Is This the End for BP?

Dec.15.10 | About: BP p.l.c. (BP)

The U.S. Chemical Safety Board (CSB), an independent federal agency charged with investigating chemical accidents, will hold a public hearing on Wednesday, December 15, as part of its ongoing investigation into the causes of the BP (NYSE:BP) Deepwater Horizon drilling rig explosion and fire which occurred on April 20, 2010, killing 11 workers.

The energy business was already highly regulated before this year’s BP oil spill. The oil industry is bound to become even more highly regulated after investigations into the causes for the oil spill are completed. The days of wildcatters with an "anything goes, as long as you hit a gusher" attitude, are over.

The dark chapter of the Teapot Dome scandal in the petroleum industry occurred almost 100 years ago, but our government and the oil industry have apparently not learned their respective lessons. Heads were turned when shortcuts were taken by the drillers because the payoff would be so much greater than the fines -- if any would ever be assessed.

The costs for the clean-up are mounting -- estimated at over $100 billion and still counting. Just like how the size of the oil spill was initially estimated to be 5,000 barrels per day (there are 42 gallons in a barrel of crude oil) and it turned out to be at least 10 times more than that. The federal government has now estimated that about 2.6 million gallons of crude oil per day spewed from the well, declining to about 2.2 million gallons daily before the well was finally capped in mid-July 2010.

BP is trying to limit the damage expenses and its liability in any fines being assessed, which is calculated on the actual amount of crude oil spilled into the Gulf of Mexico. It has mounted a new challenge to U.S. government estimates of how much oil actually flowed from the runaway well deep below the destroyed deep-water drilling rig. The issue will be critical in determining the size of federal pollution fines the company now may have to pay, which are estimated to be $5.5 billion.

BP is arguing that the government overestimated by as much as 50% the amount of oil that spilled. If successful, the argument could reduce BP's likely fines under the Clean Water Act by as much as $2.7 billion.

Now it’s the banks that will rule the roost and decide if BP gets to stay or does not stay in business. HSBC (HBC) and Standard Chartered (STAN) are among a group of banks that contributed to a credit facility for BP when it was in the eye of the storm in May. Credit Suisse (NYSE:CS) Morgan Stanley (NYSE:MS), and Goldman Sachs (NYSE:GS) also contributed, and UBS (NYSE:UBS) is still BP’s corporate broker.

BP’s in-house mergers and acquisitions department has already been busy divesting parts of the company, for which it will receive a premium price in its efforts to raise $30 billion by the end of 2011. That leaves the remainder of the company with parts that may or may not be as profitable affecting its overall viability as a fully vertically-integrated oil company in a very competitive, cutthroat industry.

A significant drop in volume of gasoline sold by BP, due to the negative impact from the summer backlash to the oil spill, has somewhat abated after the capping of the oil well. However, its pricing posture in the retail market has not been as competitive as it was before the oil spill.

That has BP/Arco dealers very concerned that they will not be able to sustain the high volumes required by long-term supply contracts at their stations. Adjustments in BP's “We are the low price leader” policy will have a negative effect at renewal time of those supply contracts, especially with big chains like The Pantry (NASDAQ:PTRY). Arco, the brand still being used on most of its west coast stations, publicly burned its proprietary credit cards in a widely-advertised promotion about 30 years ago.

In the end of this scenario, BP will continue to slowly bleed more money and eventually having to constrict its business to the basics of exploring for and producing crude oil.

Disclosure: No position