BP Faces Investigation Over Rig Disaster, May Burn Oil Slick

BP plc (NYSE: BP) does not have much choice. It said it will cooperate with a US government investigation into the cause of the disaster at the Transocean drilling rig Deepwater Horizon in Mississippi Canyon Block 252 . The Department of the Interior and Department of Homeland Security announced a joint inquiry into the explosion and sinking of the rig on April 22. Panels from both the House and Senate are also reviewing the matter

The blow-out and sinking of the platform have caused an oil spill that is 50 miles wide and has come within 20 miles of the US coast line where it could cause extensive ecological problems. One proposed solution is to burn off the oil, but controlling a fire which is spread over hundreds of square miles is dangerous.

The direction of the probe is impossible to predict now. The presumed cause of the accident was unexpected and sudden pressure through the pipe that runs to the ocean floor. Whether BP and Transocean took proper precautions to mitigate the risk will almost certainly be at the center of the investigation.

Another major risk factor for BP is the cost of the clean-up which could be substantial, particularly if the slick reaches land. The pipe from the destroyed rig is still pumping out 42,000 gallons a day. The only piece of luck that BP has is that the amount of oil spilled is nowhere near as large as other significant crude disasters like the Exxon Valdez.  And the problem is far enough offshore that it could be contained before its reaches land.

There is a myth that the catastrophe has cause an unusually large drop in BP’s shares. Actually, over the last five days, the stock is off 6% compared to drop of 2% in Chevron’s (NYSE: CVX) stock.  Yesterday, shares in all major oil firms dropped about 2.5%.The more important factor in the price of these shares is the sharp drop in crude oil due to calculations that  supplies are larger than expected and the effects of the European debt crisis.

BP may face some liability in the matter. It may face hundreds of millions of dollars in clean up costs. But, it could end there. The disaster, after all, may have been a natural one and therefore unavoidable.

Douglas A. McIntyre

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