bp oil spill

The Billericay School

The BP Oil Spill: Effect on BP and the Economy

Muaaz Khan - EPQ

Muaaz Khan EPQ – The BP Oil Spill: Effect on BP and the Economy

Contents

Project Introduction..............................................................................................................................2

- Project Aims and Objectives............................................................................................................2

Global Energy Industry..........................................................................................................................2

- Background Information..................................................................................................................2

- History of energy ............................................................................................................................3

Oil Spills.................................................................................................................................................4

- Background Information…...............................................................................................................4

The BP Oil Spill.......................................................................................................................................4

- Facts about BP PLC..........................................................................................................................4

- History of BP PLC.............................................................................................................................5

- BP Oil Spill, what happened?...........................................................................................................5

The Impact of the Spill on BP.................................................................................................................6

- BP Today (Early 2014)......................................................................................................................7

Impact on Local Economy......................................................................................................................8

Impact on Global Economy....................................................................................................................9

Potential Benefits................................................................................................................................11

Conclusion...........................................................................................................................................11

Bibliography.........................................................................................................................................12

Appendix.............................................................................................................................................13

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Project Introduction- Project Aims and Objectives

This project will look at the main economic impacts of the Deep water Horizon disaster (‘BP Oil Spill’). I will firstly research what caused the spill in the first place, examining whether it could’ve have been avoided. Following on from this I will find out the immediate impact e.g. number of deaths/injuries, etc. I will then begin to look at the financial implications from BP’s perspective; this will include comparing their share prices from before and after the spill as well as the amount of money they lost and whether they have recovered. Leading on from this I will begin to research how the spill had an impact on both local and global economies, finding figures on costs, unemployment etc. I will then conclude on whether a disaster such as this could occur again. My main aims therefore are to find out background information about the BP Oil Spill, look at the financial implications on BP as a company and also research the economic impacts as a result of this spill.Having studied Economics at AS Level and now at A2, I believe my knowledge on subjects such as supply/demand will help me in this project.

Global Energy Industry

- Background Information

The energy industry is the totality of all the industries involved in the production and/or sale of energy. This includes fuel extraction, manufacturing, refining and distribution. Modern day society consumes huge amounts of fuel, making the energy industry a crucial part of the infrastructure and maintenance of almost all countries.

In particular, the energy industry comprises of the following sub-industries; - Petroleum, including oil companies (BP), petroleum refiners, fuel transport and end-user sales at petrol stations.- Gas, including natural gas extraction and coal/gas manufacture.- Electrical power, including electricity generation and sustainable energy companies including those involved in hydroelectric power, wind power and solar generation.- Renewable energy industry, including alternative energy and sustainable energy companies e.g. MakEnergy LTD.

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Figure 1 above shows the energy consumption in kilograms of oil per person per year per country (2010 data). The darker tones indicate large consumption. (Grey areas indicate missing data). (Wikipedia )

- History of energy

The use of energy across the globe has been key in the development of modern human society by helping it to control and adapt to the environment. From 770,000 B.C., scientific evidence shows humans in modern-day Israel discovering how to make fire. The Chinese then began to use coal for both heating and cooking in 2000 B.C.. In the 1820’s, the first natural gas well was drilled in Fredonia, N.Y.. 1850 saw the first oil well drilled in Titusville, Pa. Now, in the 21st century, energy is used more than it ever was, e.g. electricity, gas, oil, etc. (howstuffworks) Figure 2 below shows the global oil production levels and the predictions for the next 20 years.

Figure 2 (howstuffworks)

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Oil Spills

- Background Information

An oil spill is the release of a liquid petroleum hydrocarbon into the environment, particularly marine areas. It is a form of pollution and in most cases is a direct result of human error. The term ‘oil spill’ is usually applied to marine oil spills in oceans, seas, etc, but can also occur on land. Oil spills may be due to releases of crude oil from tankers, offshore platforms, drilling rigs or wells. Spills have a huge effect on the environment wherever they may occur. Spilt oil can penetrate the structure of the plumage of birds and into the fur of mammals. This can reduce their insulating abilities, making them more vulnerable to temperature fluctuations and much less buoyant in the water. Clean up in the aftermath of a spill is hugely difficult and the extent of the clean-up depends on the type of oil spilled, the temperature of the water as this can affect evaporation and biodegradation and the types of shoreline and beaches involved. Oil spills can take weeks, months or even years to clean up.

