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Ships work near the site of the BP Deepwater Horizon oil spill on Tuesday in the Gulf of Mexico (Chris Graythen/2010 Getty Images)
Ships work near the site of the BP Deepwater Horizon oil spill on Tuesday in the Gulf of Mexico (Chris Graythen/2010 Getty Images)

Oil

BP likely to avoid frontiers of oil industry as it rebuilds shattered reputation Add to ...

At a celebration of BP's centennial last October, CEO Tony Hayward boasted to guests that the oil company "lives on the frontiers of the energy industry."

But this week, in the first major sign that the Gulf of Mexico oil spill may have caused lasting damage to the company's long-term strategy of embracing projects with high risks, BP was frozen out of a potentially lucrative license to drill for oil off the coast of Greenland.

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The Arctic setback comes as BP's plans to begin deep-water drilling in Libya and the North Sea have been delayed, and its vast offshore U.S. operations remain under a cloud.

BP may face less difficulty in carrying out risky projects in parts of the world where regulation is less restrictive, such as in Angola, Russia and Iraq. But it can ill afford another major accident as years of investigations and costly lawsuits linked to the Gulf spill loom.

To help cover the costs of the spill, BP has begun shedding assets around the world, with a goal of raising $30-billion. Analysts say that cleanup, fines and lawsuits could cost BP more than that, although the company appears to have avoided some worst-case environmental scenarios, like oil washing up the East Coast.

By selling mostly land-based assets, BP is signalling that it intends to remain a deep-water driller. Still, with Hayward gone soon, incoming CEO Bob Dudley is expected to mimic the safety-first strategy pursued by ExxonMobil Corp. after its historic 1989 spill in Alaska's Prince William Sound. For example, Exxon quickly appointed an executive to develop a new inspection system that would examine every major piece of equipment within the company's global operation.

"I don't see (BP) marching off into new frontiers any time soon," says Dougie Youngson, an analyst with Arbuthnot Securities in London.

That would be a shift from the past decade or so.

Its aggressive growth, including its acquisition of Amoco in 1998, made it the largest producer of oil and gas in the Gulf of Mexico. And, until the deadly explosion of the Deepwater Horizon rig on April 20, it would have been expected to be at the centre of the new oil rush in the Arctic.

Interest in the Arctic is rising after Cairn Energy PLC's announcement this week that it had found gas off Greenland's west coast. BP said it had decided not to bid for a drilling license after showing interest in the preliminary stages of the bid round.

But with a Greenpeace ship already circling Cairn's rig, Greenland Premier Kuupik Kleist indicated that the company had stood little chance of gaining a license to operate in such an environmentally sensitive part of the world.

"Of course we are influenced by what happened in the Gulf right now," Kleist said this week.

BP spokesman Robert Wine said the company had not ruled out bidding for future licenses around the world.

State-owned oil companies in Libya and the Middle East that have bestowed major contracts have so far stood faithfully by the company. So too have its partners in Russia, where it produces more crude than in the United States - 840,000 barrels a day, compared with 665,000 barrels a day. It also has 19 new discoveries in Angola to explore further and plans for 50-100 wells in southern Iraq.

But Dudley, who takes over from Hayward on Oct. 1, is expected to focus initially on selling assets to pay for the spill and repairing the company's tattered reputation.

The company is putting a positive spin on the fire sale. It has already raked in almost $9-billion from the sale of assets in Egypt, Canada, the U.S. and Colombia, and says the moves will "better align our strategic footprint with our global strengths."

Credit Suisse believes BP is adopting a "shrink to grow" strategy with sales of less essential oil-production assets.

But it will also take time to restore BP's reputation, and the company is likely to take a leaf out of Exxon's book to prove to the world that it has changed. An internal report on the Gulf disaster due out next week could be key moment for the company.

Following the Exxon Valdez tanker spill in Alaska, Exxon "embraced the idea strongly that operational excellence - not having accidents - is a real good indicator of good management," said Joseph Pratt, a professor of business and history at the University of Houston.

That approach goes double for BP's operations in the United States, home to 40 per cent of the company's business, where it is facing political and regulatory pushback.

BP was already on shaky ground in America after a 2005 Texas refinery explosion that killed 15 workers and a 2006 Alaskan pipeline spill. It's now facing a push by some lawmakers to bar the company from getting new offshore leases or drilling permits for up to seven years. Congress is also considering whether to take away BP's lucrative business of selling fuel to the military.

The threat of a shadow over its operations in the Gulf, where BP is the operator of 89 producing wells and a stakeholder in 60 other wells, is unsettling investors. Equally worrisome is the uncertainty over just how high BP's costs of cleanup, fines and lawsuits will climb.

The 40 per cent rout in its share price since the Deepwater Horizon explosion has brought with it new bargain-hunting investors. Some of these shareholders are putting pressure on the company to consider larger divestments as a way of driving the stock price higher.

Both investors and regulators want to know how BP will stop another accident - preferably before it proceeds with other planned projects.

BP has delayed plans to begin drilling off a rig in Libyan waters in the Gulf of Sirte amid calls by Italian Environment Minister Stefania Prestigiacomo and EU energy commissioner Gunther Oettinger for a moratorium on drilling in the Mediterranean.

The Libyan project is also facing political heat. A U.S. Senate committee was angered this week when Hayward refused to appear at a hearing next month over allegations that BP pressured the Scottish government into releasing convicted Lockerbie bomber Abdel Baset al-Megrahi in return for Libyan oil deals.

Meanwhile, BP's plans to drill in a field 60 miles west of the Shetland islands will be scrutinized in a public inquiry next month into whether the British government was right to rule out a moratorium on North Sea drilling. Norway has already blocked off its waters in the North Sea until the Gulf Spill has been fully investigated.

The irony for BP is that most analysts credit the company with being a skilled deepwater driller, despite the Macondo well explosion. Opportunities to prove that may be out of its grasp for a while.

"The sad fact about the Macondo oil spill was that it was a fantastic discovery for BP," said Holly Pattenden, the head of oil and gas analysis at Business Monitor International. "That's why the spill was so awful, because the discovery was so good."

The Associated Press

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