Wednesday, June 16, 2010

So... what's going to happen with BP and how will the government respond?

2) What are the business implications?  What are the political implications?  And, most importantly perhaps, how are these intertwined?

Team Hayword vs. Team Obama.  Let's not make it a draw a la World Cup.  Image source.

As with most national catastrophes, in this situation Big Business and Big Government has seemed to be in cahoots.

BP is in shambles as of late.  Their stock price has plummeted in accordance with their involvement with this disaster.  Though once lauded by those less knowledgeable about alternative energy as seeming to put emphasis on renewable energy, they have proven that "Beyond Petroleum" wasn't BP but BS.  The question remains though, can BP return from this?

The US government, meanwhile, has also been criticized and blamed, though also lauded and praised.  President Obama has been accused of using this event to further push his own agenda, particularly when it comes to cap and trade.  He has also been praised for taking a strong stance against BP's nonsense.  (Though, as with most events in politics, also criticized by Britain for trying to ruin their economy.  All right, England, let's save it for the World Cup.)  The question from this stance is will the government use this disaster to finally and seriously attempt much needed energy reform or will it allow Big Business to roll all over it, as it often does, and we go back to business as usual?

Read on for a breakdown of what BP's business implications are and what government is doing.

What are the business implications?

Image from WSJ.

What's going to happen to BP?
It's still up in the air whether the world's fourth largest company in the world (and third largest energy company in the world) can even survive this.

It looks likely that BP will end up riding this storm and surviving to provide energy for future generations, though they may be bought out by another energy company now that their share price is so low.

It is very likely that major BP executives will be demoted or fired.  It's unlikely that any personnel will be fired until the crisis is over and accounted for, but after the dust settles, so to speak, there's a chance that Tony Hayward will be ousted.  What is more likely, however, would be a change in operations or execs along those levels.

It is still being debated how much they will actually have to pay.

What has already happened to BP?
BP's share price has been plummeting ever since the oil spill, a decrease around 40% as of most recently, and is now hovering around $34.  (On April 20, the share price of BP was about $60.)

For those less business-savvy, this means that:
1) current shareholders are losing major capital value.  They'll either be selling their shares now (further pushing the price down because of the supply-demand curve) or just waiting it out.
2) BP is losing a lot of value.  They have less money to spend on business operations.
3) BP is less able to get loans.  Their credit is questionable and it doesn't look as if banks will be making major loans to them.

Granted, BP has a lot of assets ($67mm in current assets and $235mm in total assets), so they should have enough capital to wade, slowly, out of this mess.

What about their shareholders and investors?
As stated above, shareholders are suffering.  Their share prices are down a lot - so if a shareholder had purchased ONE share before April 20, they would have lost $26 if they sold it today.  (Obviously, not a great investment strategy.)

The other way that shareholders make a profit is through dividends.  The US government has been pressuring BP to stop paying dividends until the mess is cleaned up, though only BP can decide whether to issue dividends.  It obviously, from a PR point of view, looks pretty bad if BP offers dividends, spending tons of their cash on hand, to give to shareholders.  Dividends are meant to be a sort of reward to shareholders for investing in sound business practices, something which I am loathe to think BP has done.

It has just been announced that BP has set up a $20 billion victim's fund and has stopped the payment of dividends for now.

They will decide whether to issue their dividends after their senior board meeting on Monday and after the CEO's meeting with President Obama.

This being said, the dividend policy could be terrible for British pension funds (funds meant to raise money for individuals' retirement funds, usually in large pots), which receive an estimated 1pound for every 7pounds they receive in dividends from FTSE 100 companies.  

On the flip side, some think that, since it looks likely that BP will survive this mess, BP is becoming a "buy" since it's current price is so low.

How will this affect other energy companies?
So far, other oil companies are trying to distance themselves from BP, claiming that this was a preventable accident and hoping that the US government won't try to limit offshore drilling any further, therefore allowing them to continue their business practices.

Though we don't have access to the inner workings of these companies' boardrooms, it seems that there is a slight chance these companies will try to be more careful about oil spills, though, as we all know, "the Gulf is a very, very big ocean."

Let's try to hit BP where it hurts - their wallet.

As of 2007, BP owned only 700 gas stations that beared its name and logo - and BP had made plans to sell them and to focus on extraction and refining oil.  The other 10,300 gas stations are franchises - boycotting them really only hurts those managers, mostly small business owners.

These franchises get to put the BP logo on their store because they use a specially made set of BP additives in their gas, added only after the gas is delivered to the station, which sends maybe a few cents per fill-up to BP.

For those trying to boycott BP oil, that means you're going to have to stop using gas period.  Gas refined by BP goes to stations all over the world, regardless of whether it's a Chevron, Exxon, or Texaco.  In fact, it's nearly impossible to tell what company refined your gas once it gets to the gas station, or even before, because gas is mixed from multiple sources before delivery.  Any given tank of gas could be filled with gas refined by any Big Oil company.  In this way, it's a very savvy business decision to partner with other oil companies, even indirectly, because no company can really be hit hard by a boycott of their retail stores.

