Who Is BP? Will It Survive?

June 23, 2010

By Terry Smilijanich:

As BP (formerly British Petroleum) continues to struggle with the massive amounts of oil leaking from its Deepwater Horizon disaster in the Gulf of Mexico, many are wondering just how big this company is and whether it can make good on its promise to clean it all up and compensate all its victims. Let’s take a look at a little history of BP and see if we can answer these questions.

BP – A Historical Timeline

BP has had a long and colorful history, from the first discovery of oil in the Middle East to the Iranian Revolution of 1979.

1901 – William Knox D’Arcy, a very wealthy gold mine developer from England, obtains an exclusive right from the Shah of Iran to search for oil. No oil had yet been discovered in the Middle East, but he thought there might be black gold beneath the sands.

1908 – D’Arcy discovers oil in Iran, and forms the Anglo-Persian Oil Company, later changed to the Anglo-Iranian Oil Company (AIOC), with exclusive and lucrative rights to exploit Iran’s oil riches. For half a century, AIOC and the rulers of Iran make billions, with the citizens of Iran enjoying very little of the benefits.

1913 – Through negotiations with First Lord of the Admiralty Winston Churchill, the British government acquired a controlling interest in AIOC.

1927 – Having acquired oil leasing rights in neighboring Iraq, AIOC hits a gusher in Kirkuk, Iraq, adding Iraqi oil to its profits.

1951 – Increasing pressure to nationalize the Iranian oil industry results in the assassination of Iranian Prime Minister Haj Ali Ramzara and the election of Mohammed Mossadeq, who promptly takes over all oil production in the name of Iran. Appeals by the British government to the Hague are unsuccessful.

1953 – President Eisenhower authorizes the C.I.A. with support from the British government, to orchestrate an Iranian coup, the success of which throws Mossadeq out and puts the Shah of Iran back into power.

1954 – New oil leasing arrangements give AIOC, which changes its name to British Petroleum (BP), renewed rights to exploit 40% of Iran’s oil, with the remainder shared by American oil companies and Shell Oil.

1965 – BP, having expanded its oil exploration to Alaska, is the first company to strike oil in the North Sea, which becomes a major supplier of oil to the world.

1979 – The Iranian Revolution overthrows the Shah, and Ayatollah Khomeini destroys the oil refineries, making Iran a supplier of raw unrefined oil. Khomeini breaks all existing oil leases and enters into a new agreement giving BP exclusive rights to 90% of Iranian oil, the remaining 10% going to Khomeini and his followers.

1987 – The British government sells all of its shares in BP, based on Prime Minister Margaret Thatcher’s privatization program.

2001 – Through a series of mergers with Standard Oil of Indiana, Gulf Oil, Conoco, and Amoco, BP becomes the fourth largest company in the world, and one of the top three energy companies in the world.

Can BP Survive This Crisis?

The financial impact of the Gulf crisis will be felt for some time. Claims from clean up efforts, lost business revenue, and personal injuries will amount to billions of dollars. After meeting with President Obama on June 16, BP announced that it will set aside $20 billion for all “legitimate” claims. Yet the Exxon Valdez spill in Alaska back in 1989, a much smaller and confined spill, cost Exxon an estimated $7 billion.  So, will $20 billion be enough?

On top of these clean up and claims costs, there is the real possibility that negligence on the part of BP may give rise to criminal charges and fines by the federal government. Civil fines alone might cost BP as much as $280 million per day. Combined with potential doubling of fines resulting from criminal charges and loss of government contracts, the cost could be crippling to even the fourth largest company in the world.

An analyst at Raymond James has estimated the total financial impact to BP, including potential fines, to be $63 billion dollars. Of course, the total costs resulting from the spill will be spread over many, many years. The Exxon Valdez case took almost twenty years to make it to the U.S. Supreme Court. And the U.S. and world appetite for oil will most likely remain unabated for some time as well.

BP made $14 billion in profits in 2009. In 2008, its profits were $31 billion. Since the Deepwater Horizon disaster, BP’s total stock value has dropped from $180 billion in mid-April to $91 billion, although there are signs the stock value will rebound. BP has announced that it will not pay a dividend this year, the first time it will have failed to pay a dividend since World War II.

Based on the announcement of a $20 billion set-aside by BP, the cost of insuring BP against default has fallen and its bond prices have started back up. Talk of a potential bankruptcy have subsided as a result.

About 40% of BP stock is owned by British investors. U.S. investors own about 39% of the company. The British dividends reportedly represent one-seventh of all dividend payments in the United Kingdom, and many British pension plans are heavily invested in BP stock. Shareholders recognize, however, that the sight of BP distributing profits to them while the Gulf struggles with this catastrophe would just increase political pressure to punish BP further.

Ultimately, our reaction to this crisis will have to be balanced. Revenge in the form of crippling criminal and civil fines might feel good temporarily, but will not undo the damage done nor improve the ability of BP to make good on its promises to pay for the costs. It would make more sense to concentrate on individual criminal responsibility. Jail a few safety engineers, foremen, and executives clamoring for speed and profits at all costs, and watch how it impacts future employees and executives thinking about cutting a few corners.

And hey, America! How many more wake up calls do we need before we do something – anything – to quell our appetite for cheap fossil fuels? From the Middle East turmoil to the Louisiana wetlands, we can plainly see what our addiction to oil is costing us.