BP disaster is not in the spill...it's with their PR...and long term Russian manouevres

It's a horrible accident but you don't really have to clean up the entire Gulf of Mexico as the mass media would lead you to believe. The Gulf of Mexico is massive, covering 615,000 square miles and containing 660 quadrillion (660 thousand million millions) gallons of water. Looking at the amount of oil the Macondo well drilled by the Deepwater Horizon rig has been leaking, most estimates are in the 12,000-20,000 barrels per day range, so let's take the high end and also assume that this continues until mid-August, meaning four months since the accident.

Assume that the cap captures no oil (the latest reports are that it may be capturing much of the oil but let's be conservative). 20,000 barrels/day x 120 days x 42 gallons/barrel = 100.8 million gallons of oil released. 100.8 million divided by 660 quadrillion is one gallon of oil for every 6.6 billion gallons of water in the Gulf. That's the equivalent of roughly one-millionth of an ounce of oil in a typical bathtub full of water.

Huge oil spills have happened before and they were not the end of the world. The 1979 incident with PeMex's Ixtoc oil well was far worse than the Deepwater Horizon well. 140 million gallons of oil poured out of the Mexican well. After four months, an oil slick had covered about half of Texas's 370-mile gulf shoreline devastating tourism...and they recovered.

This in itself was nothing compared to Kuwait. During the first day off the 1990 Gulf War, 10 times as much oil spilled into the Persian Gulf which is one-sixth the size of the Gulf of Mexico. What were the long-term consequences? Whitney Tilson, a value-oriented New York hedge fund manager cites a 1993 UNESCO study that reported "little" long-term damage was done to the environment. "Half the oil evaporated, a million barrels were recovered and 2 million to 3 million barrels washed ashore mainly in Saudi Arabia," he said...and they recovered.

So, does that make BP a bargain investment today? Not yet. Four factors are unfolding which could serve as a drag to BP's fortunes. Last week, the major ratings agencies, Standard & Poors, Fitch and Moody's downgraded BP's credit ratings to just above "junk" status as financial liabilities escalate. The US$20bn escrow account set aside for compensation is just a starting point. Soon after a meeting at the White House, it eliminated its dividend for the next three quarters. As a result, some mutual funds may have to sell off their BP holdings due to internal rules on having to maintain only dividend-paying companies within their portfolios.

One company's crisis, however, is someone else's opportunity. Russian President Dmitry Medvedev added further pressure on BP stopping short of saying the disaster would prompt a review of Russia's partnership with BP. He warned that the oil giant might face "annihilation" as a result of the fall-out of the oil disaster. In an interview with the Wall Street Journal, he described the spill as a "wake-up call" and said that "hopefully [BP] can afford the losses". In Russia, BP holds a 50% stake in TNK-BP - a joint venture with AAR (Alfa Access-Renova) which is owned by a group of Russian billionaires. BP is the third largest oil producer in Russia accounting for roughly a quarter of BP's global production. According to analysts at Moscow investment bank Troika Dialog, BP's stake in TNK-BP is worth about US$16-18bn. Relations between BP and the Russian authorities have been strained for many years going back to Putin's leadership over taxes and operating control. The weakened company must be wary operating in partnership with business oligarchs who have forged connections to the highest echelons of central government circles where a nationalistic fervour has recently gained momentum and with energy supply high on its agenda.

While this dark cloud looms overhead, BP has stumbled from one PR disaster to another. The CEO, Tony Hayward stated at the end of May he "wanted his life back" having already spent some time in the Gulf in charge of daily operations while many local fishermen and hotel owners have had their earnings potential obliterated this summer as the crisis mounted. Last week their Swedish chairman stated after the White House meeting BP would look after the "small people", an unfortunate slip in translation. It smacked again of an aloof corporate culture. Meantime, he has withdrawn his hapless CEO from the firing line after his weak testimony to Congress for neither being able to articulate anything new over the company's decision-making process in the events leading up to the accident nor any reassurances on the management of the spill. Mr Hayward was subsequently savaged by the US press. After jetting back to the UK, yesterday he was back in the news for taking his 52 foot yacht out to take part in a boating competition attracting yet more biting criticism from the English press. BP accounts for one in six pounds of the FTSE 100 total dividend payout leaving many organisations and individuals out of pocket...and this 53 year old geologist seems to have got his life back...but at what reputational cost to the brand?

The oil community is becoming more concerned with longer term erosion under the seabed within the immediate vicinity of the well spill due to the failure to seal the well head. Why? This is a relatively huge reservoir with an abundance of methane. The oil and gas that are flowing out of the rock are bringing small amounts of that rock (in the form of sand) out with them. Rocks that contain lots of oil are not that strong and are easily worn away by the flow of fluid through them. This leads to cracks in the zone and could be a precursor to more leakages within the area and a worse case scenario could be a gargantuan "volcano-like" eruption as the seafloor collapses due to the unremitting pressure build-up and increasing flow rates. Will this almost certainly lead to the bankruptcy of the company as containment fails at all levels?

Look to see if the relief well being drilled and expected to be completed in August can solve the problem. This will be the first positive fillip to BP's revival.