[VIDEO] One out of every seven pounds in British dividend payments comes from BP, whose shares form a vital part of a vast array of that country’s pension funds. Coffee spill video.

Globe and Mail

Crisis confronts investors as oil spill capture delayed

Nathan Vanderklippe


Friday, Jun. 11, 2010

A week after BP PLC began capturing large volumes of oil from its leaking well, U.S. authorities say it could take until mid-July before sufficient capacity is in place to handle the full amount of crude spewing from the depths of the Gulf of Mexico.

Experts have doubled their calculations of the leak’s size, and Admiral Thad Allen, the U.S. national incident commander, admitted on Friday that it will take another month before BP can sail in ships big enough to handle the highest amounts that are estimated to be flowing from the well.

U.S. officials said they have pressed the company to speed its collection efforts.

“The issue is for BP to move quickly,” Adm. Allen said.

And, as the seemingly ceaseless leak continues to feed a political firestorm, the embattled company is considering a suspension of its $2.6-billion (U.S.) second-quarter dividend in a bid to assuage U.S. political anger over the idea of a huge cash payment to investors while oil is still spilling.

But while BP seems to be treading increasingly turbulent waters, some of the shareholder fears that wiped billions of dollars off the company’s value early in the week appear to have eased. BP shares’ market value fell to a 13-year low on Wednesday, but rallied on Friday as investors latched on to a greater sense of certainty around the extent of the spill, and efforts to stop it.

For people living on the Gulf Coast, however, who have watched oil steadily blacken their shores, kill their wildlife and erode their livelihoods, the only certainty is that 53 days after the Deepwater Horizon exploded, the leaking won’t stop any time soon.

The company installed a containment cap over the broken well a week ago, and a single surface vessel is capturing 15,400 barrels of crude a day. But much of the volume flowing from the well continues to billow into the water from 1,500 metres below the surface.

BP needs to use ships to separate oil from natural gas. The company resisted efforts to measure the well’s output. It now finds itself without enough capacity to handle most of the oil the well is releasing – even though, with a cap in place, it has the technical means to capture most of it.

The single ship it has over the well can handle up to 18,000 barrels per day, which is then transferred to shore. A second ship won’t be ready to capture oil until next week. It will take 5,000 to 10,000 barrels a day, but has no storage capacity. Instead, it will burn the petroleum.

Even that may not be enough. On Thursday, experts estimated that 25,000 to 30,000 barrels – perhaps as many as 40,000 – were shooting up the out-of-control well. That was before BP cut a kinked pipe believed to be holding some of it back, a necessary step to capturing the oil. The current flow could be higher.

But it will take BP until July before it can boost its handling capacity to 40,000 to 50,000 barrels per day. It needs to bring two huge vessels – a floating production unit called the Toisa Pisces and an oil shuttle ship named the Loch Rannoch – to the well site. The Rannoch is sailing from the North Sea.

Critics have suggested that BP’s lack of handling capacity may be linked to earlier estimates – some from the company itself – that only 1,000 to 5,000 barrels per day were leaking.

“I find it hard to believe that it took them this long to ask for a second recovery vessel to come from the North Sea,” said Dan Pingaro, chief executive officer of ocean advocacy group Sailors for the Sea. “I would think that if you have a catastrophe of this proportion that is essentially out of control, that you would have called in all hands on deck long before we got to the 50-day mark.”

But BP has rejected the suggestion that low flow estimates are partly responsible for its problems.

People “will make up their own minds as to whether there’s any correlation,” spokesman Jon Pack said. “What I’m telling you is that there isn’t. Nobody has ever had to encounter or try and resolve a crisis like the one we’re facing at the moment. If there was a way of getting more oil up to the surface, we would be doing it.”

Yet for a company that has been battered by the spill – at one point this week its shares fell to less than half their level from before the rig explosion – the new and higher leak estimates may, ironically, have served as a boost, by providing a more definite outlook on the severity of the problem.

“If you have certainty, you know what the value is,” said Ari Levy, a vice-president at TD Asset Management who oversees energy and resources. “To the extent that you don’t, there’s a range of outcomes and a stock will trade accordingly.”

Investor sentiment was also given a lift by several prominent statements in favour of BP, including one from British Chancellor of the Exchequer George Osborne, who urged decision-makers to “remember the economic value BP brings to people in Britain and America.”

Markets even faced down the possibility on Friday that BP’s dividend could be halted. The enormously rich quarterly payments, which amount to $10.5-billion a year, have become a point of fierce transatlantic contention. U.S. lawmakers have demanded BP cancel its dividend until it can meet clean-up costs, while high-ranking British politicians have urged the company to remember its pivotal place in the British economy. One out of every seven pounds in British dividend payments comes from BP, whose shares form a vital part of a vast array of that country’s pension funds.

According to the British Broadcasting Corp., the company will suspend its dividend. But it may also pursue a compromise solution that would involve halting the actual dividend payment but issuing shareholders “scrip,” a kind of IOU that would allow it to pay out money later, according to The Times and the Wall Street Journal.

Scrip is not used in Canada, and is rarely employed in the United States, but would allow the company to mollify investors while avoiding the public outrage that could follow a massive dividend giveaway while the company faces still-unknown spill clean-up costs.

“We’re considering all options,” Mr. Pack said. “No decision is made.”

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