BP Faces Extra Obstacles After Spill

Any energy company responsible for something like the disaster in the Gulf of Mexico would face an uncertain future. BP (BP) faces two special challenges its rivals would not: Before the spill, it already had a reputation for lax safety practices. And more than any other major producer, it is committed to operating in the gulf.

Those factors will complicate any campaign the British oil titan mounts to polish its stained image and maintain its dominance in offshore drilling in the waters south of the U.S.

Since the early 1990s, the company has staked much of its future on a risky deepwater strategy. It has amassed some 500 leases in the gulf through U.S. government auctions—more than any other company. It leads in gulf production, with 450,000 barrels a day of oil and natural gas converted to oil units, accounting for about 11% of BP's output and more of its profits.

Gulf oil earns BP about $20 per barrel, estimates Fadel Gheit, an analyst at Oppenheimer (OPY). That's roughly three times what it makes in Russia, another stronghold. The U.S., where BP has about a quarter of its total oil and gas production, represented one-third of its profits in the first quarter.

Gulf Slowdown

At the very least, BP will suffer a slowdown in the gulf because of investigations, strained resources, and permit delays, which could translate into a decline in its overall growth. "We have altered our drilling plans now and for some time in the future," a BP spokesperson said. A BP partner, ConocoPhillips (COP), has said that development of Tiber, a huge discovery made by BP in the gulf last year, would be set back.

Exacerbating the inevitable obstacles BP faces in the gulf is a history of safety lapses. In March 2005, explosions and fires at the BP refinery in Texas City killed 15 people and injured 180 others. Government investigators attributed the blast to deficiencies at all levels of the company. The Occupational Safety & Health Administration fined BP a record $21 million and then hit it with a new record penalty of $84 million last year after determining that the company hadn't fixed certain violations.

Another accident at the same refinery in January 2008 resulted in a worker death now under investigation by the U.S. Chemical Safety Board. Normally one fatality might not trigger a full-dress probe, says the panel's chairman, John Bresland. "With BP we would certainly give it a closer look," he adds.

The question BP faces is how badly its reputation for mishaps will damage the exploration and production business that brought in nearly all of its $6 billion in profits in the first quarter of 2010. A leading global position in oil and gas could be at risk if governments in the U.S. and elsewhere begin to shy away, says Amy Myers Jaffe, an energy scholar at the Baker Institute for Public Policy in Houston. "If you were a politician, would you want to be responsible for giving BP a lease?"

The bottom line Having placed a huge bet on perilous deepwater drilling in the Gulf of Mexico, BP faces risks its rivals might not.

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