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Overblown BP sell-off may damage industry

“In Washington, a fresh impetus to pursue alternative forms of energy and a renewed hostility towards Big Oil will not be directed solely at BP.”

Times Online

May 5, 2010

David Wighton

The oil spill in the Gulf of Mexico is a tragedy — for the families of those who died, for the environment and for local communities.

It is a huge challenge for the company and its chief executive, Tony Hayward. But in cold, cash terms, is it really so bad as to warrant the £20 billion that has been wiped off BP’s market value?

The broken well, which is leaking 210,000 gallons of oil a day, could flow for a year and still be dwarfed by earlier incidents. The Ixtoc 1 blowout in Mexico’s Bay of Campeche disgorged 140 million gallons of crude into the Gulf of Mexico in 1979 before it was finally halted. Even that was a fraction of the 1991 spill when Iraqi forces allowed 36 billion gallons of crude to bleed into the Persian Gulf.

It will take three months for BP to drill a relief well. The wait will be excruciating but if successful the group should be able to prevent the spill from being anything like as bad as those incidents.

In the meantime, interim measures to limit the flow of oil as well as the grade of crude involved may also help. This is not the thick black ooze of the Exxon Valdez but a lighter-sweeter variety that seems easier to disperse.

If it does take three months to fix, the costs to BP for the clean-up, compensation and damages have been estimated at £5.2 billion. It is a vast sum but even if it were to double it would still be less than the fall in BP’s market value. There is also the damage to BP’s reputation. But then Exxon seemed to recover from the Valdez disaster pretty quickly.

But if the sell-off in BP’s own shares may now be overblown, investors may be underestimating the impact the disaster might have on the wider oil industry.

In Washington, a fresh impetus to pursue alternative forms of energy and a renewed hostility towards Big Oil will not be directed solely at BP.

Neither will a backlash against offshore drilling or new, tighter regulations that will force up costs.

Ultimately, the incident is likely to trigger a shift in the economics and risks involved in deepwater oil exploration. These will be felt just as keenly by Exxon, Shell and Total as by BP.

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