Deepwater Horizon Incident - Essay Example

? BP Case Study: Investment Proposition Table of Contents Table of Contents 2 BP Overview 3 Timeline 3 Deepwater Horizon incident 4 Financial impact on BP 4 Reasonable compensation by BP 6 Reaction of financial market to BP’s involvement in price-fixing scandal 7 REFERENCES 8 APPENDIX 9 BP Overview BP is the one of the world largest international company dealing in gas and oil. The company has exceled in providing the customers the fuel for their daily livelihood and transportation, lubricants for the engines and petrochemical products to be used for various purposes like packaging, clothing and paints and energy for light and heat. They are operating in more than 80 countries with 15 refineries generating 2354 thousand barrels of oil per day. The company has recorded a sales and other operating revenue figure of $375,765 million. They follow a business model that creates value across the value chain of hydrocarbon. This process starts from exploring and ends in supplying energy and other stuffs necessary for the everyday life. The operation s and projects undertaken by BP helps in generating the investment, employment and tax revenue for the communities and countries present all over the world (BP Plc., 2013a). Timeline April 2010 Deepwater Horizon incident that causes massive oil spill in the Gulf of Mexico July 2010 Natural gas activities at Canada, British Columbia and Alberta were sold to Apache Corporation. Massive divestment plans were undertaken by the company in order to compensate the liability caused by the accident January 2011 BP and Roseneft enter into a joint deal to develop East-Prinovozemelsky field. February 2011 BP enters into partnership with Reliance Industries May 2011 Wytch Farm onshore oilfield was sold to Perencho December 2011 The liquid natural gas business of Canada was sold to Plains All American Pipelines LP and fractionation plant present in other locations. March 2012 Sold assets of North Sea gas to Perenco. August 2012 Southern California’s Carson Refinery was sold to Tesoro and gas processing plant in Texas to Eagle Rock Energy Partners September 2012 Sold Gulf of Mexico located at various places to Plains Exploration and Production. October 2012 Agreed to sell Texas City Refinery and its assets to Marathon Petroleum. April 2013 Announced selling of wind energy unit located in United States. May 2013 Raid at the London office for suspected involvement in price-fixing scandal All these measures like selling up of assets has resulted into The British company BP Plc to shrink and announced a quarterly profit in 2013 that was made it to come down from the second largest oil majors to fourth position. All these selling were done in order to make them prepared for meeting the biggest oil spill payout (Callus, 2013). Deepwater Horizon incident Deepwater Horizon incident is considered to the biggest marine oil spill in the history of petroleum industry that caused huge damage to the livelihood of the people and the environment. Release of gas, which resulted into subsequent explosion, occurred on the evening of April 20 in the year 2010 in the Deepwater Horizon oil rig functioning on the Macondo exploration well in the Gulf of Mexico for BP. This explosion took away 11 lives and several others were left injured. The fire burnt for about 36 hours until the rig sank. Several tonnes of hydrocarbons were leaked in the Gulf of Mexico before the well was sealed and closed. The well integrity failure was involved in the accident, which resulted into loss of hydrostatic control over the well. The explosion resulted into failure of the blowout preventer equipment due to which the flow from the well could not be controlled. Thus the discharge and consequent ignition of the hydrocarbons continued. This massive marine oil spill was further exaggerated by the failure of emergency function of the BOP after which the well could not be sealed. Financial impact on BP Financial damage was huge on BP due to the Deepwater Horizon oil spill that took place in Gulf of Mexico. BP was found guilty in 14 criminal cases that killed 11 employees and spilled million barrels of oil in the Gulf. Due to this disaster the company had to pay the biggest fine in the history of US that amounted to $4.5 billion. After reaching to a deal with Securities and Exchange Commission (SEC) and United States Department of Justice (USDJ), it was decided that the whole fine will be paid by BP over six years (Reuters, 2012). In the 2011 when the company released the income statement for the last quarter of the year 2010, it was seen to incur a pre-tax expense of US$40.9 billion due to the Deepwater oil spill that included cost of US$17.7 billion incurred in the year 2010. All the charges that the company had incurred were treated as non-operating item and were deducted from the taxable income (See Appendix I). This included an escrow account of US$20 billion that the company decided to create over the period of 3.5 years through the sales of US assets. The escrow account will be used for satisfying the claims associated to the “Gulf Coast Claims Facility (GCCF), final judgments in litigation and litigation settlements, state and local response costs, and costs related to natural resource damages.” The company has also decided to fund the research program that looks at the impact of the oils spill and subsequent response on the shoreline and marine life ecosystem. Apart from all these expenses the company can experience some more costs if gross negligence is proved under the Clean Water Act. However the scale of penalty is expected to grow more if damages to marine life are assessed. The company is seen to undisclose the methods of pre-tax calculation and the details of social and ecosystem damages. Thus this restricts the understanding of the stakeholders regarding the social, financial and environmental implications of Deepwater Horizon oil spill (Houdet and Germaneau, 2011). In the year 2013, BP was seen to make ?2.5 billion in the fourth quarter of 2012 as