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.


OPEC, a golden raspberry

OPEC, the oil producers’ cartel, turns 50 today, September 14, 2010.

To mark the occasion, OPEC’s Secretariat in Vienna has produced a lengthy brochure, with scrapbook photos and a fairly partisan version of the organisation’s history. 

OPEC's first meeting in Baghdad, Sept. 14, 1960 (Source: OPEC)

OPEC Secretary-General, Abdalla Salem el-Badri, sets the nationalistic tone in his introduction:

“It was therefore a heroic act by the Founder Members to come together in the Iraqi capital 50 years ago and decide that enough was enough. They could no longer allow the lifeblood of their economies to be drained” … by their colonial masters, in the shape of the “Seven Sisters”, the big oil companies that controlled world oil resources up to that point.

Writing in Foreign Policy magazine under the title “How to Ruin OPEC’s Birthday”, Gal Luft, an academic and former lieutenant colonel in the Israeli Defence Forces, takes the counterpoising position. Since the 1973 oil embargo, implemented to deter western support for Israel in the Yom Kippur war, “OPEC has earned a reputation as a club of greedy, non democratic governments whose oil ministers, who gather in Vienna every few months to set the price of crude, hold everyone else’s economic fate in their hands,” Mr Luft asserts.

Furthermore, Mr Luft observes: ” OPEC’s well-deserved reputation as a bully obscures another fact: For all its bluster, the group seems almost uninterested in actually getting all its oil out of the ground. Today, the cartel’s 12 members account for 78% of global oil reserves, but produce only one-third of the actual oil supply; the world’s non-OPEC producers, with little more than a fifth of the world’s oil at their disposal, pump twice as much. Even with the 2007 induction of two new members, Angola and Ecuador, who collectively produce as much oil each day as Norway, OPEC produces today less oil than it did before the 1973 embargo.”

Mr Luft’s recommendation for spoiling OPEC’s birthday is twofold: a longer-term move to electric vehicles and a shorter term law – for the US, at any rate – requiring cars to be flex-fuel capable, running ethanol and methanol with conventional petroleum products.

In the Financial Times, Javier Blas takes a somewhat more circumspect view, listing what he sees as the main challenges for OPEC. Having demonstrated that a technocratic approach works better than a politically-motivated one, the FT reckons that OPEC will need to replace its technocrat-in-chief in the next year or so, namely Saudi oil minister Ali al Naimi, who turns 75 next month. The cartel will also have to deal with the ramping up of Iraqi oil, which is targeted to rise four-fold over the next decade to 10m, assuming the country continues to stabilise and can garner the investment required by international oil companies. Finally, OPEC will have to work within a world that is looking for alternatives to oil – and fossil fuels in general – more seriously that at any time before.

But the piece closes with a quote that acknowledges a fact that was as true at OPEC’s birth as it will be when and if it reaches its centennial: we have no clue what the energy world will look like in 50 years.

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.

Hurricane season

As BP continues to work on its containment, the Gulf Coast oil spill is being given different senses of scope all the time. Two recent examples offer very different perspectives on the spill. Meanwhile, tropical storm Alex looks set to disrupt operations from afar.

The USA’s National Aeronautics and Space Administration (NASA) has released a timelapse series of pictures, taken from two of the agency’s orbital satellites. The pictures offer a space-based point of view of the spill, tracking it since its beginning as it spreads and changes shape due to weather conditions, currents and the use of oil-dispersing chemicals.

Meanwhile, a no less compelling ground-eye view of the spill’s consequences has been broadcast by Russia Today, filming in Louisiana. The video shows the aftermath of a rainfall which has left puddles of oil on the city’s streets.

Although they offer very different views of the disaster, both videos drive home its scale in a way that BP is unlikely to appreciate at the moment. Still, it’s not all bad news for the company. There had been concerns that tropical storm Alex, expected to become big enough soon to be reclassified as Hurricane Alex, would hit the area around the oil spill. However, the storm now appears to be heading towards Mexico, with its predicted trajectory carrying it well away from the spill area.

This is fortunate for BP; experts say that favourable wind and tidal patterns, as well as Mississippi River currents countering the flow from the Gulf, have spared the wetlands the worst of the oil. A direct hit by a hurricane on the area could hurl oil-soaked water inland, severely increasing the impact on the environment and the company’s far from glowing reputation.

