pic: DigitalGlobe

The Deepwater Horizon disaster has been, and will continue to be, an environmental catastrophe of epic proportions.  But it is also a disaster for BP’s business, for all those who directly hold its shares, and for many more besides.

Devastation to BP's business

BP’s market value has now dropped somewhere in the region of £43 billion since the beginning of the disaster, more than a third of its share value. Some of this is attributable to the spiralling clean-up costs the company faces, and concerns about direct financial liability for damage to local industry.  But the company faces other less tangible costs that at the moment are very difficult to quantify, but are no doubt informing a good deal of the market’s judgement of the troubles that the company is set to face.

As Tony Hayward points out in BP's Annual Reports and Accounts this year, ability to manage risks in frontier operations are fundamental to BP’s access to new resources and long-term success:

In 2009 we saw further challenges for international oil companies in terms of generating growth and achieving access, together with the continued strong emergence of national oil companies. How is BP responding?

BP has always operated at the frontiers of the energy industry and our core strengths are more relevant and valuable than ever. BP’s experience, skills, capability, technology and access to markets enable resource holders to maximize returns over the long term. We continue to show our ability to take on and manage risk, doing the difficult things that others either can’t do or choose not to do. This is why we are able to form such strong relationships with governments and national oil companies and why we continue to have a critical role to play in supplying the world with its future energy needs. In a world of increasing energy demand and growing technical challenges, I believe BP will continue to set itself apart by operating and succeeding at the frontiers of the energy industry."

The way that BP has managed the risk of environmental disaster in its deep sea drilling activities has resulted in a devastated reputation and potentially irrecoverable damage to its relationship with a major national administration (the US administration's taskforce is reportedly 'incensed' with BP's approach to the situation).  The company's access to new resources (whether reserves, employees or others) will be compromised, and the faith that the US or any government has that the company (or many other oil and gas companies) can manage risk in frontier extraction will now be dramatically reduced.

Robert Peston observed on BBC Radio 4 today that BP has enormous assets located in the United States, and that operating these under the BP brand may be untenable following Deepwater Horizon.  This would of course be a game changer for BP as a company.  Hear his comments below:

http://news.bbc.co.uk/today/hi/today/newsid_8717000/8717316.stm

(Also noteworthy in this clip is Mr Peston’s discussion of the risk to ordinary UK pension fund holders stemming from BP’s ‘environmental’ practices).

The importance of trust

As President Obama reflected recently:

I was wrong...in my belief that the oil companies had their act together when it came to worst-case scenarios.... it just takes one [accident like Deepwater Horizon] for us to have a wake-up call and recognize that claims that fail-safe procedures were in place, or that blowout preventers would function properly, or that valves would switch on and shut things off, that -- whether it’s because of human error, because of the technology was faulty, because when you’re operating at these depths you can’t anticipate exactly what happens -- those assumptions proved to be incorrect."

How much faith can be placed in BP and other extractive companies' claims that their safety procedures are covering the risks, and that the potentially extreme environmental consequences of their operations (and the business risks that come with them) are near-irrevelant as a result?  How much faith can shareholders and investors have in BP, and many other companies, on these questions now?  How many risks like this are hidden in the extractive industries, sitting just behind ‘fail-safe’ company procedures and confident assurances?

The environment matters to business

The Deepwater Horizon disaster has resulted in losses to BP's share value of more than a third.  The scale of this loss is truly astounding – and all because of what many would refer to as an 'environmental' concern, and the company's failure to manage it.  Environmental risks do not exist in a vacuum – they are very real and very serious business risks.

Where lies the future for the oil and gas industry?  One thing is certain – it is inherently and inseparably tied to the future of our environment.  The wellbeing of Earth's environment depends in no small part on the path of the industry.  But it is a short-sighted oil and gas business that underestimates the power of the natural environment, or mobilisation to protect it through regulation and government action, to define their path and returns.