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U.S. probe, surging costs threaten to sink BP

Contract workers from BP ferry oil soaked waste to a pickup point as other workers use skimmers to clean oil from a marsh near Venice, La.

Win McNamee/Win McNamee/Getty Images

BP PLC, one of the storied Seven Sisters of the global oil business, finds itself in an epic battle for its future, as the Obama administration has opened criminal and civil investigations into the Gulf of Mexico oil spill.

The London-based company, the world's fourth largest public corporation, has suffered a stunning loss of its market value since the April 20 blowout in the Gulf of Mexico. After an unsuccessful "top kill" effort on the weekend, its share price dropped another 15 per cent on trading Tuesday, wiping $17-billion (U.S.) off the company's value.

Following a tour of the oil-stained coastline of Louisiana, U.S. Attorney-General Eric Holder announced he has opened civil and criminal investigations into the blowout that could result in years of court battles and crippling fines.

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The spill is already being dubbed the worst environmental disaster in U.S. history with the prospect of two more months of gushing crude. Mr. Holder's announcement is part of a mounting assault on the oil company by the Obama administration, which has itself been roundly criticized for its handling of the spill and the impact on coastal communities in Louisiana and Mississippi.

Industry analysts worry BP will find it increasingly difficult to operate in the United States, even if it can survive the massive costs for clean-up, compensation and fines that are inevitable. And they question the impact of months of horrific headlines if the company is unable to stem the leak with its latest effort - installing a cap and funnelling the crude to waiting tankers.

Regardless of its promise to pay all legitimate claims, the embattled company certainly faces a slew of legal battles as federal and state governments, businesses and citizens in the Gulf states seek to recoup losses.

Mr. Holder said U.S. attorneys will be looking to see whether BP officials violated the Clean Water Act - which has both civil and criminal penalties - the Migratory Bird Act, the Oil Pollution Act of 1990, and other criminal statutes.

"If we find evidence of illegal behaviour, we will be forceful in our response," the Attorney-General said a statement released by his office.

BP's market value has shrivelled under the constant onslaught of negative headlines and growing concerns that the company will have to finance a massive clean-up and compensation effort, plus face billions of dollars in fines.

Already down 30 per cent from its pre-spill level of $60 (U.S.), BP shares plunged in trading in London and New York on Tuesday, losing $6.43 to close at $36.52 (U.S.) on the New York Stock Exchange. Since the blowout on April 20, BP's market value declined by $63-billion (U.S.), raising takeover speculation.

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Analyst Phil Weiss said he did not believe BP would be an acquisition target because it is too big for even its largest competitor to take on. More importantly, any acquirer would be assuming the massive but uncertain liabilities related to the Gulf spill.

BP trails only RoyalDutch Shell PLC and Exxon Mobil Corp. in revenues among publicly controlled oil companies worldwide, and operates in 30 countries with 80,000 employees.

The company's biggest threat now comes from Washington, which may prevent BP somehow from operating in the U.S. Gulf Coast and Alaska. In both regions, it is the largest producer of oil and gas, Mr. Weiss said in an interview.

Dougie Youngson, an analyst at Arbuthnot Securities in London, also questioned the fate of the company.

"What worries us the most is the emotive language coming from the Obama administration and the reputational damage done so far. It is difficult to see how the company can recover, and it remains unclear what punitive measures will be put in place in terms of its operations in the Gulf of Mexico," he said in a note to clients.

Meanwhile, President Barack Obama announced the co-chairs of the presidential commission that will spend the next six months reviewing the spill and recommending ways to avoid such disasters in the future. The two are Bob Graham, a former Florida governor, and William O'Reilly, the head of the Environmental Protection Agency under George H.W. Bush.

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BP had rated the chance of success of its "top kill" effort at 60 to 70 per cent, but after it failed, a senior company official said its chances of success had always been a "matter of luck." Now, it is attempting to install a tight-fitting cap over the well and funnel the gushing crude into a waiting tanker.

While BP officials again expressed optimism about the procedure, U.S. Homeland Security Secretary Janet Napolitano cautioned that the procedure is risky and could even increase the flow of oil out of the damaged well.

The administration has warned the blowout could continue gushing until a relief well can be completed, expected in early August. It added that summer hurricanes could add to the woes.

The oil giant should be able to cover the liability costs it is facing, Mr. Weiss said. He expects it to generate up to $35-billion (U.S.) of operating cash in each of the next two years. Even at a $20-billion capital expenditure program, the company should be able to pay costs from current operations.

BP has already spent nearly $1-billion on clean-up costs and compensation, and has said it will pay all legitimate claims for economic loss, despite federal law that caps the liability at $75-million. Backed by the Obama administration, Democrats in Congress are pushing to raise the liability cap to $10-billion, and apply the higher level retroactively to BP.

With reports from Associated Press and Reuters

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About the Author
Global Energy Reporter

Shawn McCarthy is an Ottawa-based, national business correspondent for The Globe and Mail, covering a global energy beat. He writes on various aspects of the international energy industry, from oil and gas production and refining, to the development of new technologies, to the business implications of climate-change regulations. More

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