3 Threats to BP's Success Other Than Macondo
Oct 19th 2013 10:15AM
Updated Oct 19th 2013 10:16AM
Let's face it: Many of the problems with BP still stem from the Macondo spill. The company finished making payments to the $20 billion trust it set up to cover losses from businesses in the Gulf region, but the current court battle could cost as much as $13 billion in Clean Water Act violation charges. As a company, though, there are other things that could trip up the business plan for BP. Let's look at three things not related to the Macondo litigation that could keep BP down.
Locked out of Gulf of Mexico
OK, so this is slightly related to the Macondo spill litigation, but this isn't one that presents a major downside for BP. Rather, it blocks the company from any potential upside. In 2012, the EPA barred BP from receiving any new contracts with the federal government or leases on federal land.
So while the company may continue to develop its current leaseholds, missing out on new sales in the Gulf could put a major damper on BP's growth plans in the future. Both Chevron and Anadarko Petroleum have made major discoveries in the Gulf recently that have proved the viability of the Gulf's own pre-salt layer much like the much-hyped fields off the coast of Brazil.
Even more important to BP is that the Gulf of Mexico has historically been one of the company's largest production regions, contributing 21% of all oil produced by BP subsidies. The Mad Dog field operated by BP is expected to hold as much as 4 billion barr0els of oil equivalent. If this suspension were to hold up, it wouldn't be able to lease any blocks that could border places like the Mad Dog to expand on the major work it has already done there.
BP is appealing the EPA's decision, but if it were to hold up, then perhaps BP may want to look a little further south. Mexico is in the process of reforming its constitution to promote foreign investment in the nation's oil industry. BP, one of the leading offshore operators, could be a valuable partner for Mexico, and the potential of Mexico's Gulf oil assets could be a good consolation prize for getting kicked out of the U.S. side.
"So the major obstacle to the development of new supplies is not geology but what happens above ground: international affairs, politics, investment, and technology."
-- Daniel Yergin, Author of The Prize
Integrated oil companies are no strangers to the issues of operating in challenging political conditions, and BP is no exception. Today, though, BP is witnessing firsthand how these challenges can negatively affect the bottom line. Currently, the company's Rhum gas field in the North Sea is shut in because it its a 50-50 joint venture with the Iranian National Oil Company, and economic sanctions forbid companies working with the Iranian oil industry. This field was responsible for 5% of the U.K.'s natural gas supply, and having it shut in has a major effect on the bottom line.
The political struggles don't end there, either. BP has been forced to pull a majority of its staff out of Egypt, Lybia, and Algeria because of both instability and attacks on its facilities.
The one bright side to BP is that it has avoided the operating in Nigeria. Chevron and Royal Dutch Shell both have well-documented issues operating there, and because of those issues they have decided to slowly transition Nigerian operations to offshore regions where the threats of theft and sabotage are much less.
High exposure to deepwater
The opportunities in deepwater exploration are immense. BP has plans to further explore off the coasts of Brazil, Uruguay, Nova Scotia, Angola, Namibia, India, Norway, Indonesia, and Australia. While all of these assets could be a major win for the company, many of these regions are still unexplored and could prove to be duds.
Namibia is a prime example. Despite previous efforts from Chevron and Royal Dutch Shell, there hasn't been a major oil find there. Some companies have successfully tapped some natural gas wells, but the closest infrastructure to monetize those gas assets is the Angola LNG facility owned by Chevron, BP, and Total .
The other thing to consider with deepwater exploration, though, is that it is inherently risky. BP has gone to great efforts to improve its safety and operations standards to mitigate risk since the Macondo spill, but the stark reality is that incidents will still happen. Both BP's and Total's exploration plans are disproportionately toward the offshore environment compared with many of the other majors, so investors need to be aware that a higher exposure to the offshore environment does equate to higher risk.
What a Fool believes
While the Macondo spill may still put a big hit on the company's bottom line, it may not be as much of a long-term threat as many may think. Going forward, the company will need to prove to the EPA that it can competently operate in the Gulf so it can have this suspension lifted. Also, investors need to be aware that the high exposure to political risk and the possibility of a disaster could be another major setback for BP waiting to happen.
One company that could determine BP's success
For BP and many of the other integrated major oil companies, exploration is getting extremely expensive. To mitigate this risk, they need to be extremely good at identifying potential well sites. There is one behind-the-scenes energy company that is built to help Big Oil do just that, and make big profits along the way. The prospect for this company is so great, our chief investment officer has selected it as his No. 1 stock for this year. In our comprehensive report "The Motley Fool's Top Stock for 2013.", we outline how this company will change the way we drill for oil and give you the name of this under-the-radar-company. Simply click here and we will give you free access to this valuable investing resource.
The article 3 Threats to BP's Success Other Than Macondo originally appeared on Fool.com.Fool contributor Tyler Crowe has no position in any stocks mentioned. You can follow him at Fool.com under the handle TMFDirtyBird, on Google +, or on Twitter, @TylerCroweFool. The Motley Fool recommends Chevron and Total. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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