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BP races to contain damage, limit costs

May 3, 2010 |  5:02 pm
BP is in a race not only to keep environmental damage to a minimum, the London company is working to limit costs, which analysts said could easily exceed the $3.5 billion needed to clean up after the Exxon Valdez, if an untried and untested temporary fix failed in the next two weeks.

Even if the temporary solution succeeds, which involves placing a kind of canopy over the well that looks like an inverted funnel, the costs will still be very high.

Fadel Gheit, managing director of oil and gas research for Oppenheimer and Co., said in a note to investors Monday that if BP succeeds in stopping the leak within the next two weeks, “costs could be under $1 billion. If all failed until the relief well is completed in 90 days, costs could be significantly higher.”

Significantly higher than the $3.5 billion it took to clean up after the Exxon Valdez spill? Gheit said yes, in reponse to that specific question, in an email.

Gheit added that BP may have a lot of bills coming in that go beyond the actual clean up. That’s because of all the important infrastructure in the Gulf area, and everything that travels through it, if ports and shipping are shut down becaused of widespread contamination.

According to the Energy Department, there are four power plants that draw water directly from the Gulf for their cooling systems. Oil could foul or damage them. Eleven refineries could be affected if shipping is stopped, by running out of oil. If oil production platforms are shut down, it will stop operations representing 24% of the nation’s crude oil production.

Federal law might keep a lid on lost wages and economic suffering. A law passed in response to the 1989 Exxon Valdez spill in Alaska makes BP responsible for clean-up costs. But the law sets a $75 million limit on other kinds of damages. Analysts said it was unclear whether that law deals with economic and commercial damage.

“BP is trying several approaches to achieve that -- some for the first time -- but if they are unsuccessful, the spill could spread with catastrophic consequences for the environment and the economies of the Gulf States,” Gheit said.

BP won’t be able to rely on any insurance company for help shouldering the costs. The company self insures its operations “except in those circumstances in which it’s mandated by other regulatory or partner-related constraints,” BP’s Chief Financial Officer Byron Grote told investors and analysts last week during the company’s quarterly earnings call.

“So with respect to this specific incident, it’s all BP self-insurance, which we’ve determined over the course of time is a much more economic way for a company like BP to manage its risk factors,” Grote said.

--Ronald D. White
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