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Risk Analyst: Oil Liability Tough to Tally, But BP Will Likely Survive

July 27, 2010 at 12:00 AM EST
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Soon-to-be CEO of BP, Bob Dudley, is set to take over for Tony Hayward on Oct. 1. Gwen Ifill speaks with Holly Pattenden of Business Monitor International in London about the leadership switch, the company's liability in the oil disaster and prospects for survival.
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GWEN IFILL: More now about what’s behind the changes at BP and what lies ahead.

That comes from Holly Pattenden, head analyst for the oil and gas industry at Business Monitor International, a risk consulting firm.

For the record, BP is one of many clients that seeks information from her firm.

Welcome, Ms. Pattenden.

HOLLY PATTENDEN, Business Monitor International: Thank you.

GWEN IFILL: What can you give us of the significance of this change in leadership at BP?

HOLLY PATTENDEN: The most important aspect of it is that Tony Hayward is going. He’s really been so unpopular because of the gaffes that he’s made and because of the impression that he’s given, both with the U.S. government and with the broader U.S. public.

And this change of leadership is really a way to try and restore BP’s reputation in the U.S.

GWEN IFILL: So, is his departure more about show, the P.R. image war, or is it about the substance of a change in direction for BP?

HOLLY PATTENDEN: I think it’s both.

Certainly, Bob Dudley’s tact and diplomacy are really going to stand in his favor, when he has this enormous task of rebuilding BP’s reputation with investors and the public. But, also, he’s — he’s going to have to bring in really quite broad reforms to BP, one of which is going to be making safety absolutely paramount in all concerns at the company.

GWEN IFILL: We heard today also about this incredible third-quarter — $17 billion third-quarter loss. Was the timing of Hayward’s departure and Dudley’s arrival, as it were, were those two things related?

HOLLY PATTENDEN: Yes, I think they most certainly were.

It was important that — that such a catastrophic — after such a catastrophic loss, that BP was being seen to make really broad and important changes to the way that the company works. And I definitely think that they were timed to come together.

GWEN IFILL: Tell us what you know about Bob Dudley and how significant it is that they promoted an American now.

HOLLY PATTENDEN: It’s very significant. They have never had a foreign CEO before, so it’s a big change for BP.

It is very important that he’s American, obviously. But, also, he was born in New York, but raised in Mississippi. So, he’s got very intimate knowledge of the Gulf area of the U.S. And that’s certainly seen as an asset for the future of his position at BP.

GWEN IFILL: As we watch all of their announcements today, what kind of fiscal shape is it possible — is it possible to know what kind of fiscal shape overall BP is in?

HOLLY PATTENDEN: Yes.

I mean, it’s obviously made a provision of $32 billion for costs — cleanup costs and potential compensation. It can meet that — that bill. It’s going to sell a huge amount of assets, about $30 billion worth of assets. It’s also got quite a lot of cash flow. I think it’s still going to be in fairly strong financial shape, even after this disaster.

GWEN IFILL: When they say they’re going to sell $30 billion in assets, does that mean they assume that’s how much all of this is going to cost? That means that there will be assets sold in the future, or…

HOLLY PATTENDEN: Yes. Well, I mean, they have provided for $32 billion on their balance sheet today as part of the results.

But that cost is predicated on the fact that they will not face criminal charges. If they were to face criminal charges of gross negligence with — in relation to operating the rig, then we could see that cost almost double. So, some analysts are suggesting a bill of up to $60 billion.

GWEN IFILL: So, there are other costs down the road that dividend — that shareholders ought to be aware of, potentially?

HOLLY PATTENDEN: Yes. It’s been very difficult to try and work out what the potential liabilities could be, because there are so many class-action lawsuits in preparation, in the making. So, we can’t really work out exactly what BP’s end liability is going to be.

But it’s important to be aware of the risks that it could be significantly larger than what they have provided for so far.

GWEN IFILL: At the same time, a couple of weeks ago, I remember there was a kerfuffle here in the States about whether BP was going to pay out dividends to shareholders at the same time that it was wrestling with all of these additional costs.

Today, they lifted the freeze they put on the dividends after that debate broke out. Is that something which was meant to mollify shareholders? Is that something which may make people more uncomfortable?

HOLLY PATTENDEN: Well, I doubt it will mollify shareholders in particular, because most shareholders own BP for the sake of the dividends, all these pension funds. There are 18 million Britons who are exposed to BP through their pension funds.

And it’s not going to mollify them, but I think it’s going to mollify the broader market and the U.S. government and public. So, BP has put a freeze on all its dividends for — for 2010 and is probably unlikely to pay any in 2011 as well.

GWEN IFILL: You talk about mollifying the U.S. government and also Americans living in the Gulf. Part of the announcement today was also that BP would take — would — would deduct the cost of the cleanup from its U.S. tax payments.

Is that likely to mollify or is that likely to inflame people who have been watching how BP has been managing its finances?

HOLLY PATTENDEN: I imagine it will probably create more ill will in the short-term. Certainly, that’s the way that a lot of media reporters who have presented this story.

Nonetheless, when a company makes really massive losses, obviously, it doesn’t pay as much tax as it would when it was making large profits. And, under U.S. law, you are — a company is allowed to reclaim 35 percent of its tax bill in the event of making significant losses like this. So, it’s normal corporate practice to do so, although, yes, it has been presented in a bad light by many media reporters.

GWEN IFILL: So, what about the timing of the well cap? Could they have moved Tony Hayward from this position, Bob Dudley into the new position, could they have made this decision about selling assets if they did not have that well capped?

HOLLY PATTENDEN: The capping of the well has been an incredibly important development. It means that there’s no more oil or gas actually leaking into the Gulf.

However, the actual disaster is not really going to be — come to an end until the well is finally plugged and cemented, which will happen with the drilling of the first relief well when it hits its target towards the end of the first week of August. But, certainly, they needed to wait until the immediate disaster was over in terms of having capped the well before they made an announcement about getting rid of the CEO, although the actual change won’t take effect until the beginning of October.

GWEN IFILL: Overall, is BP a crippled company now that this has happened, after all — everything is played out, or is it still a strong company in spite of all of these problems?

HOLLY PATTENDEN: BP has a very strong asset base, spread across around 80 countries. It has assets worth around $250 billion. So, while this is an absolute disaster financially and reputationally for BP, I think they still have the financial strength to survive in the long run.

GWEN IFILL: Holly Pattenden of the Business Monitor International, thank you so much for joining us.

HOLLY PATTENDEN: Thank you.