A Gonzo take on BP

Rolling Stone’s Sept. 30 issue features a new angle on BP-as-corporate-villain by Matt Taibbi, the magazine’s Hunter S. Thompsonesque writer, who, starting with his now famous “vampire squid” take-down of Goldman Sachs, has pushed business journalism in a fearlessly irreverent direction.

 The opening paragraph sets out the premise clearly:

It was sickening enough when British oil giant BP set new standards for corporate scumbaggery in the Deepwater Horizon oil spill, turning the Gulf of Mexico into its own personal toilet and imperiling entire species of wildlife in an attempt to save a few nickels. But with the Gulf geyser finally capped, there’s still a way for BP to cause an even more unthinkable disaster: an AIG-style, derivative-fueled financial shitstorm.

The risk, then, is primarily a Wall Street one: that the insurance market for debt – credit default swaps (CDS), which can also be characterised as a market to bet on (or hedge) the risk of a debtor defaulting – would amplify many-fold the impact of BP going into bankruptcy. Taibbi explains it in colourful fashion:

If a CDS is two bankers sitting on a bench placing bets on whether or not the oil company across the street defaults on its loan, a CSO [collateralised synthetic obligation] is a giant basket of those CDS bets whose contents can be chopped up and sold as securities-like products to whatever moron is interested in buying them.

With all the amoeba-like variations on bets against BP’s debt, Taibbi finds out from Moody’s, one of the main debt rating agencies, that almost one-in-five CSO’s in circulation have a link to BP.  The bottom line: a BP bankruptcy, or near bankruptcy, could have an effect on the corporate debt market similar in size to that of AIG’s near-death experience, though with perhaps less of a ripple effect through the world financial system.

The question, then, is what risk of BP going bankrupt? Clearly, the perception of that happening has receded as the company has come to grips with the Macondo gusher, finally sealing it last weekend. BP’s shares have recovered considerable ground since their nadir in the summer, rising from below £3 at their London Stock Exchange low to above £4, though still well off their highest this year above £6.50. In the debt market, as Taibbi acknowledges, the CDS rates (the cost of insuring the debt) have eased back to 240, two-thirds lower than the peak but still some 50-times higher than where they were before the blow-out.

In sum, Taibbi’s point is that there is a lingering risk that BP might try to choose bankruptcy as a way to avoid — “weasel out of” — paying liabilities for the Gulf spill if they reach far beyond the US$20bn the company agreed with President Obama to set aside in the summer.

For a company of BP’s size and resources, the bankruptcy scenario is far-fetched, a fact Taibbi acknowledges:  “It may very well be that BP won’t go bust — or that, even if it does, it won’t cause a financial catastrophe.”

But his point, ultimately, is about the unquantifiable nature of the risk because of the murky ways that banruptcy law, but more particularly the derivatives markets, work. BP’s Gulf spill saga will run and run, much as Exxon’s Valdez disaster has done, and while the bankruptcy scenario fades it is still a plausible one.

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BP state’s its case

BP, having plugged the hole in the Gulf of Mexico and staunched the haemorrhaging of its market value (see share price chart), has now issued its take on the causes of the disaster last April, when a hydrocarbons leak from its Macondo oil well led to an explosion, a subsequent fire and the sinking of the Deepwater Horizon rig, with the death of 11 workers and an 87-day well gusher that resulted in the worst crude oil spill in US history.

Partial recovery

The full report can be read here and BP has even produced a full video presentation of its findings as part of its efforts to make its case. The company puts forward eight “key findings” describing a “causal chain of events” involving “various parties” that led to the explosion, and offers recommendations of how to prevent similar disasters in future.

Inevitably, critics say the report is BP rationalising a disaster for which it bears ultimate responsibility as operator, even if there were shortcomings among its sub-contractors and in the oversight regime for oil drilling more generally. The report will be weighed against others that are yet to be concluded, especially the national commission ordered by President Barack Obama in May, which is due to report within six months of its first meeting in mid-July.

