Business News

ANALYSIS: Wounded oil giant BP heads for uncertain future

By Anna Tomforde Jul 27, 2010, 13:22 GMT

Picture showing the logo of oil company BP at the company\'s German headquarters in Bochum, Germany, 28 October 2009. Oil giant BP 27 July 2010 announced a record quarterly loss of 17.1 billion dollars as a direct result of the Gulf of Mexico oil spill. EPA/BERND THISSEN

London - After disaster, the hope of a new beginning.

BP Plc, the multinational oil giant that was once the pride of corporate Britain, has been battling to restore its reputation and financial health.

The April 20 oil rig explosion in the Gulf of Mexico, which killed 11 people and sparked the biggest environmental disaster in United States history, was a 'watershed incident' in BP's 101-year-history, chairman Carl-Henric Svanberg said Tuesday.

But he hopes that the company, whose cash flow and underlying performance remains strong, has turned a corner in the fight to salvage its reputation - and secure its ultimate survival.

There was no doubt that heads had to roll following the communications catastrophe associated with the spill and lingering doubts over BP's safety record.

Tony Hayward, the 'angel-faced' Englishman who gained the status of 'most hated man in America' during the crisis, was sacrificed in the process of making a new beginning.

BP announced Tuesday that he will step down in October after just three years as chief executive to make room for Robert (Bob) Dudley, a US citizen with intimate knowledge of the Gulf region.

After a career with BP that spans almost 30 years, Hayward's departure will be sweetened with a generous annual pension arrangement of nearly 1 million dollars and a one-off annual salary payment, plus bonuses and share options.

He is also expected to stay on with BP for a post with the company's TNK-BP joint venture in Russia as part of the 'golden parachute' deal.

'BP appeases US by sending Hayward to Siberia,' the Guardian newspaper wrote on Tuesday.

The Financial Times praised his replacement, saying that BP was 'breaking the mould for a brighter future' with the appointment of its first non-British chief executive.

But BP's problems go far beyond the issue of image-saving changes in its leadership structure, analysts say.

As demonstrated by the record quarterly losses of 17.1 billion dollars revealed Tuesday, and a rise in planned asset sales to 30 billion dollars, its troubles are far from over.

The company has set aside a pre-tax charge of 32.2 billion dollars to cover the consequences of the Deepwater Horizon accident and subsequent environmental damage.

The figure includes 20 billion dollars set aside, at the urging of the US administration, for an escrow compensation fund and the nearly 3 billion dollars spent on the cleanup so far.

However, experts have predicted that the final costs for BP could reach 70 billion dollars, if fines and penalties are taken into account. There also is the unpredictable factor of future court cases in the US.

'The magnitude and timing of possible obligations in relation to the Gulf of Mexico oil spill are subject to a very high degree of uncertainty,' BP admitted in its quarterly statement.

According to analysts in London, BP's own cost estimate of around 30 billion dollars is based on the assumption that the company will not be found guilty of gross negligence in relation to the disaster.

BP's hope that future inquiries will fail to establish a link between negligence due to cost-cutting and the accident was succinctly expressed in Hayward's resignation statement Tuesday.

'I will always feel a deep responsibility, regardless of where blame is ultimately found to lie,' the outgoing company chief said.

Meanwhile, thousands of shareholders and employees will continue to worry about their investments in BP share and option schemes, after seeing the company's share price fall by 40 per cent since the disaster.

Shareholders in BP, a staple holding for British pension funds, have already felt the pain as the company suspended its dividend payouts for the first time since 1945.

The future of deep-sea drilling and its place in the wider context of global energy security is another issue that has been placed under the spotlight by the BP disaster.

In just a few weeks' time, BP is planning to start its highly controversial gas and oil exploration off the coast of Libya, where the depth of 1,750 metres will exceed that of the wells in the Gulf of Mexico.