell faces tougher scrutiny in Nigeria – FT

- Uganda firm on $360m Heritage Oil tax bill – FT

- Russia’s Medvedev Assesses Spill and BP – WSJ

- Democrats Divided on Energy Bill – WSJ

- Frustrated U.S. left with few answers – Houston Chronicle

- BP’s lobbyists still court members of Congress – Washington Post

- Drilling Moratorium Means Hard Times for Gulf Rig Workers – NYT

- Republican’s oil spill gaffe hands advantage back to administration – The Hill

- Polish shale gas drilling starts – Argus

Carola Hoyos

This graph from Bloomberg shows that shareholders are beginning to believe BP and Anadarko may have different fates.

For the first time since the April explosion of the Deepwater Horizon Rig the share price of the two companies has significantly diverged.

“People are starting to believe Anadarko will dispute some of their liability with BP,” says Ben Dell, analyst at Sanford Bernstein.

Anadarko owns a 25 per cent stake in the ill-fated Macondo well, which is still spewing oil into the US Gulf of Mexico, while BP owns 65 per cent and Mitsui, the remaining 10 per cent. That means Anadarko and Mitsui are liable to pay their share of any clean-up bill, unless BP is found guilty of gross negligence.

On Wednesday, BP agreed to put $20bn in an escrow account to pay claims arising from the spill. The question now is: Will Anadarko pay $5bn of that or will it set up its own account?

Anadarko, a US exploration and production company a fraction of the size of BP, could have a tough time paying up, especially as $5bn may not be the final bill, given that the $20bn is not a ceiling and punitive damages as well as clean-up costs come on top of it.

With all the focus on BP, Anadarko has kept rather quiet. In a statement to the FT, an Anadarko spokesman distanced the company from the claims account. “We were not involved in the negotiations or contacted regarding the establishment of the account, so we don’t have the insight to comment further,” he said in an email.

He added, however: “We’re going to do what’s right. We continue to assess the various remedies available to us in this matter, and all of the questions regarding potential liabilities will be answered at the appropriate time.”

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