The BP Oil Spill

- Facts about BP PLC

BP PLC or British Petroleum is a British multinational oil and gas company headquartered in London, England. It is the sixth-largest energy company by market capitalisation in the world. (Wikipedia). In terms of revenue, it was fifth largest in 2012 and the sixth-largest oil and gas company measures by production in 2012. It is one of the six big oil and gas ‘supermajors’, along with; Chevron Corporation, ExxonMobil Corporation, Royal Dutch Shell plc and Total SA with ConocoPhillips Company also described as forming part of the group in recent years. (Reuters, 2008). BP is an example of a vertically integrated company meaning it combines two or more stages of production which are normally operated by separate firms in one firm. BP operates in all the areas of the oil and gas industry, including; exploration, and production, refining, distribution and marketing, petrochemicals, power generation and trading.

- History of BP PLC

BP’s origins date back to the founding of the Anglo-Persian Oil Company in 1909, established as a subsidiary of Burmah Oil Company to exploit oil discoveries in Iran. In 1935 it became the Anglo-Iranian Oil Company and in 2954 British Petroleum (BP). In 1959, the company expanded beyond the Middle East to Alaska and in 1965 it was the first company to strike oil in the North Sea. In 1978, BP sent out a strong message to its competitors by acquiring the majority of Standard Oil of Ohio. The British government privatised BP in the early 1980’s

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and by 2003; BP had merged with Amoco, acquired ARCO and Burmah Castrol. It had also signed a partnership deal in the TNK-BP joint venture in Russia.As of December 2012, BP has operations in over 80- countries, produces around 3.3 million barrels of oil per day, has around 20,700 petrol stations (BP) and 85,700 employees. (The Wall Street Journal)

- BP Oil Spill, what happened?

On the 20th April 2010, the Deep water Horizon drilling rig exploded in the Gulf of Mexico, causing an oil spill that soon became the worst environmental disaster in US history. (BBC, 2010).The cause of this explosion was high-pressured methane gas escaping from the well BP were drilling into, this expanded into the drilling riser and rose into the drilling rig were it ignited and exploded, engulfing the platform. At the time there were 127 workers on the rig. Out of these, 11 tragically lost their lives, 17 were injured and the rest were safely rescued via boat or helicopter. The mobile offshore drilling unit was owned and operated by US company Transocean. Transocean was drilling for BP in the Macondo Prospect oil field about 40 miles (660km) southeast of the Louisiana coast. (MarketLine, 2012).Transocean is one of the world’s largest offshore drilling contractors. The company is Swiss-based and rents floating mobile drill rigs, along with the equipment and personnel for operations to oil and gas companies. Their average rate is around $280,000 (2010). On the 21st April 2010, a fire was reported on a Transocean-owned semisubmersible drilling rig. This was the rig responsible for spilling millions of barrels of oil into the sea. At the time, the rig was drilling for BP. Transocean as a result of this came under fire from lawyers, representing the fishing and tourism businesses that were affected by the oil spill (see ‘Impact on Local Economy’). During testimony, Transocean and BP blamed each other for the disaster. (Wikipedia).

Early attempts by BP to stem the flow of oil attracted widespread criticism for being unnecessarily slow and for creating unnecessary delays. Efforts to activate the well’s blowout preventer failed on the 25th April. On May 7th, the cap named ‘top hat’ bought in to cap the well failed and a further attempt six weeks after the spill named ‘top kill’ also failed. It wasn’t until the 15th July 2010, nearly three months after the explosion, that a new capping stack successfully closed the well. By this time however estimates suggested that over 4.9 million barrels of oil (780,000,000 litres) (Reuters, 2012) had leaked into the surrounding waters.

Over 210,000 gallons of oil leaking daily into the Gulf for nearly three months upset the intricate ecosystem which serves as a source of 40% of the seafood consumed in the United States. The Gulf of Mexico also acts as a home for wildlife migrating between South America and U.S. waters. The oil spilled into the sea threatened seabirds and other wildlife. Birds were being found other dead of coated in thick oil and other marine life (sea turtles and fish) were being killed by toxic emulsions permeating the sea. It is difficult to quantify the damage that has been done in terms of damage to wildlife, food

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chain, etc. There is also hardly anything known about the long-term ecological damage and effects of a deep oil spill as it is a relatively modern phenomenon and there is only a limited amount of relevant information to be extrapolated from the Exxon Valdez disaster in terms of the expected final extent of environmental damage.

