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Drowning in Oil: BP & the Reckless Pursuit of Profit Excerpt from Drowning in Oil: BP & the Reckless Pursuit of Profit

by Loren Steffy

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Drops in the Big Ocean
By Loren C. Steffy,
Author of Drowning in Oil: BP and the Reckless Pursuit of Profit

BP's problems, though, were far greater than a chief executive with his foot in his mouth. The financial repercussions were spinning out of control. The stock market is a heartless forum. Investors care about returns, and any industrial disaster is looked at in terms of the company's potential liability. As one stock analyst noted, the markets don't care about the loss of life. Indeed, in the week after the Texas City refinery explosion, BP's stock price slipped less than 3 1/2 percent in the week, then began rising again. With the smoldering remains of the Horizon heading for the seafloor, though, by the start of the following week, investors began to worry that BP's exposure could be far greater than it had first seemed. Its shares went into free fall, losing more than half their value by late June. Other companies associated with the disaster faced similar declines. Transocean and Anadarko, BP's far-smaller partner in the well, saw the value of their shares halved as well.

For BP, the falling stock price posed a direct threat to the company's survival. As the crisis progressed and the oil continued to leak, speculation grew that BP would be bought by a rival such as Exxon or even Shell, turning the tables on John Browne's own acquisition plans a few years earlier. In the United States, BP's market value-the worth of all its available stock-fell by $100 billion, making it the lowest among the "supermajor" oil companies. Exxon Mobil, by comparison, was worth more than three times as much. BP, though, still held some of the best oil and gas drilling prospects among the majors, and that created a dangerous market condition for the company. BP's assets were now worth far more than its stock price. For example, later in the summer, when BP began selling assets to raise money for cleanup costs, it reached a $7 billion deal with the Houston-based Apache Corporation for a package of oil and gas assets in places such as Egypt, Vietnam, and West Texas. Based on the sale price, all of BP's assets should have been worth more than $350 billion, but at the time, the stock market still valued the entire company at less than $130 billion. In other words, BP's parts were worth more than the whole.

Such a steep decline in stock value leaves a publicly traded company vulnerable. Rivals, seeing that they could buy the entire company on the cheap to get its properties, began looking at ways to do a deal. The problem was BP's huge open-ended liability from the Macondo disaster. Wall Street investment bankers, who collect big fees from takeovers, excel at solving such problems. They began working on scenarios to shield a prospective buyer from BP's Macondo liabilities. Speculation mounted that another oil company would make a hostile bid for BP in a transaction that would use a bankruptcy filing to corral the spill liabilities. The buyer would get BP's prime oil reserves while leaving a court to handle the spill cleanup.

Within weeks, Hayward had gone from the chief executive who was turning BP around to the executive who might oversee its demise. As investors fretted about the company's future, its engineers in Houston were working frantically to either cap the well or at least abate the flow of oil-anything that would end the environmental nightmare that was now playing out daily on newscasts and cable television shows. Everyone in the company knew that the best way to stop the slide in the stock price and preserve the company's future was to somehow stop the leak. But nothing worked. No well drilled to such depths had ever blown out before, and neither BP nor the industry was prepared to respond. Many of the methods (which had made-for-TV names like "top kill," "top hat," and "junk shot") had worked on land, but the pressure, water depth, and frigid temperatures at the Macondo wellhead frustrated the efforts. Containment devices were built from scratch and lowered over the well; new batches of mud were pumped in through the broken blowout preventer; a tube was inserted into the broken riser to siphon off some of the oil. The best BP crews could do was slow the flow of oil. To truly "kill" the well, the only option was to drill a second hole, known as a "relief well," which would intersect with the first. It meant positioning another rig near the site where the Horizon sank, drilling down 13,000 feet, angling the drill bit sideways, and then lining up two holes, seven inches in diameter, almost three miles below the surface of the water. Once the two wells intersected, engineers could use the new one to inject drilling mud and cement, permanently plugging the leak. BP well designers had drawn up plans for a relief well within days of the Horizon explosion, but drilling it would take at least three months.

Government officials began to doubt whether BP could ever get the well under control. "I was not comfortable they knew what they were doing," Interior Secretary Ken Salazar told the New York Times. Energy Secretary Stephen Chu turned to other oil companies such as Exxon Mobil and Shell for expertise, which insulted the BP engineers who were working long, frantic hours to cap the well. (8) Over time, the failed ideas permitted a solution to coalesce, allowing engineers to keep refining their designs toward a solution, known as a "capping stack," that would eventually cover the well.

Given the rapid decline in BP's share price and the mounting public anger over both the environmental and economic consequences of the spill, Hayward couldn't be sure that the company would survive long enough to complete a relief well. He decided that it would begin drilling two of them, with rigs provided by Transocean. In the meantime, teams of engineers would keep working on the other efforts to slow or plug the leaks, and BP teams across the Gulf Coast would keep paying the claims of fishermen and business owners whose livelihoods had been compromised by the spill. None of that, though, was enough.

Hayward needed more help. He got it from an unlikely source: the Obama administration. The president told the Today show in early June that he would have fired Hayward if the BP executive had worked for him, and said that he wanted to know "whose ass to kick" over the spill.(9)  The tough talk, though, masked a growing concern that the administration had appeared inept in its handling of the crisis. Relying on BP's predictions and its own flawed forecasts, it had appeared to defer to BP, letting the spiller clean up the spill. It needed to take charge. Its political desperation and BP's financial fears would dovetail into an agreement that would help them both.

The above is an excerpt from the book Drowning in Oil: BP and the Reckless Pursuit of Profit by Loren C. Steffy. The above excerpt is a digitally scanned reproduction of text from print. Although this excerpt has been proofread, occasional errors may appear due to the scanning process. Please refer to the finished book for accuracy.

Copyright © 2010 Loren C. Steffy, author of Drowning in Oil: BP and the Reckless Pursuit of Profit