But the legal proceedings regarding the spill – not only claims on BP and BP’s defence of those claims, but also the claims and counter-claims already being pursued between BP and its sub-contractors – will go on for years, so the report can also be seen as part of BP’s legal defence process too.

For most people, references in BP’s report to “the annulus cement barrier” and “shoe track” and “overboard diverter line” will mean little. But it is clear that there were a series of mistakes made during what should have been routine engineering operations and a failure to recognise warnings signs and to take action.

The report concludes, “The [investigation] team did not identify any single action or inaction that caused this accident. Rather, a complex and interlinked series of mechanical failures, human judgments, engineering design, operational implementation and team interfaces came together to allow the initiation and escalation of the accident. Multiple companies, work teams and circumstances were involved over time.”

In BP’s press release, outgoing CEO Tony Hayward similarly spread the blame. Commentary has focused on his statement – “To put it simply, there was a bad cement job …” – as a clear reference to Halliburton, the company in charge of that operation. There is also reference to Transocean, owner of the Deepwater Horizon rig, and failure of its staff to recognise early warnings signs. No doubt both companies will have a response.

Clearly, the report is only the beginning of the disaster’s Phase II – the recriminations – which will end only after all of the reports have been issued, mulled over and ruled upon. The final phase – the implications – can then begin.

Frankenfuels

Under Steven Chu, the US Department of Energy (DoE) has never been so science-friendly. DoE has created and funded an idea’s incubation unit and has been busy with, in the energy secretary’s oft-quoted phrase, its “hunt for miracles” to transform America’s energy landscape.

The most substantial backing from the DoE’s Adnvanced Research Projects Agency – Energy (arpa-e) so far has been the package of grants, totalling more than US$92m, it announced in July. Among these, the largest single grant was one of more than US$5m to HRL Laboratories (formerly Hughes Research Laboratories), whose partners include GM, for a project to develop Gallium Nitride, a semiconductor material, to make small, efficient battery switches so that electric vehicles can interact more efficiently with the grid. Most of the grants on that list are to similar projects aimed at better batteries, more efficient grids, etc.

Impressive as these innovations promise to be, others working outside of the DoE’s aegis offer truly inventive breakthroughs. A team led by Michael Strano of the Massachusetts Institute of Technology, has used a combination of nanotechnology and bioengineering to reproduce nature’s “self-repairing” mechanism for solar cells. As Science News describes the process on its website, it could lead to solar cells with an indefinite lifetime:

The researchers began with light-harvesting reaction centers from a purple bacterium. Then they added some proteins and lipids for structure, and carbon nanotubes to conduct the resulting electricity.

These ingredients were added to a water-filled dialysis bag — the kind used to filter the blood of someone whose kidneys don’t work — which has a membrane that only small molecules can pass through. The soupy solution also contained sodium cholate, a surfactant to keep all the ingredients from sticking together. 

When the team filtered the surfactant out of the mix, the ingredients self-assembled into a unit, capturing light and generating an electric current.

Just as remarkable, Synthetic Genomics is researching DNA engineering that may lead, as the New York Times reports, to a way to transform coal into natural gas or to cut out the middle man, as it were, so that plants can produce fuel directly rather than via an expensive and energy-intensive refining process. It is getting substantial backing from industry:

Exxon Mobil is giving Synthetic Genomics $300 million in research financing to design algae that could be used to produce gasoline and diesel fuel. (The new greenhouse will be used for that research.)

BP has invested in the company itself, turning to Synthetic Genomics to study microbes that might help turn coal deposits into cleaner-burning natural gas. Another investor, the Malaysian conglomerate Genting, wants to improve oil output from its palm tree plantations, working toward what its chief executive calls a “gasoline tree.”

Minerals mismanagement

An article in Rolling Stone has criticised the scale of corruption in the Minerals Management Service, the body responsible for regulating the oil industry, and accused the Obama administration of failing to act despite knowing of problems.