However, the storm will not leave the spill unaffected. While BP may have avoided direct disaster, the company’s senior vice-president Kent Wells admitted that the storm is expected to make sea conditions too rough to connect various parts of the new floating riser system together, delaying its completion to the middle part of next week.

Coast Guard Admiral Thad Allen has said that the current operation of transferring oil onto the Discoverer Enterprise containment ship, which is currently siphoning around 28,000 barrels a day, could also be disrupted. However, he added that the storm was unlikely to affect the two relief wells that are currently BP’s long-term hope for stopping the leak altogether.

Aside from disruption to the relief effort, there has been disagreement over whether the storm, even at a distance of 600 miles, will have an adverse effect on the slick itself. Admiral Allen has claimed that the oil, which was generally heading east, has now turned north, already affected by the storm system. However, Dr. Piers Chapman, chair of Texas A&M University’s oceanography department, has argued that the storm may in fact have a positive effect, breaking down the oil slick into smaller patches that will evaporate more quickly.

Soon-to-be-Hurricane Alex will affect more than the physical aspects of this spill. The markets have already lurched in response to fears that it would hit directly, and failed to respond strongly to the news that it would not. Analyst Tim Evans has predicted that the approaching hurrican season will bring a “long and choppy summer” if that reaction is any indication.

Clearly, though, BP’s greatest concern will be a hurricane that affects the region directly. If that happens, not only will recovery operations be devastated, but there will be a far greater influx of oil than Russia Today recorded in Louisiana.

Tony’s a no-show

The spectre of the Gulf of Mexico extended to an annual conference in London this week – the World National Oil Company Congress – at which many of the top executives from national oil companies, such as Saudi Aramco, gather annually to mingle with their counterparts from the big international oil companies.

This year, industry folk lined up to offer BP sympathy, including the head of Libya’s state oil company and OPEC president, Shokri Ghanem, who even went so far as postulating that the spill may have been “exaggerated somewhat“. Surely, this was the perfect setting for BP’s beleaguered chief executive, Tony Hayward, to make an appearance? But no, Mr Hayward cancelled at late notice, leaving delegates, the press pack and environmental group Greenpeace disappointed. Steve Westwell, BP’s “chief of staff” stepped into the breach and did his best, offering BP’s condolences and expressing the company’s sorrow, but his address was interrupted twice by Greenpeace protesters (see the full video here).

Mr Hayward no-show sparked much debate. As the PR gaffs continue – an ill-advised sailing trip over weekend had caused another wave of outrage in the US – the official line was that Mr Hayward’s revised schedule prevented his attendance. It is possible that Mr Hayward was on route to Russia. Having navigated the company through a difficult dispute with its Russian shareholders in joint-venture company TNK-BP, Russia is now seeking assurances from Mr Hayward that BP’s investment in Russia will not be hit by the fallout from the spill. If Mr Hayward fails to convince the Kremlin as spectacularly as he failed to convince the US Congress last week, BP might find it has even more trouble on its plate.

Accused again

BP now has to cope with yet another accusation about its behaviour prior to the Deepwater Horizon disaster. This will not help the company’s attempts to emphasise that it was not alone in running operations.

BP’s battle with the series of damaging revelations that have emerged over the last two months has been almost as tough as its struggle with the Deepwater Horizon leak itself. Now, the company has to deal with accusations from a survivor of the original accident that BP and Transocean executives were told of a fault with the oil rig’s safety equipment weeks before the explosion.

A leak on one of the control pods, which help control the blowout preventer (the piece of equipment that was designed to mitigate a leak but which failed) was not fixed, according to rig worker Tyrone Benton. Instead, the device was shut down and a second one relied on in order to avoid a costly shutdown of operations, which at the time were costing BP around $500,000 a day. In other words, this development adds to the pile of accusations that BP wilfully put profit over safety. To cap off the PR nightmare, Mr Benton is now suing both companies.

BP has laid responsibility for the equipment on Transocean, while Transocean have countered that they tested the device successfully prior to the accident. However, such details may get lost amid the increasing tendency of the public to focus blame on the British company.

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.