Will the Gulf swallow BP?

By Nic Moulis, General Manager, ACAPMA

Some of you will recall the story about a man named Jed Clampett. While out shooting one day, Jed made a hole in the ground and up through it came bubbling crude – oil that is … black gold … Texas tea. Well, Jed became a millionaire, moved to Beverly Hills and the rest is 1970s television history.

The same cannot be said for BP just now. Since 27 April, when crude oil began gushing from a damaged wellhead 1.5 kilometres below the surface in the Gulf of Mexico, BP has been struggling with a massive disaster. The numbers are staggering. Eleven people tragically lost their lives and seventeen were injured when the Deepwater Horizon rig sank. This direct impact on people's lives seems to have been forgotten in the aftermath.

Indirect impact

The indirect impact is on the environment, the livelihood of Florida residents, and of course the financial strength of BP. For a start, it is estimated that BP spent $US2 billion on cleanup in the first two months. More importantly than the dollars perhaps, some 200 km of US coastline has been damaged by the estimated 7.5 million litres of crude oil spewing into the ocean every day.

Certainly BP has an enormous cleanup task to do before it can say that all is back to normal, but I think that the impact will extend well beyond the shores of Florida. BP will need to reorganise its international business to cover the costs. BP's spokespeople say that the company is strong enough to cope with the direct financial cost of remediation.

I don't dispute that; however, the US Senate has demanded that BP put $US20 billion in an escrow fund to cover future "payment of economic damages and cleanup costs", while under US environmental law BP currently faces $US14 billion in civil penalties that increases at around $US4000 for each barrel spilled. Already there has been over 67,000 civil claims prepared against the company, with 32,000 payments made.

Taking all this into account BP reportedly plans to raise $US50 billion to cover ongoing liabilities; $US10 billion from bond sales, $US20 billion in bank loans and $US20 billion in asset sales. Worse still is President Obama's insistence that BP must pay the wages of rig workers laid off by other firms because of the six-month moratorium on deepwater drilling in the Gulf. If pursued, BP fears it would be exposed to potentially limitless claims from anyone affected by the disaster. This could eventually bankrupt the company.

In Australia, BP accounts for 19% of the retail market and 17% of wholesale supply. It employs more than 5000 Australians, brands around 1400 service stations (225 owned and operated directly) and runs two refineries. By all counts, BP is very important to the Australian economy. If the Gulf of Mexico disaster is a game changer for BP in Australia, we need to consider why that would be.

Profitability & return on investment

One answer lies in overall profitability and returns on investment. I know that I have said it before, but the fact is that the downstream petroleum industry is under-recovering on both sales and assets. The last ACCC monitoring report released in December 2009 indicated that the return on sales for the downstream industry was 3.2%, while return on assets was 9.7%. In dollar terms, the downstream segment lost approximately $A480 million on the sale of petrol in 2008–09. As money leaks into the Gulf as quickly as the runaway crude oil, these are important figures.

ExxonMobil has shown that, even without an environmental disaster, operations in Australia are under scrutiny. In comments made days prior to announcing the 7-Eleven acquisition of 295 Mobil retail outlets, ExxonMobil's Australian chairman John Dashwood made clear the major oil company's position on the downstream petroleum industry when he said, "We're not in the business of being a shop."

Even if BP can weather the financial storm, it may suffer as much from market sentiment. At the time of writing the share market value of BP had fallen more than 48% since the disaster began, igniting concerns that it will become a takeover target. The Fitch ratings agency has taken BP's borrowing status down from AA to BBB, which is two rungs above 'junk' status. This has a significant impact on cost of borrowing, prompting meetings with international financiers, such as Blackstone, and the decision to hold back on dividend payments. The consequences of this on a struggling British economy could be dire, considering that BP contributes £1 out of every £6 of dividend received in the UK.

At the time of writing, the ongoing oil spill is only partially contained and there are many uncertainties. It seems to me that this unfortunate accident could have happened to any one of the world's many oil and gas production companies, and it may eventually impact on all the major oil companies to some extent.

I believe it is important for the Australian economy and petroleum industry that companies like BP remain viable. They are vital to continued choice in wholesale supply and for the many small businesses that operate as branded independents. I hope that, unlike the Beverly Hillbillies, BP in Australia does not become the victim of poor ratings.

Nic Moulis is the General Manager of the Australasian Convenience and Petroleum Marketers Association (ACAPMA). ACAPMA is an employer association representing the interest of distributors and retailers in the Petrol and Convenience industry.