compared to ?3.1 billion in the year 2011. The company has been seen to sell assets worth ?24 billion. It has been claimed by Bob Dudley the chief executive of BP that they have been repositioning BP through bringing new projects and divestments. They claimed that solid foundation has been laid so that the company can achieve its long term goals. Furthermore it has been claimed by the company that by 2014 the ten point strategic plan that included the growth in operating cash flow will also be achieved (Richardson, 2013). Reasonable compensation by BP Under the direction of the federal government BP has undertaken the cleaning up work. In order to swiftly compensate the people affected by the accident, to take care about their health, welfare and safety the company claims to implement large number of initiatives. On the other hand people who were associated in economic recovery of the seafood industry and Gulf Coast tourism that was impacted by the spill was also compensated. The company also claimed that they jointly conducted a study with the state natural resource trustee and the federal government in order to assess the level of damage that has been caused to the natural resources. According to the records as on December 31, 2012 the company has spent over $14 billion on the response activities. The company aims to work together with the stakeholder, employees, local residents and the government to fight with such a disastrous situation. In addition to this the company has also planned to commit long term funding towards the research initiatives that improve the knowledge about the ecosystem of the Gulf of Mexico. This better understanding will not only help the company in mitigating the current impact but also stop oil spilling in other regions (BP Plc., 2013b). The initiatives taken by the company apart from paying fine shows that the company has compensated the damage at the best possible level. The company has realised the level of damage that has been caused by the oil spill and has taken initiatives to stop any such oil spills in future. Though loss of live cannot be compensated in monetary terms but the company has tried to minimise the impact by taking immediate measures. Reaction of financial market to BP’s involvement in price-fixing scandal BP’s London office has been raided by the regulators of European commission for investigating allegation of oil price rigging for more than a decade. The officers of the commission claimed that the distorted price was reported to the price reporting agency in order to manipulate the figures of the published price for the bio-fuel and oil products. The officers also reported that this conspiracy was going on from the year 2002 and has created huge impact on the prices of the petrol which are delivered at the stations; thus severely affecting the final users. European Commission has been suspecting the involvement of the oil giants BP and Shell in this conspiracy (Bawden and Wright, 2013; Neate and Macalister, 2013). Report says that both the companies BP and Shell has been seen to trade flat as the market was weighed up by the allegation of the European commission against theses two companies (See Appendix II). The shares of Shell have recorded a fall by 1.4pc in London. BP was also seen trading in a flat market. The officials of European Commission are still investigating the matter and mere investigation does not prove any one to be guilty. Oil Analyst Peter Hutton at RBC Capital Markets argued that it is hard to react to such news because the investigation is at it very early stage and nothing can be concluded (Gosden, 2013). REFERENCES Bawden, T. And Wright, O., 2013. ‘Limp-wristed and lettuce-like': MP attacks inquiry into BP and Shell petrol price-fixing allegations. The Independent [online] Available at < http://www.independent.co.uk/news/business/news/limpwristed-and-lettucelike-mp-attacks-inquiry-into-bp-and-shell-petrol-pricefixing-allegations-8616293.html> [Accessed 14 June 2013]. BP Plc., 2013a. Company information [online] Available at < http://www.bp.com/en/global/corporate/about-bp/company-information.html> [Accessed 14 June 2013]. BP Plc., 2013b. Deepwater Horizon accident and response [online] Availability at < http://www.bp.com/en/global/corporate/gulf-of-mexico-restoration/deepwater-horizon-accident-and-response.html> [Accessed 14 June 2013]. Callus, A., 2013. Smaller BP's profits down as oil spill trial looms. Reuters [online] Available at < http://www.reuters.com/article/2013/02/05/us-bp-results-urgent-idUSBRE91409C20130205?irpc=932> [Accessed 14 June 2013]. Gosden, E., 2013. Shell and BP unmoved by price fixing probe. The Telegraph [online] Available at < http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/10058245/Shell-and-BP-unmoved-by-price-fixing-probe.html> [Accessed 14 June 2013]. Houdet, J. and Germaneau, C., 2011. The Financial Impacts of BP’s Response to the Deepwater Horizon Oil Spill [pdf] Available at < http://www.synergiz.fr/wp-content/uploads/2011/04/Case-study-BP-gulf-oil.pdf> [Accessed 14 June 2013]. Neate, R. And Macalister, T., 2013. BP and Shell raided in European commission price-rigging inquiry. Theguardian [online] Available at < http://www.guardian.co.uk/business/2013/may/14/bp-shell-oil-price-rigging> [Accessed 14 June 2013]. Reuters Reporter, 2012. The biggest fine in U.S. history: BP agrees to pay $4.5billion fine for Deepwater Horizon oil spill. mailOnline [online] Available at < http://www.dailymail.co.uk/news/article-2233222/BP-agrees-pay-4-5billion-fine-Deepwater-Horizon-oil-spill.html> [Accessed 14 June 2013]. Richardson, A., 2013. BP still feeling financial impact of Deepwater Horizon disaster. The Northern Echo [online] Available at < http://www.thenorthernecho.co.uk/business/shares/10209107.BPstillfeelingfinancialimpactofDeepwaterHorizondisaster/> [Accessed 14 June 2013]. APPENDIX I: Financial impacts of non-operating charges linked to the BP Gulf of Mexico oil spill response for the first two quarters of 2010 II: Stock Price movement from May 13, 2013 to June 10, 2013 Read More