Gulf Oil Spill Disaster Could Cost BP $10 Billion

By: Money_Morning

Don Miller writes: As its engineers struggle to plug an underwater oil leak in the Gulf of Mexico, the total cost of the spill to BP PLC (NYSE ADR: BP) continues to mount, and might even threaten the financial stability of the company.

The total cost to BP to date has reached about $760 million, or $22 million a day, compared with an initial estimate of $6 million a day last month, the London- based oil company said. BP's net income in 2009 was $16.6 billion, or $45.4 million a day, in that time, according to separate data compiled by Bloomberg.

"The longer it takes, more costs are going to be incurred," Greg Smith, managing director of research firm Fat Prophets in London, told Bloomberg in a telephone interview yesterday (Monday).

The final bill, which may not be known for more than six months and will heavily depend on the outcome of pending litigation, may be as much as $10 billion, he said.

Since the April 20 explosion aboard the Deepwater Horizon drilling rig that killed 11 workers, BP's stock is down more than 25% and is now trading around $43 a share, the lowest level in 10 months.

Doug Suttle, BP's chief operating officer for exploration and production, said in an interview on NBC thatthe company expects to try the "top kill" operation on the morning of May 26. It is the second time BP has delayed the measure, and Suttles rated its chances at "six or seven" on a scale in which 10 was certain success.

The "top kill" method requires liquids twice the density of water be pumped into the well using a Helix Energy Solutions Group Inc. (NYSE: HLX) rig, Suttles said last week.

"It could slip to Wednesday because it has to be a day operation," U.S. Coast Guard Rear Adm. Mary Landry told The Wall Street Journal on a conference call.

Landry added that she visited BP offices in Houston and confirmed that the company is "working around the clock" on implementing the procedure, but there are a series of tests that need to be done, which are likely to be finished by Tuesday evening.

The delay came as BP and the government faced a firestorm of criticism for failure to stop the leak or keep it from wreaking heavy environmental damage.

"Frustration is growing all around, with Louisiana authorities blaming both BP and the federal government for dragging their feet, while the feds are expressing increasing anger towards BP for missing various deadlines to get the leak plugged," Edward Meir, a senior analyst at MF Global Inc., wrote in a report obtained by Bloomberg.

Criticism over the spill has reached fever pitch since patches of thick, brownish crude began washing up last week on beaches and marshes in the region.

Landry said that about 65 miles of shoreline and 30 acres of marshes have been stained by the spill. Landry also said that BP has improved the speed at which it is deploying clean-up equipment in the western part of the Louisiana coast, but only after she "put pressure on the company."

Interior Secretary Ken Salazar said on Sunday that BP has missed "deadline after deadline" in its attempts to stop the leak.

"I am angry," Mr. Salazar said at a news conference outside of BP's Houston offices. "I have no question that BP is throwing everything at the problem to try and resolve it because this is an existential crisis for one of the world's largest companies. Do I have confidence that they know exactly what they are doing? No, not completely."

Meanwhile, Louisiana officials ripped the government for being ill-prepared to deal with a spill of this magnitude even though the industry has been drilling in the Gulf for decades and has 77 rigs operating there.

Scientists researching the spill don't have the right instruments to study its impact. Maps that federal officials are using to identify priority areas to protect from spreading oil are outdated. And the Coast Guard says the country lacks enough plastic piping, or "boom," to keep the incoming oil away from the coast, The Journal reported

Critics are even questioning the government's estimate of the size of the leak at 5,000 barrels a day. The criticism escalated last week, after BP released a video that showed a huge black plume of oil gushing from the broken well at a seemingly high rate. BP has repeatedly claimed that measuring the plume would be impossible.

So far, the cleanup has involved more than 1,100 tugs, barges and other vessels and the use of more than 2.5 million feet of containment boom is in place to protect shoreline and fish nurseries in Louisiana, Mississippi, Alabama and Florida, Bloomberg reported.

In total, more than 22,000 personnel from BP, other companies and government agencies are involved in the response to the incident, BP said. So far 23,000 legal claims have been filed and 9,000 have already been paid.

Source : http://moneymorning.com/2010/05/24/gulf-oil-spill-could-cost-bp-more-than-half-its-net-income/

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