Barack Obama has been keen to lay criticism for the Deepwater Horizon disaster firmly on BP’s doorstep (to the extent that he was accused of xenophobia by one British ex-minister, now a lord). But a lengthy article in Rolling Stone magazine now claims that the reason for this is not mere political expediency, but awareness that his administration is directly responsible for failing to deal with the very cronyism and corruption at the Minerals and Management Service (MMS) that Obama himself has criticised, and which contributed to the failure of regulation of Deepwater Horizon.

While recognising that BP was at fault, the article is scathing about the MMS, which has already been accused of being too close to the industry it regulates. According to Rolling Stone, the Bush years saw the MMS descend “into rank criminality” where “MMS managers were awarded cash bonuses for pushing through risky offshore leases, auditors were ordered not to investigate shady deals, and safety staffers routinely accepted gifts from the industry”. The MMS apparently provided the Deepwater Horizon operation with a “categorical exclusion” – an exemption from environmental review that is supposedly applicable only to activities that have “no significant effect on the human environment.”

But the article is also critical of the Obama administration, including Secretary of the Interior Ken Salazar, for failing to deal with a corrupt culture of which they were aware, and for pushing through an increase in offshore drilling. It cites MMS employees who referred to their working practices as being like “a third Bush term”, despite the new president’s rhetoric. Although the administration was fairly quick to condemn corruption at the MMS and seek distance from it after Deepwater Horizon (the body is due to be broken up by the administration, separating its royalty-collection personnel from its safety and environmental regulators), Rolling Stone charges that lapses in standards were already known about, and that “a top-to-bottom restructuring of MMS didn’t require anything more than Ken Salazar’s will: The agency only exists by order of the Interior secretary.”

Obama used part of his recent Oval Office address to argue that the accident has highlighted the incentives of ending “America’s century-long addiction to fossil fuels”. But if this article is correct, then Obama’s idealistic rhetoric is worth very little. And even if that view is a little one-sided, the administration will struggle more than ever to get its energy policy accepted if the public can be convinced that their President’s words are not in step with his actions.

BP Disaster: Sticking the knife in

Writing the MT Diary in Management Today, a UK magazine, the director of the London School of Economics, Howard Davies, sticks the knife in with some harsh and personal words about BP’s head of communications, a former editor of the Financial Times, Andrew Gowards. Mr Davies writes:

Gowers, you may recall, resigned as editor of the Financial Times at the end of 2005 over ‘strategic differences’ with the board. The differences amounted to the fact that the board wanted the FT to be an authoritative and successful paper, whereas … (it now is once more under Lionel Barber).

Gowers then became head of public relations for Lehman Brothers, required to spin his way through the world’s biggest bankruptcy. Having failed in that task, he wrote a couple of distasteful ‘kiss and tell’ articles in the Sunday Times, which almost made one feel sorry for Dick Fuld. Then he moved on to pastures new and signed up as head of external relations for the new dean of London Business School, Robin Buchanan. Buchanan lasted six months, so Gowers was once again on the market.

You guessed it. He is now running public relations for BP. And it took him little time to work his particular brand of magic. He has become an impeccable leading indicator of disasters ahead. If he turns up next advising the Greek government, you will know what to do.

Underpowered Power Act

The American Power Act, unveiled before the Senate yesterday, attracts criticism from both sides of the energy debate.

The American Power Act was unveiled yesterday to lukewarm reception. The bill, crafted by Sen. John Kerry (Dem.) and Sen. Joseph Lieberman (Ind.), suffered setbacks recently when disagreement over offshore oil drilling seemed likely to kill it before completion. The bill does include provisions for expanding offshore drilling , albeit with a veto for any state against drilling within 75 miles of their coastlines, and a promise to give states which allow drilling 37% of federal royalties.

Sen. Kerry made an appeal to environmentalists to support the bill, calling himself a “true believer” but adding that “our planet can’t wait for the perfect bill”. Nevertheless, a number of environmental groups came out in opposition almost immediately.

