Last updated: June 22, 2010 9:45 pm

BP fallout threatens smaller operators

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Washington’s pursuit of BP to set up a $20bn (£13.5bn) fund to pay for the liabilities from the fatal explosion of Deepwater Horizon in the US Gulf of Mexico, could have important unintended consequences for other companies in the oil industry.

Gulf of Mexico oil companies

Gulf of Mexico oil companies

Executives and analysts warn that many of the smaller companies operating in the Gulf will be driven from the area by the potential costs of operating there, ensuring that one of the world’s most prolific oil regions becomes a zone reserved exclusively for three big companies: ExxonMobil, Chevron and Royal Dutch Shell.

The fate of BP, the Gulf’s biggest oil producer and the company that holds the highest number of leases for future drilling, is yet unclear. Some analysts believe Washington is unlikely to allow BP to operate in the region, especially if it is found to have caused the spill because it was cutting corners. Others warn it would be legally difficult to completely expel BP, which is desperate not to loose one of the most important parts of its portfolio.

The rhetoric from Washington in the past two weeks, including the demand that BP pay the wages of idled oil industry workers, has already done a lot of damage, says Ben Dell, analyst with Sanford Bernstein, the financial services group.

The practical reality has become the real problem, even before discussions over whether to raise the liability cap for energy companies from $75m to $10bn have concluded, he says.

“Washington is basically saying an oil company has endless liability if it spills. Very few companies will want to, or be able to afford to operate in the US Gulf of Mexico under those conditions,” he said, adding: “If Anadarko had been operating the well, it would be in Chapter 11.”

As a junior partner, holding a 25 per cent stake in the ill-fated Macondo well, Anadarko, the independent US exploration and production company, is struggling to convince investors that it can survive the spill.

It is a lesson many other companies will take on board, potentially fleeing the US Gulf completely, analysts warn.

“Small, lesser-capitalised operators in the deepwater Gulf of Mexico are toast,” says Ralph Eads, chairman of the energy investment banking group at Jefferies.

Chasing the smaller companies from the Gulf is “a huge blow to activity, a material blow to future US oil production, a material blow to jobs in Texas and Louisiana and to government revenue,” says Mr Dell, noting that in the past smaller US independent oil and gas explorers and producers, such as Mariner, Anadarko and Cobalt, rather than the majors, had provided the boost in drilling in the Gulf of Mexico when cash flow allowed.

Cobalt, the $2.8bn private-equity backed explorer, has proved so much more successful in the Gulf of Mexico than some big oil companies, that Total, the world’s fifth-largest western oil company, is relying on the company to teach it how to find oil there.

Since the spill, Cobalt has had to delay its drilling programme because of the moratorium, going as far as declaring force majeure on one of its rigs in order to avoid paying the rental on it.

Meanwhile, concerns that its balance sheet will not withstand the increased liability coverage that will be expected of companies following the BP accident have pushed its share down almost 50 per cent.

Merger and acquisition activity is also likely to be affected.

Just days before the BP disaster, Apache agreed a $2.7bn cash-and-stock deal to take over Mariner, the Houston-based oil and gas company that has about 85 per cent of its production offshore, with significant deepwater exposure.

Apache remains committed to closing the deal after Mariner shareholders approve it.

But other potential buyers in the space might hesitate, argue industry bankers.

Tom Petrie, vice-chairman of Bank of America Merrill Lynch, notes that the response of the US government to the oil spill could deter some would-be acquirers.

“The tone set so far raises a question about whether there will be an easy exit for those who decide, ‘I’m not prepared to bet my company every time I drill a well in the Gulf of Mexico,’ ” he says.

Some analysts argue that a greater focus on safety across the industry could benefit some makers of rig equipment as demand for the most technologically advanced parts, including so-called blow-out preventers, increases.

But any benefit could be dwarfed by lost business caused by the seven month drilling moratorium in the US Gulf of Mexico and the hugely eroded negotiating position drillers now have in Brazil, which no longer has to compete for rigs with the US Gulf of Mexico.

Even as most oil executives and analysts agree that US regulation must be tightened and safety procedures improved, they warn that raising significantly the liability of causing
a spill could eventually come back to haunt lawmakers.

Only two years ago the world’s oil producing countries were unable to keep up with demand, pushing the price of crude oil to $147 a barrel and unleashing anger among US voters who were forced to pay more than $4 a gallon at the
petrol pump.

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