The Impact of the Spill on BP

BP as a company suffered hugely in the aftermath of the spill. Firstly they made an instant loss of around 4.9 million barrels of oil which leaked out of the well and into the sea. (MarketLine, 2012). Looking at the price per barrel (159 litres) of crude oil at the time of the spill, I estimate the loss in crude oil to total around $403,200,000. However, of the 4.9 million barrels, 17% were recovered making the total estimated loss in crude oil a total of $334,656,000. As a result of this huge loss, BP had no choice but to suspend dividend payments to shareholders in the first 3 quarters of 2010. (Bergin, 2012). UK pensions were also affected by the suspension of BP’s dividend payments as their dividends pay for 14% of FTSE 100’s contribution to British pension funds. By the end of 2010, BP had made a massive loss of $41,000,000,000. This was $27 billion higher than their 2009 profits.As a result of this huge loss and bad reputation BP now had, their share prices fell by over 50% in 2010. (See figure 2 below).

(Figure 1)

Figure 2 shows the extent of the fall BP’s share prices in the aftermath of the disaster. The red circle indicates when the spill happened. Before the spill, share prices were at a steady 600p; this dramatically fell by half to below 300p in the space of 3 months. Since then BP’s

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share prices have struggles to reach the 600p mark again and almost 4 years on their share price is around 480p (price true on 7/2/14). (Bloomberg).

Tony Hayward was the CEO of BP at the time of the spill. Hayward initially downplayed the spill stating on 17th May 2010 that the environmental impact of the Gulf spill would likely be “very modest” and calling the spill “relatively tiny” in comparison with the size of the ocean. This did not go down well with the media. (Tony Hayward Wikipedia). By May 2010, Hayward changed his assessment calling the spill an “environmental catastrophe”. (CNN, 2010).

Finally, after months of pressure from the media, BP announced on 27th July 2010 that Tony Hayward would be replaced by Bob Dudley effective as of 1st October 2010. In 2013 Tony Hayward was appointed chairman at UK-based gas-to-liquids company CompactGTL. (Express).

300 lawsuits have been brought in federal court in New Orleans claiming substantial economic losses as a result of the spill and 31 class-action law suits have been filed in Texas and Florida. Plaintiffs include the families of the workers killed or injured, commercial fisherman, shrimpers, charter-boat operators and beachfront-property owners asked to represent anyone whose livelihood depends on coastal waters. However, due to BP’s global brand and extensive business interests, more than half of the deferral judges in the region are unable to preside over these cases due to conflict of interest. This has slowed down the legal process which does not work in the favour of the plaintiff where there are practical time limits for parties making a claim.

- BP Today (Early 2014)

BP since the spill has slowly been on course to returning to the once dominant oil company in the energy industry. Since the spill they have invested billions of dollars each year in oil and gas development, focusing on deepwater exploration and development. (BP). BP has said recently that their own internal investigation into the Deepwater Horizon accident led to 26 recommendations for reducing risk in BP’s drilling operations. They have since made ‘significant progresses in implementing these recommendations, including in their Gulf of Mexico operations. Following the US governments court order for BP to resolve all federal criminal claims, BP have agreed to take additional actions designed to further enhance the safety of drilling operations in the Gulf. BP have trained staff in safety measures and also educated their drillers in new safety measures the must take to prevent a disaster such as the spill from occurring again. Financially, BP have not suffered hugely in terms of pre-tax profits; in 2011 they made $25.7 billion profit, this was up from 2010 when they were hit financially due to the spill and only made $11.6 billion. In 2013, BP has announced recently their pre-tax profits were $23.45 billion.

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Recently a divided U.Ss appeal court rejected BP’s bid to block businesses from recovering money over the 2010 spill even if they could not trace their economic losses to the disaster. By a 2-1 vote, the 5th U.S. Circuit Court of appeals in New Orleans authorised the payments on so-called business economic loss claims. It also stated that an injunction preventing payments to businesses should be lifted. Geoff Morrell a BP spokesman said the company may appeal the decision. (Reuters, 2014) BP are angry because they claim businesses have to real ‘evidence’ that the spill impacted them the amount they are asking for, and that it cannot be proved. This court ruling is a blow for BP who still has to compensate for the spill which happened almost 4 years ago.

