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Financial Impact of BP Oil Spill

Question:

Discuss about the Financial Impact of BP Oil Spill.

Answer:

Introduction:

The Deepwater oil spill incident of 2010 is considered as one of the biggest disasters of the twenty first century. The British oil giant BP was the developer of the field named Macondo prospect oil field, the owner of which was Transocean Limited and with whom it had a contract to develop that field for exploration of oil (Lilley and Firestone 2013). After the spillage, there was tremendous outcry with regard to the environmental impacts as damage to the same was unmatched in the history of industrial disasters in US history. The report outlines the ecological, social, functional and political implications in the backdrop of this disaster and how it reshapes the methods and policies for the US and other economies.

Causal effects and implications:

After Transocean entered into a contract for the development of the Macondo field with BP, both had joint responsibilities in carrying out safe conduct of their activities. Since this accident was not sudden, there lie several aspects which remain unchecked and need to be thoroughly analyzed to come to a specific conclusion. The cause and effect analysis and other economic and political implications need to be taken into account while arriving at a probable argument (Cherry et al. 2015).

The causes of the disaster are as follows:

  • Loose cementing at the bore well
  • Malfunctioning of the valve
  • Pressure miscalculation
  • Delay in spotting the leak
  • Absence of alarm at the gas field

The above causes contributed to the disaster to a huge extent but the financial implications it has had on the surrounding environment cannot be quantified in actual terms but in probable measures only. BP needs to sort this critical issue keeping in perspective the social and political factors in mind. The financial impact assessment holds value as the same needs to be judged based on the loss suffered, not only by the lives which have been lost but also the damage it caused ecologically and economically as a whole (Lamendella et al. 2015).          

Financial impact:

While comparing the economic costs of the disaster with the developmental costs of an offshore oil field, the cost goes up to billions of dollars. In view of this case,  it is prudent to mention that the development costs of fossil fuel based conventional energy needs far outweigh the costs of a cleaner and alternative source of energy like solar power and wind power (Humphrey, Carter and Simkins 2016). By measuring the costs associated with the disaster of this magnitude and cleaning up the same, it is found that:

The estimated clean up costs for the damage is around $6 million per day and which will take months and years to contain it. By analyzing the contours of the damage and poring over the stated facts and figures of the incident, certain theories are being put into perspective (Barrage, Chyn and Hastings, 2014). After BP released the income statement for the fourth quarter of 2010, it was estimated that almost $40.9 billion was being taken as charge before tax and other considerations. BP has been forced to account for this charge as non-operating item as damages cannot be included in daily operational income statement since it is counted as a contingent liability. By going though the cost analysis scenario, it can be derived that the companies cannot shy away from the core responsibilities towards ensuring the safety and security aspects of their activities and their consequences, if and when damage occurs, especially in proportions of this scale.

The above mentioned cost does not include the penalties and fines that will be imposed on BP and its contract partners, which reflects how much damage this incident has caused to the American economy at large and also the political implications in the context of present scenario and for the future as well (Dismukes, Barnes and Upton 2014). Penalties can be as high as $4300 per barrel of oil which got spilled in the Gulf of Mexico, which will go into an escrow account for payout related to the damage. Since ecological cost of damage is very much related to the economic cost of the US government as a whole, the state administration will try to push for greater imposition of penalty and fines so as to ward off any probable losses in the future and most significantly act as a deterrent to other global oil explorers, such as Exxon Mobil, Shell, among others (Cisneros‐Montemayor et al. 2013).

Political impact and motivations:

Any industrial disaster has political ramifications, both nationally and internationally. After the disaster happened, the president of the nation, Barrack Obama decided to put all further oil explorations on hold. Only recently he called for the opposite to do the same (Lilley and Firestone 2013). In the aftermath of the disaster, the governor of California also put all drilling actions on hold. Government legislators were rallying around to support the introduction of a new bill aimed at producing clean sources of energy, but since the bill also included the provision of offshore drilling in wells, it proved to be a headache for the authorities in amending the same in the backdrop of this disaster (Chang 2014).

In recent years, there have been several similar examples of oil spill disasters, if not to the scale of this one, but the experience of those have prompted the governments to sit up and take note of the incidents and draw up alternative measures to meet the needs of the world economy on urgent basis (Lilley and Firestone 2013). For example, the gulf war oil spill has had tremendous impact on the global economy as billions of dollars were spent in restoring the condition of the surrounding environment and also for incurring associated penalties and litigation costs.

Conclusion:

Based on the above deliberations, it can be inferred that apart from the economic consequences of the disaster, BP has to face the reality and meet up all the costs, like social, political and regulatory while continuing its operations in the safest manner as possible. Since the company incurred significant costs in containing the damage only, socio-political considerations are to be given prime importance as regulatory changes and amendments affect the functioning of the company in the long run. Therefore, it must be noted that, BP has to formulate a comprehensive strategy and outline the areas of concern related to implications of economic, social and political factors.

References:

Barrage, L., Chyn, E. and Hastings, J., 2014. Advertising, reputation, and environmental stewardship: Evidence from the bp oil spill (No. w19838). National Bureau of Economic Research.

Chang, S., 2014. BP OIL SPILL FROM THE VIEW OF MONEY FLOWS. Petroleum Accounting and Financial Management Journal, 33(2), p.23.

Cherry, K.E., Lyon, B.A., Marks, L.D., Nezat, P.F., Adamek, R., Walsh, S.D., Fitzgerald, K.B., Anbinder, D.R. and Bernacchio, C.V., 2015. After the BP deepwater horizon oil spill: Financial and health concerns among coastal residents and commercial fishers. Current Psychology, 34(3), pp.576-586.

Cisneros‐Montemayor, A.M., Kirkwood, F.G., Harper, S., Zeller, D. and Sumaila, U.R., 2013, November. Economic use value of the Belize marine ecosystem: Potential risks and benefits from offshore oil exploration. In Natural Resources Forum (Vol. 37, No. 4, pp. 221-230).

Dismukes, D.E., Barnes, S.R. and Upton, G.B., 2014, June. Economic and policy issues in sustaining an adequate oil spill contingency fund in the aftermath of a catastrophe incident. In 37th AMOP Technical Seminar on Environmental Contamination and Response, Environment Canada, Canmore, Alberta (pp. 3-5).

Humphrey, P., Carter, D.A. and Simkins, B., 2016. The market’s reaction to unexpected, catastrophic events: The case of oil and gas stock returns and the Gulf oil spill. The Journal of Risk Finance, 17(1), pp.2-25.

Lamendella, R., Strutt, S., Borglin, S., Chakraborty, R., Tas, N., Mason, O.U., Hultman, J., Prestat, E., Hazen, T.C. and Jansson, J.K., 2015. Assessment of the Deepwater Horizon oil spill impact on Gulf coast microbial communities. The metabolic pathways and environmental controls of hydrocarbon biodegradation in marine ecosystems, 16.

Lilley, J. and Firestone, J., 2013. The effect of the 2010 Gulf oil spill on public attitudes toward offshore oil drilling and wind development. Energy policy, 62, pp.90-98.

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