[Note: Big Oil companies are generally considered to be ExxonMobile, Royal Dutch Shell, Chevron Corporation, ConocoPhillips, Total S.A., and, yes, BP.]

What I think the most important note to make is summed up by, Kert Davies, research director of Greenpeace, who states, "[On my way home], there [is] a Chevron, a Shell station, Exxon and BP.  I can think of really good reasons to boycott every one of those."

It's also important to note that Greenpeace, some of the greenest hippies I can think of, has not decided to boycott BP, whereas Public Citizen, a left-wing advocacy group which casts a very wide net as far as the issues it decides to protest are concerned and boycotts virtually everything, has decided to boycott.

So how do you really hit their wallets?
The only way to hit their wallets is to stop using oil and gas, period.  This means switching to a car that uses less gasoline or a hybrid (or better yet, a bicycle).  To stop using so much oil, you'd need to either stop using electricity (back to the Stone Age!) or to invest, and push government to invest, in alternative energy sources.

How will BP deal with the public?
BP has undergone some huge public backlash.  I think it's important to note that BP has been censoring images of defenseless animals trapped in BP's mess.  They have also purchased the search results on all major search engines.  They are trying to limit the amount of information that the public has access to, to try to protect their skin.

I think it is disgusting and cowardly.  The first images that pop up are of workers with a trash bag on white, sandy beaches.  Yes, they're cleaning up, but the beaches don't look anything like that and most of the images of oil-slick covered animals are conveniently cut out or blocked.

I know these images are painful to look at, but they're really important.  Ignorance really isn't the answer.  Just because you can't see these animals, literally drowning in oil, doesn't mean it's not happening.  It's a business move by BP, who hopes to block these images so people will forget and continue to line their pockets.  In fact, it's important to look at these images, to remind yourself that people really are affected by this and that there are real consequences that need to be dealt with and can't just be brushed under the rug.

What are the political implications?
What has the US government done?

On May 27, President Obama placed a 6-month moratorium (halt) on offshore drilling.

This, and President Obama's increasingly harsh criticism towards BP, has been the only concrete government action.

What sort of implications will a moratorium have on individual states?
Interestingly enough, the state which has perhaps the most to lose from the oil spill, Louisiana, does not support the offshore drilling moratorium.  They are more concerned with their weak economy, which depends on offshore drilling to exist.

It is here in which I'll say to Louisiana, with all due respect, open your eyes and use your brains.  Yes, obviously the economy is your number one concern.  You can't be concerned with anything else if your people can't afford to get the things they need to survive.  But you also need to think about the long term.

Offshore drilling can, and obviously does, lead to terrible environmental disasters, which tend to ebb away at other industries (take note, fishing and tourism) but also other necessities (water supply, which leads to food supply).  Offshore drilling is a short term fix for a long term problem.  And, in the farther future, what's going to happen when you're out of oil to drill but you've also lost all your marine life, have a polluted water supply, and have dangerous chemicals in your food system?

It's time to wake up.

Other states' stances: Florida supports it because they don't have offshore drilling but are still suffering from the very real, tangible consequences.  Texas criticizes it because they feel they are losing jobs.  Mississippi criticizes it because it is hurting their economy.  Alabama also criticizes it.

Does this mean that the moratorium is a bad decision by President Obama?
Not necessarily.  Yes, the overwhelming criticism needs to be accounted for (and, I suppose if you're of "that sort," celebrity Sarah Palin also criticizes it) but it also needs to be analyzed.  These states are looking out for their bottom line, and, like most major organizations (of which a state's government is definitively) that's all they care about.  But who will be the voice for the millions of people and creatures who are suffering from this?  Ideally, you should believe that you owe something to future generations, though this seems to be a morality issue.  I personally think that it would be hasty and unwise for President Obama to do anything BUT have this 6-month moratorium.

Look at it this way: you waiting 6-months isn't going to change the amount of oil, which has been in the making for millions of years and which is running out, that remains under our ocean beds.  But us, as a nation, waiting 6-months and really taking the time to analyze the situation and decide: what happened, what we need to happen, and what this means for our economy and our people - is worth much much more than any amount of money we could make by drilling.

What do you think will the US government do for the future?
It's all up in the air right now.  The worst thing, from BP's point of view, that could happen would be that the federal government would ban BP from operations in US soil and waters.  Personally, I think this would be a bit much.  BP is still a major corporation with a lot of expertise, albeit flawed, in energy sourcing.  It is, however, a possibility.

Or, perhaps nothing will happen, though that seems highly, highly unlikely.

BP is likely to have to undergo a lot of government scrutiny.  Hopefully, in the wake of this, the government won't exempt oil companies from doing an environment review, like they did for BP. The government will also need to review much of its energy policy, which I will address next.  Before I get to that, however, it's important to address something that's been in the news lately, the $75mm cap.