Impact on Local Economy

The local economy was drastically affected by the BP Oil Spill. Both small and large businesses along the coastal Gulf State regions begun to fell the impacts of the spill after just 2 months. The impact of this disaster began to show declining activity in the following industries; commercial fishing, recreational/tourism, oyster and seafood processing, BP pipe and fitting suppliers and numerous others. Sean Snaith, an economist at the University of Central Florida completed a study in August 2010 showing that Florida’s gulf coast could lose 195,000 jobs and $11 billion by the end of 2010 alone if the spill cuts tourism in half.Many businesses in the Gulf Coast Region will inevitably experience a loss of saleable goodwill due to damages and loss of income. This loss, in addition to losses of hard assets and physical property, could drastically affect the values of these once thriving companies. It will be crucial for companies affected by this national disaster to have a good idea of the income lost during and after the oil spill. A certified appraisal by a well-qualified business appraiser can help reduce the guess work and liability of making a claim with BP. (Business Evaluaton Systems).

Through my research on the impact of the oil spill on local economies, I was able to gather some numbers to show the extent of the damage this spill had economies around the Gulf of Mexico.Supply of fish in the summer of 2010 had fallen by 20% from the previous year; this led to demand moving to alternative suppliers outside the Gulf of Mexico. (Financial Times, 2010).

Tourism was also affected as many potential tourists chose different destinations away from the Gulf where oil had spilled into the sea and onto beaches of popular destinations. In the summer of 2010, tourism had fallen by 28% in relation to the summer of 2009. (Reuters). In total, the fishing and tourism industry lost a total of $700 million before they were back to the same level of output as before the spill. (useconomy).

BP as a result of this huge loss to local industries announced plans in November 2010 to help Louisiana tourism by spending $78 million to promote tourism and test/advertise seafood.

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Impact on Global Economy

In order to find out how much of an impact the spill had on the global economy, I had to first look at the prices of crude oil both before and after the spill to see how much they were influenced by the disaster. Fig. 3 and 4 below show the prices of crude oil in 2010 and 2011.

Figure 3

Figure 4

The graphs above show the comparison between crude oil prices in 2010 and 2011. April 2010 is when the BP Oil Spill occurred and the graph shows crude oil prices set at $87.83 per barrel of oil. By April 2011 (1 year on) this price has increased by 27.1% to $110.9 per barrel.

These higher crude oil prices had a costly affect on supply/demand of oil. As the crude oil prices rose due to a shortage of supply, the cost to manufacture petrol rose for petrol companies. As a result, petrol prices increased across Western civilisation.

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Figure 5 below shows the average price per litre of petrol in the UK.

Figure 4 (petrol prices)

The table shows the price of petrol did not rise immediately following the spill in April 2010. This is because of the oil reserves across the world compensating for the fall in supply from the Gulf. Towards the end of 2010 however, the price of petrol begins to rise slowly. By April 2010 (1 year on) price as increased by 14.2p to 134.7p/litre. It peaks in April 2010 at 141.9p and then begins to drop as supply of oil increases again. You could argue that there could be other factors involved in the price of oil increasing (VAT rising from 17.5% to 20%), etc. Also, petrol stations could be colluding (the process of 2 or more firms who dominate a market forming a cartel to illegally set prices higher leaving no alternative for consumers); however for my project I am assuming the petrol stations in the UK obey the law.

I believe the evidence I have found points to a large impact globally from the result of the spill, although other factors may be involved, oil prices were affected by the spill (as shown in figure 4) but have since then returned to their level before the spill.

Potential Benefits

Within this huge man-made disaster, where the any benefits? Firstly as a result of the spill, BP were forced to employ over 4,000 people to help clean up the spill, this would be a benefit to the local economy who’s unemployment rate would’ve reduced as a result of

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these jobs being created. However, due to the spill destroying the local fishing industry, the amount of jobs lost in this sector may have outweighed the 4,000 newly employed workers. In terms of the local economy, the spill could act as a scapegoat to poor economic growth around the Gulf i.e. governments have something the can blame should performance fall. In the long run energy companies (not only BP) may learn from this disaster and promote new measures to ensure something as terrible as this never happens again.

In conclusion, in terms of benefits I believe there were no benefits that were not caused by costs, e.g. loss in jobs in fishing industry along with the employment of thousands to clean up the spill.

Conclusion

In conclusion, I believe I have answered all the questions I had at the beginning of this essay. I have found out that the BP Oil Spill dramatically affected BP as a company, destroying their public image, something which they are still recovering from today. In terms of the economy, it may have recovered in the short run (petrol prices falling back to rate before spill) however the long term effects are still in progress, e.g. shortage of fish in the gulf. This disaster is something that will take many more years to recover from, maybe even decades.

(Freudenburg, 2012)

(Carollo)

Bibliography

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BBC. (2010, September 19). BBC News. Retrieved from BBC News: http://www.bbc.co.uk/news/world-us-canada-10656239

Bergin, T. (2012). Spills and Spin: The Inside Story of BP. Random House Business.

