BP - Deepwater Horizon

After watching the ’BP: $30 Billion Blowout’ documentary on the Deepwater horizon explosion in April 2010, I still can’t believe how horrendous a catastrophe had to happen before multinational oil and gas company BP, decided to take a real focus on the safety of their workers. Following what U.S. president Barack Obama described as the worst environmental disaster in America, BP’s chief executive Tony Hayward became the most hated man in America. However, it wasn’t just an environmental disaster, in the months following came a political uproar and financial crisis. But with oil becoming a necessity to the general public, the risk factor to oil and energy companies will rise year on year because as it said in the documentary; “Oil, we can’t live with it, or without it”. Due to the excessive need for oil in this day and age, consumers will turn to the most common ethical rationalizations, one of which being Klein (2016) theory that during childhood we all learned to instinctively rationalize our misconduct, for example when someone fills their car up with petrol, although they know it is bad for the planet, they will use excuses such as “Everyone does it” and “If it’s not illegal, it can’t be wrong”.

As a result of this disaster that left 11 men dead, BP’s shares took the plunge with stock falling by 50% therefore meaning they were losing around $12 million a minute. However, it wasn’t always like this, 10 weeks prior to the explosion, from the outside looking in BP could be seen to be on the path towards major growth, ploughing money into the expansion of offshore oil and gas exploration, adding to the $45bn they have invested in the last 6 years. As well as this in April 2010 they outperformed all of their major competitors, putting their current company value at nearly £100 billion. There are a number of different ways in which analysts in the oil and gas industry will value a company, these being;

1.       Enterprise value in comparison to Earnings before interest, tax, depreciation and amortization (EV/EBITDA)

2.       Enterprise value in comparison to daily production (EV/BOE/D)

3.       Enterprise value in comparison to proven and probable reserves (EV/2P)

4.       Price in comparison to cash flow per share (P/CF)

5.       Enterprise value in comparison to debt-adjusted cash flow (EV/DACF)

One of the calculations that would’ve been affected by the disaster is EV/BOE/D, as it can also be referred to as ‘price per flowing barrel’. This then means that because of the significant amount of oil spilled in the Gulf of Mexico, their company valuation would have gone down due to their daily output of oil decreasing from their usual amount of around 260 million litres. However, even though it does have an effect on BP financially, the environmental stand point on the issue would be that BP has a moral and ethical duty to rectify the situation and put preventative measures in place to make sure that this never happens again. Following the disaster BP executives said that they are now going to raise the company’s safety for employees to another level by tripling their risk management, but surely this should’ve already been set in place and my main question here is why did this awful tragedy have to occur for BP to make the decision that safety is their main priority? Their main issue is placing too much of an emphasis on their investors whilst ignoring the needs of their other stakeholders. It’s one thing to offer a healthy dividend to their shareholders but if this means that they have to put their other stakeholders at risk due to cost cutting it is just simply unacceptable and in terms of their track record this isn’t the first time their cost cutting resulted in disaster. In March 2005 because of poor maintenance of their Texas oil refinery due to cutting costs an explosion occurred in which 15 workers died and 180 were left injured.

As well as being ethically in the wrong, BP were also breaking federal law as in the United States, ‘The Clean Water Act’ states that for every barrel that enters the Gulf of Mexico the company will receive a fine. As a result of this BP would have been extremely out of pocket, as around a month into the crisis around half a million barrels of oil had spewed into the gulf and as of January 2015 the fine was luckily capped at $13.8 billion opposed to the feared $18 billion.

Overall, I think that BP deserved everything that came to them as a result of the Deepwater Horizon explosion, because in my opinion I feel that if you have full knowledge that what you are doing is wrong, then you should also have full knowledge that there will be consequences to your actions, especially if these actions are so disgusting that they will result in the loss of people’s lives.

Klein, G. (2016) Ethics in Accounting; A decision-based approach. Wiley.