Friday, June 25, 2010

British Petroleum - Disaster Metrics & Money Talks

There's an old quote, "statistics don't lie but liars tell statistics." And,the stats, stories and spin-doctoring spew almost as fast as the devastating oil geyser in the gulf. Here are a couple disaster metrics - and a few thoughts on the fate of BP -that can help give some context for the average Joe the Plumber.

The Size of the Sludge
With the help of we can see how the slick would look if it was placed in Eastern Canada. Here we see that Montreal, Ottawa, Quebec City and southern Vermont would all be drenched by toxic sludge. That's a 2.5 hour drive east-west and a 5.5 hour drive north-south through venemous devastation.

From a North-eastern American perspective, the size of the toxic sludge would cover all of Massachusetts and Rhode Island, and a healthy chunk of Vermont, New Hampshire and Maine.

Tony Hayward, president of BP is on record for saying, "The Gulf of Mexico is a very big ocean. The amount of volume of oil and dispersant we are putting into it is tiny in relation to the total water volume." (May 14, 2010) While he is right (see map below), what is really tiny is the amount of thought put into that statement. I don't think we need to do a deep dive on his comments, discuss his lack of judgment on the ecosystem and cruelty towards animal life, or examine his lack of sensitivity towards the tens of thousands of residents of the Gulf coast who lost their livelihoods due to the disaster. The point is that the slick is a big, nasty blog that is damaging to a big area. But we're also living on a pretty big planet.

Money metrics
As Angus Young wrote, "money talks"- so how much money is at stake here? More specifically, how much liquid gold has been lost and what's the clean up price tag? According to Reuters, about 40,000 barrels per day flow into the sea. So let's do a back of envelope calculation: 70 days of flow at 40,000 barrels per day at a little under $80 per barrel is just under a quarter billion dollars of oil. That's hardly anything to BP's $12 billion profit from last year. But, obviously the longer the hole goes unplugged, the greater the value in lost oil. But then there are the big costs: Plugging the hole, containing the mess, cleaning up the mess, payouts,legal costs, and damage to the brand. Let's look at these one at a time.

At the start of the crisis, BP was spending $6million per day on containment. As containment becomes more difficult due to mini blobs, a growing slick, and tropical storms, this amount inevitably rises. A recent Drudge article noted that BP is paying $30 million per day in hole-closing and containment costs. Soon we'll be on day 90.

That takes us to the clean-up costs. For this, we have some historical data for a benchmark. The 1989 Exxon Valdez oil tanker disaster had an estimated $5 billion clean up price tag. So given that the BP geyser is already much larger in terms of both volume and area - and continuing to grow- and adjusting for the time value of money, the clean-up will far exceed the estimated $5 billion dollar Alaska clean up. Add on to BP's catastrophe, the clean-up costs the $20 billion of compensation (or should I say "starting point compensation), legal costs and other defenses, and, any way that you calculate it, if BP antes-up like it says it is going to do, we can predict a 1:100 ratio of lost oil revenue to damage costs to BP. And of course, this tally doesn't include the damage to the BP brand, which is already estimated at $1 billion.

Why BP won't go bankrupt
So with mounting billions in liabilities, some folks in the press are flirting with the question, "should BP close its doors?" A more interesting question is, "why can't BP fail?" There are a few interesting forces at work here.

First, British Petroleum is the flagship brand of Britain. It hovers around being the 4th largest company in the world(as ranked by market cap). With such international prominence, the British brand is a source of strong national identity for its citizens. Just as Embraer or Petrobras are sources of great pride for Brazilians, or as Ferrari is for Italy, BP generates emotional appeal for its citizens. On this note, it is not coincidental that these "national brands" often prominently display the home nation in the brand name. (BRITISH Petroleum, PetroBRAS, EmBRAer etc.) So, if BP seems under attack by another nation, odds are the homeland residents will rally in support of their national brand. BP is the home team for Brits. (Note: BP has officially changed its name from British Petroleum, but media persistently calls it British Petroleum)

Second, organizations of BP's size and power have tremendous clout, lobbying and reach with in political circles. Excuse me for being cynical, but the investments BP has made in lobbying and elections has been done in exchange for political favors. Is anyone surprised that Joe Barton, the Republican Congressmen who said BP "deserves an apology" from the Obama, received $27,000 in donations from BP? Let's not forget that Obama and McCain also received handsome BP donations- $75,000 and $45,000 respectively. The point is this- there is a lot of BP goodwill in political circles and it reaches from Congressman to Senator to the President of the United States. I would bet it also reaches even deeper into British parliament.

Third, BP stock is widely held in pension funds. As the BP stock plummets, British pensions are being devastated, which means that the British government is going to be very reluctant to let BP fail. While the "anti-BP" rhetoric can be pretty strong in the US, the US government also has incentive to help out BP. According to Bloomberg, public state retirement funds have lost around $1.5 billion in value due to the declining BP stock price. (Eg.California State Teachers’ Retirement System lost $104.8 million; Florida State Teachers' Retirement lost $87.8 million). This is further compounded by the fact that many of these losses are in states that are already in terrible fiscal shape due to the housing collapse. Pile on the federal pension losses and private fund losses and we can see that the impact is huge. In short, a lot of people are going to be losing a lot of money and corporate welfare can alleviate some of these losses.

Finally, BP is an energy company. Governments repeatedly demonstrate their desire to have a national energy company. Petro Canada in Canada was started for this purposed. Brazil's Petrobras is 50% owned by the government. Boliva recently sent military troops to nationalize energy areas within its borders. Many argue that US-led Iraq war also was done to support American oil companies. Because energy has strategic importance for nations, governments like their nation to have an energy company. I'm making the case that Britain wants BP to succeed in the sector.

So, the incentives are aligned for BP to find a way out of its mess. While the environmental carnage continues with no end in sight and while economic value continues to be plundered, many will talk about how bad BP is. As long as BPs balance sheet can support the clean up, "BP is bad" rhetoric will continue among the politicians and compensations will be pursued. But, if there comes a time when BP is in financial jeopardy, Brits will support their national brand, many politicians will support the hand that has fed them, and the governments will help BP bail out and clean up. This will be done to support the stock. In the meantime, let's all hope the hole gets plugged pronto.


  1. Is BP being tracked on

  2. BP damaged more than its own brand. It also damaged the image of the communities involved and made it harder for them to compete for capital investment. Read about the work being done to help economic development professionals refurbish their community brands.

  3. The category also takes a hard blow.

  4. Hey prof- I think that BP will take a bigger hit on the brand than Exxon did because of more environmental awareness today. What do you think?

  5. And one more thing- what do you think the right thing for BP was?

  6. And one more thing- what do you think the right thing to do for BP was?