Bloomberg. (n.d.). Retrieved January 3, 2014, from Bloomberg: www.bloomberg.com

BP. (n.d.). BP. Retrieved January 20, 2014, from BP: www.bp.com/en/global/coporate/gulf-of-mexico-restoration/back-to-work-in-the-gulf-of-mexico.html

Business Evaluaton Systems. (n.d.). Retrieved January 10, 2014, from http://besappraisals.com/index.php?option=com_content&task=view&id=84&Itemid=

Carollo, S. (n.d.). Understanding Oil Prices. John Wiley & Sons.

CNN. (2010).

Express. (n.d.). Express. Retrieved January 4, 2014, from Express: http://www.express.co.uk/finance/city/382725/BP-s-ex-boss-Tony-Hayward-lands-new-energy-role

Financial Times. (2010). Oil Spill Local Effects. FT.

Freudenburg, W. R. (2012). Blowout in the Gulf. MIT Press.

howstuffworks. (n.d.). howstuffworks. Retrieved February 2, 2014, from howstuffworks: http://science.howstuffworks.com/environmental/energy/timeline-energy-history.htm

MarketLine. (2012). BP PLC Case Study - After the Deepwater Horizon Oil Spill.

petrol prices. (n.d.). Retrieved January 21, 2014, from www.petrolprices.com/the-price-of-fuel.html

Reuters. (2008, August 1). Reuters Oilmajors. Retrieved Feburary 3, 2014, from http://www.reuters.com/article/2008/08/01/us-oilmajors-production-idUSL169721220080801

Reuters. (2012). British Petroleum Oil, Inc (BP) Deep Oil Spill - CASE STUDY.

Reuters. (2014, March 4). Reuters BP court ruling. Retrieved March 2014, 4, from Reuters BP: http://www.reuters.com/article/2014/03/04/us-bp-idUSBREA230IR20140304

Reuters. (n.d.). Reuters. Retrieved January 12, 2014, from www.reuters.com

The Wall Street Journal. (n.d.). BP Overview Wall Street. Retrieved Feburary 4, 2014, from http://quotes.wsj.com/BP/company-people

Tony Hayward Wikipedia. (n.d.). Tony Hayward Wiki. Retrieved January 3, 2014, from http://en.wikipedia.org/wiki/Tony_Hayward

useconomy. (n.d.). Retrieved January 13, 2014, from http://useconomy.about.com/od/suppl1/tp/BP_Oil_Spill.htm

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Wikipedia . (n.d.). Retrieved January 5, 2014, from http://upload.wikimedia.org/wikipedia/commons/e/eb/Energy_per_capita.png

Wikipedia. (n.d.). BP Wikipedia. Retrieved February 2, 2014, from BP Wikipedia: http://en.wikipedia.org/wiki/Bp

Wikipedia. (n.d.). Transocean Wiki. Retrieved January 10, 2014, from http://en.wikipedia.org/wiki/Transocean#Deepwater_Horizon_drilling_rig_explosion_.282010.29

Appendix

Having used a numerous amount of different sources throughout my project, I will now evaluate some of them.The main type of source I used for my EPQ was the internet; this is due to easy access to thousands of websites withholding endless amounts of information. I was at first reluctant to use Wikipedia as my source as their webpages are written by people with no accreditation who may have no idea what they are talking about. As a result, Wikipedia was only used to back up information such as dates, information on Tony Hayward as public profiles are very accurate on Wikipedia. I was also able to obtain certain diagrams from Wikipedia webpages, e.g. Figure 1. Other sources included books, e.g. ‘Blowout in the Gulf’ by William R. Freudenberg. I used this source to find out information about the BP Oil Spill and the effect of the spill afterwards, looking at the clean-up effort from BP, etc. I have recently researched the author William R. Freudenberg and found out he is an environmentalist. This therefore means his book may be bias against BP and the spill. Despite this I have included some of his quotes in my essay as I believe them to be very eye opening and important.I used BP.com as a source but limited the information from their own website as I wanted to reduce bias from my project. Although BP will not lie, they may miss out essential information which could make them look bad, e.g. they say “we have since worked very hard with local businesses to get them back on track following the decline in fish in the Gulf”. This does not mention the amount of money they are investing after destroying the fishing industry in the Gulf and therefore I am to assume it is a very small, insignificant amount.

In evaluation, I believe the use of many different types of sources has broadened my research and limited bias in my project. I am therefore confident I have included valid information throughout my essay and sourced all the information accordingly.

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