Let's face it, it is not unexpected to see stories about rising oil prices in the news, is it? In fact, high oil and gas prices have been on everyone's lips for the last several years at least. People get tetchy about it, and not just investors either.
Consider the amount of ink that has been spilled on the subject of the "Peak Oil" Crisis, the idea that oil production is heading into a period of terminal decline as the earth is finally stripped of its last remaining fossil fuels. A very brief search for "peak oil" in books on Amazon.com brought up 2,834 results!
Some prophets of doom suggest this oil shortage is already underway, with oil production having "peaked" in 2002. In addition, the alleged Western greed for fossil fuels has been blamed for dozens of wars (or the lack of) from Afghanistan to Sudan. I will leave it to the reader to investigate these claims and make up their own minds.
Suffice to say that public opinion is highly volatile when it comes to the supply and price of oil and gas. This is no surprise when you consider that fluctuations in oil and gas prices directly affect billions of people all over the planet, both in terms of vehicle fuel costs and gas central heating bills. This is before you even give a thought to government tariffs and duties on fuel.
I for one have seen my gas heating bill double in cost twice since 2009, one of many millions affected by the double assault of high gas prices and several unprecedentedly cold winters. In this climate of economic downturn and rising cost of living, it is no wonder that large oil and gas companies such as BP (BP) walk a very unstable tightrope as far as public relations are concerned.
BP and its competitors, among the oil and gas "supermajors" like Chevron (CVX), Exxon Mobil (XOM), Royal Dutch Shell (RDS.A), Total (TOT) and ConocoPhillips (COP), have found it far more difficult winning public approval than other controversial industries such as Biotech, despite spending millions of dollars on eco-friendly PR charm offensives.
The perception and frequently the reality of spiraling oil and gas costs flies in the face of a recent announcement from the Associated Petroleum Institute that US crude oil reserves are considerably higher that once thought and consequently the global price of crude oil has dropped by 1%. Whether this price drop will affect prices at the consumer level is anybody's guess. I suspect not.
One could be forgiven for thinking that the media is simply waiting for the oil and gas companies to trip up, to make an insensitive gaff or inaugurate the next environmental catastrophe. To be fair to the press, the oil and gas industry have made this task extremely easy in recent years. The Deepwater Horizon disaster in the Gulf of Mexico, raged for three months following the explosion of the Deepwater Horizon drilling rig in April 2010. The resultant spill, often dubbed the "BP Oil Spill" in common parlance, was the worst recorded environmental oil spill in history. During the crisis BP saw its common stock value plummet from around $60 before the Deepwater Horizon explosion to just over $27 on July 28, 2010, the blackest period (pardon the pun) in the company's 60-year history.
Although BP common stock has since recovered its value to around $45 at the time of writing, a glance at the five day or monthly range on the New York Stock Exchange reveals wildly erratic fluctuations of value - proof that investors and the general public are edgy about news events affecting the industry.
Risk management in uncertain times
It is unfair to focus solely on BP. In late March, a natural gas and condensate spill from a Total installation in the North Sea wiped 6% off the value of the company in a single trading day. Despite playing down the risks of the spill, Total is still hemorrhaging investors as fast as the gas spilling into the cold waters of Northern Europe. The news prompted politicians from the US, the UK and France to consider a coordinated emergency release of oil reserves in order to deaden the impact of the latest crisis.
Any candid insider from within the oil and gas industry would tell you that contingency planning boils down to risk management. There is very little the big players can do to completely avoid disasters like this, but they can take measures to spread the risks and to quickly restore investor confidence when the worst case scenarios happen.
In this field, BP has taken some positive steps toward long term stability, showing that some of the lessons from Deepwater Horizon, when the company was clearly out of its depth, may have been learned. For instance, BP has been praised for its rapid response in closing down its Texas City Refinery after a recent hydrofluoric acid leak.
In the long term, a strategy of localized downsizing and sharing risky operations with subcontractors lies behind the recent decision to sell off $3.2 billion worth of North Sea assets in 2012 and 2013. The first move in this plan was the sale of BP's southern North Sea assets to independent Anglo-French oil company Perenco for $400 million. Perenco have made an initial payment of $100 million, with the bulk of the sale to follow by the end of 2012. A further $10 million may be paid in he future depending on trends in gas prices.
At the same time, BP has subcontracted extraction of oil in the northern North Sea area to British firm Technip, a $600-million euro contract that is expected to yield an additional $450 million barrels of crude oil, not including BP's potentially lucrative new deepwater well at Uist, off the West coast of Shetland.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