The bill has been criticised for its inclusion of a $2bn a year incentive for controversial carbon capture and sequestration (CCS), on top of the $2.4bn already allocated. Greenpeace denounced a “dirty energy bailout”, with director Phil Radford claiming that it catered almost exclusively to the fossil fuels industries.

If so, then those industries haven’t realised it yet. Shell, BP and ConocoPhillips, all of which Kerry and Lieberman have claimed as supporters of the bill, were notable by their absence at the unveiling. Shell put out a statement praising the legislation, but others were more guarded in their responses.

The White House made its expected endorsement , although it managed to reference the bill by the wrong name, calling it the American Clean Energy and Security Act, the title of last year’s House cap and trade bill.

Joining the ranks of the unenthused was Sen. Lindsey Graham (Rep.), who was co-sponsor of the bill before pulling out recently. Although he restated his support for the broad concepts of the bill, he doubted its ability to garner bipartisan support. Despite Sen. Graham not offering his support, Sen. Lieberman said that he expected the Republican to vote for the bill if it came down to a close vote.

Hopes are hinging on the support of moderate Republicans who accept the need for a reduction in greenhouse gas emissions. But Senate Republican Leader Mitch McConnell hinted at the extent of potential Republican enthusiasm when he called the bill “little more than a job-killing national energy tax”. And with Republicans who previously have been sympathetic to climate action, such Sen. John McCain and Sen. Olympia Snow, rejecting the American Power Act almost immediately, chances look slim for the necessary bipartisan support.

US climate bill shrinkage

The Kerry-Lieberman climate and energy bill is likely to face difficulty.

Hopes are low for the climate and energy bill due before the US Senate tomorrow. The bill has already been delayed once by sponsors Sen. John Kerry (Dem.) and Sen. Joe Lieberman (Ind.) after their Republican co-sponsor Sen. Lindsey Graham withdrew amid rows over immigration reform .

It was hoped that provisions allowing for expanded oil drilling would garner the minimal Republican support needed to avoid a filibuster. But these are now believed to be politically untenable for many Senate Democrats due to the ongoing BP spill in the Gulf of Mexico. Still, both Sen. Kerry and Sen. Lieberman have argued that Deepwater Horizon will actually help their bill , a view apparently endorsed by the White House .

There may be something to this idea. A number of recent polls show that public opinion, at least, has turned in favour of the bill. One survey, conducted by Obama pollster Joel Benenson, suggested that a majority of Americans would be more likely to vote for a Senator who supported the bill, and a slim majority (51%) would be less likely to re-elect a Senator who opposed it.

Of course, this is all based on a bill that has not been seen by the public yet. Myron Ebell of the Competitive Enterprise Institute has argued that, whatever the impact of the spill on public opinion, one incident will not affect the fact that most Republicans aren’t going near the legislation. Expanded drilling will still be the only chance to attract some Republican support, but it will remain a bill-killer for too many Democrats. In other words, there will be deadlock.

This seemed to be the tacit admission by Obama’s climate envoy, Todd Stern, when he conceded that US representatives to next December’s global warming summit in Cancun, Mexico, — which is aimed at finiding a successor to the UN’s Kyoto Protocol — might well attend without any domestic legislation to back them up. Stern maintained that that while legislation would be “useful, yes, but a good outcome is obtainable one way or another.” Given the disaster of last December’s Copenhagen effort, it is a weak claim.

Meanwhile, Senate Majority Leader Harry Reid (Dem.) floated the possibility of a “smaller” energy bill, should the Kerry-Lieberman bill fail. Sen. Reid said that he had potential support from a “couple of Republicans” for a bill that would promote renewable energy, but avoid putting a cap on greenhouse gases.

A spokesman for Sen. Reid said that a smaller bill would be based on the American Clean Energy Leadership Act, which was approved by the Senate energy committee with Republican support last June. But since that legislation allowed for wider oil-and-gas drilling in the eastern Gulf of Mexico it would still face the same potential stalemate as the bill which is due to be unveiled tomorrow.

So despite optimistic language from its sponsors the Kerry-Lieberman bill is likely to struggle, whatever stance it takes on expanded drilling.