With public anger off the charts over BP's role in the Gulf of Mexico oil disaster, there's not much sympathy about the financial burden the British oil company faces from future legal claims and cleanup costs. BP (BP) says it's considering asset sales to help cover the cost of a $20 billion escrow fund that the White House demanded the oil major set up to handle U.S. claims. The company's survival may also be in doubt if the financial hit from the Deepwater Horizon rig explosion approaches $100 billion, as some analysts suggest is possible.
Such a scenario would destabilize U.S. energy policy at home and abroad. President Barack Obama recognized as much when he said on June 16 that "BP is a strong and viable company, and it is in all of our interests that it remain so." The company's demise would be disruptive to the American oil industry, given that BP is the largest oil and gas producer in the U.S., with about 1 million barrels per day of production. Some 7,000 of BP's 23,000 U.S. employees work in the Houston area, many in a suburban office park just off the Katy Freeway. From there the company runs its Gulf of Mexico offshore operations with a phalanx of engineers, geologists, and computer scientists. "These are highly compensated people," says J. Robinson West, chairman of Washington-based consultants PFC Energy.
Until the Deepwater accident, BP's Gulf activities were viewed by Washington as a big plus for U.S. energy security interests. Since the mid-1990s, the British company has been the leader in Gulf exploration, pushing into deeper water and drilling farther into the earth. Its projects were key to the 7 percent growth in production that the U.S. achieved last year, reversing an 18-year decline.
BP's skill at negotiating access to new energy resources, especially in strategically important regions, has also served U.S. interests. The company opened up Azerbaijan, a major producer in the Caspian Sea region, for oil. It has developed two oil and gas fields there, as well as the Baku-Tbilisi-Ceyhan crude oil pipeline through Turkey that came on line in 2004, and it offers a counterweight to Russian dominance in the region. In 2007, BP signed an agreement with the investment arm of the Libyan government to explore for gas along an offshore tract the size of Belgium.
preparing to sell some assets
BP's most daring move was last year's $20 billion deal in Iraq to add almost 2 million barrels per day in production to the country's prized oil field in Rumaila. That attracted deals with other companies, greatly improving Iraq's economic prospects. "BP was bold in going in first and opening up the way for the rest of them," says Toby Dodge, an Iraq scholar at the International Institute for Strategic Studies in London.
BP is starting to identify the $10 billion or more in assets it might sell to fund the costs of the Gulf spill, says Managing Director Robert Dudley, who has taken over day-to-day oversight of the cleanup from Chief Executive Officer Tony Hayward. "We have to sharpen the portfolio to pace ourselves for what has happened in the U.S.," Dudley says. A person familiar with BP's investment plans says it may need to raise as much as $50 billion to cover costs related to the disaster. Oppenheimer oil analyst Fadel Gheit thinks BP could end up in bankruptcy if costs exceed $100 billion, a possibility if partners in the stricken well, such as Anadarko Petroleum (APC), pin full responsibility on the company.
If so, BP may have to part with some prized assets. Chinese and Russian oil companies less in sync with Washington could step in as buyers, changing the geopolitics of the oil industry. "Companies will be interested in buying assets in Azerbaijan, Angola, Brazil, and potentially also Norway," says Gudmund Halle Isfeldt, an analyst at DnB Nor, Norway's largest bank.
The bottom line BP controls strategically sensitive energy assets. Selling them may jeopardize U.S. energy security interests in the Middle East and Asia.