There is a federal law which states, in the instance that an oil company spills oil, their damages are capped at $75,000,000, which means that even if they have $2,000,000,000 ($2billion), they will only pay $75mm.  The federal government is, rightly, thinking of removing this law in light of this disaster.

Note, I'm not much of a government person.  But this is being pushed by Democrats and criticized by Republicans.  I find it strange, because the $75mm damages cap seems like more federal government (which Republicans usually dislike) but, I suppose, it also supports Big Business, which Republicans are really all about.

There is a lot of confusion over the cap, which I'll try to explain now.  The $75mm cap is limited to damages, which means people suing over losses or whatnot and does not include cost of clean up .  There are also a lot of loopholes, which those who are interested in law can read about HERE.

How will this affect future energy policy?
This is a more interesting question, because many environmentalists or environmental-supporters hope that this can be used to implement a real energy policy.  Other more moderate, or perhaps more cynical, believe nothing will happen.

Oh yes, I know everyone's been concerned with immigration reform (thanks, Arizona!) and, before that, healthcare, but energy reform has been hovering around in the political background.

Senator Murkowski (R-AK), tried to pass a resolution which would take the power to regulate carbon from the EPA.  It failed, 47-53.  She argued that politically accountable individuals, i.e. Congress, should develop policy and not "unelected bureaucrats."

To which I say, Senator, you're an idiot.  Thank goodness this didn't pass.  I really don't want people who are politically accountable to be in charge of our carbon future.  I don't want Senators and Representatives, very few of whom know anything about the intricacies and science behind climate change, a scary amount of whom still don't believe in climate change because it snowed on some mountain in northern California last year, to be in charge and acting like experts on our nation's climate.  I understand why it almost passed, because government is full of self-important and self-serving individuals, but I'm glad clearer heads prevailed.

It seems unlikely, as conceded by the New York Times, that the oil spill will act as an impetus on climate change.

Image still from Love Actually.
What does this mean for traditionally cozy British-American relations?
Now that the World Cup showdown extravaganza is over, it's back to BP vs US.  After President Obama said he wanted to know "whose ass to kick," tensions have been all a flutter.

[Note: President Obama's words have been taken madly out of context.  Though I still think he's a badass, in context, it's a lot less impressive.  The full quote is: "A month ago, I was meeting with fishermen down there... We talk to these folks because they potentially had the best answers, so I know whose ass to kick."]

President Obama has been on the attack, as he probably needs to be.  (It wouldn't really look good, regardless of whether he was Republican or not, if he just said, "all right, BP, carry on.")  He has taken to increasingly critical statements about BP, which has tickled British PM David Cameron the wrong way.  Another (seeming) snub came after the US turned down British offers to help send supplies for the clean up.

To which I say, come on, England.  Just cause we kicked your butt at soccer (yeah, it was a tie, but it was still a butt-kicking coming from us) and also we kicked your butt during this little war back in 1781, doesn't mean we're always out to get you.  (Though, I'll concede, Hugh Grant >> Billy Bob Thornton.)

As President Obama has said, the US is out only to get BP, not to attack the great country of England.  It would be like if England criticized us for the child labor of Nike, or for Wal-Mart's questionable labor practices.  Though, I guess everyone really criticizes the US, so maybe they just need to get thicker skin.

Tensions, regardless of the reason, are definitely building up with public anger towards BP, which is still in its heart of hearts, a very British corporation.

How will these be intertwined?
What does this mean for the traditionally cozy relationship between Big Oil and Big Government?
The ties between Big Government and Big Oil (or, to be more accurate, Big Business) are too strong to be terribly affected by disasters like this.  I know that's a sucky thing to read, but it's historically true.  But who knows?  Perhaps this will be the tipping point.

Dick Cheney, who has had huge ties with aforementioned oil services company, Halliburton (which actually worked on Deepwater Horizon before the explosion) and was also, more famously perhaps, Vice President under President Bush, has been notably silent on this issue, even though he acted as a major voice on government energy policy (or, I suppose more accurately, oil policy).  Some sources speculate that Cheney feels that this is a non-issue or perhaps that he doesn't wish to draw attention to the very pro-oil policies during his administration.

Whose fault is it?
It's BP's fault for failing to implement safe, and leak proof, operational measures.  It is the government's fault for looking the other way and allowing BP to slide under the rules it already had in place to make sure things like this don't happen.  Most unfortunately, however, it is YOUR fault.  The high demand for cheap energy has caused BP, as well as any other Big Oil company, to engage in these practices (re: supply-demand curve) to provide.  If WE take away demand, they won't supply.

As a side note, for all you business-major-haters out there (and I know there are a lot of you), it's of my opinion that business and finance in alternative energy is going to be one of the largest and most important industries in the next 50 years.  We need more people in business who understand energy and the environment in order to make any real difference in energy policy.

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