Oil spill puts BP’s long-term strategy at risk

Associated Press

LONDON

At a celebration of BP’s centennial last October, CEO Tony Hayward boasted to guests that the oil company “lives on the frontiers of the energy industry.”

But this week, in the first major sign that the Gulf of Mexico oil spill may have caused lasting damage to the company’s long-term strategy of embracing projects with high risks, BP was frozen out of a potentially lucrative license to drill for oil off the coast of Greenland.

The Arctic setback comes as BP’s plans to begin deep-water drilling in Libya and the North Sea have been delayed, and its offshore U.S. operations remain under a cloud.

BP may face less difficulty in carrying out risky projects in parts of the world where regulation is less restrictive, such as in Angola, Russia and Iraq. But it can ill afford another major accident as years of investigations and costly lawsuits linked to the Gulf spill loom.

To help cover the costs of the spill, BP has begun shedding assets around the world, with a goal of raising $30 billion. Analysts say that cleanup, fines and lawsuits could cost BP more than that, although the company appears to have avoided some worst-case environmental scenarios, such as oil washing up the East Coast.

By selling mostly land-based assets, BP is signaling that it intends to remain a deep-water driller. Still, with Hayward gone soon, incoming CEO Bob Dudley is expected to mimic the safety-first strategy pursued by ExxonMobil Corp. after its historic 1989 spill in Alaska’s Prince William Sound. For example, Exxon quickly appointed an executive to develop a new inspection system that would examine every major piece of equipment within the company’s global operation.

“I don’t see [BP] marching off into new frontiers any time soon,” says Dougie Youngson, an analyst with Arbuthnot Securities in London.

That would be a shift from the past decade or so.

Its aggressive growth, including its acquisition of Amoco in 1998, made it the largest producer of oil and gas in the Gulf of Mexico. And, until the deadly explosion of the Deepwater Horizon rig April 20, it would have been expected to be at the center of the new oil rush in the Arctic.

Interest in the Arctic is rising after Cairn Energy PLC’s announcement this week that it had found gas off Greenland’s west coast. BP said it had decided not to bid for a drilling license after showing interest in the preliminary stages of the bid round.

But with a Greenpeace ship already circling Cairn’s rig, Greenland Premier Kuupik Kleist indicated that the company had stood little chance of gaining a license to operate in such an environmentally sensitive part of the world.

“Of course we are influenced by what happened in the Gulf right now,” Kleist said this week.

BP spokesman Robert Wine said the company had not ruled out bidding for future licenses around the world.

State-owned oil companies in Libya and the Middle East that have bestowed major contracts have so far stood faithfully by the company. So too have its partners in Russia, where it produces more crude than in the United States — 840,000 barrels a day, compared with 665,000 barrels a day. It also has 19 new discoveries in Angola to explore further and plans for 50-100 wells in southern Iraq.

But Dudley, who takes over from Hayward on Oct. 1, is expected to focus initially on selling assets to pay for the spill and repairing the company’s tattered reputation.

The company is putting a positive spin on the fire sale. It has already raked in almost $9 billion from the sale of assets in Egypt, Canada, the U.S. and Colombia, and says the moves will “better align our strategic footprint with our global strengths.”