It’s not a topic I wanted to have to write about, but it’s one I can no longer ignore.
I begin by sending my condolences to the 11 people who died in the fire and explosion on the Transocean drilling rig, and my commiserations to all who now face loss of income or livelihood as the oil spill affects the fishery, the beaches and the coastal waters.
I do not wish to comment on the relative responsibilities of BP, the oil company, Transocean, the drilling company and Halliburton, the oil services company which provided various services to assist with the well. They have set out their own views of their roles on their own websites.
Nor is anything here offered by way of investment advice. Holders of relevant shares should take advice as appropriate.
I wish to look at the wider consequences of the accident.
The first consequence is the Presidential decision to delay further deep water drilling. The world is short of oil, and was expecting more discoveries in deep water to fill the gap between current energy demand and future supply of alternatives. This means less exploration activity and fewer finds. There is more uncertainty in governments and even in the oil industry about how much can be done operating 5000 feet beneath the waves. This for choice means slower growth and dearer fuel in the months ahead.
The second consequence is damage to UK/US relations. BP is the oil company responsible for the exploration. The most powerful man in the world, The US President, at the head of the world’s most powerful military, feels he has to engage with the crisis but appears powerless to marshall forces which can stem the oil flow. Naturally he turns to blame BP and to remind American opinion that a foreign oil company is at the heart of this crisis. Many British people look on with a sense of helplessness as well – none more so no doubt than frustrated executives of BP who see the need to stop the flow but have so far been unable to do so.
The third issue that worries me is the impact on corporate UK. The FTSE 100 Index accounts for 86% of the market value of quoted UK companies. BP, even after recent share price changes, accounts for about 8% of the value of the index, or around 7% of the UK total.
Many savers depend on dividends from the larger shares quoted in the UK. Many pension, charitable and other funds still have large positions in UK shares, and therefore also in BP. In 2008 these same funds were hit badly by the collapse of some banks and the sharp fall in prices of all quoted bank shares. Today RBS and Lloyds still pay no dividends where once they paid substantial dividends, and some other banks and financial companies are paying less than they did in their heyday. BA is no longer able to pay good dividends either, as its employees strike and it makes losses. The oil companies, 18% of the Index, and mining companies have come to represent a larger proportion of total dividends following the hard times in banking.
In 2009 BP worldwide made a profit of around £20 billion, paid around £8.4 billion of tax, and offered dividends worth about £11 billion. It is a reminder of what a large Group it has become. However, if the oil continues to gush out, and if the US requires BP to meet large costs for prevention of pollution onshore, compensation for loss of income to local businesses and clean up if oil nonetheless comes ashore, we could be talking big money even by BP’s standards.
Big British business has been badly hit by a series of disasters. The Credit Crunch, the airline cost issues and the accident in the Gulf are unrelated, but they do all have the same effect. They take reveneus away from big British companies, revenues which the Treasury wanted to tax and shareholders wanted to share in. The fragile UK eocnomy cannot afford more accidents on this scale.
May 31, 2010
I feel for BP as they go through this process of being excoriated by all and sundry. It's a pity that the accident happened to a 'British' company although anyone who knows about these things realises that there isn't an awful lot of British involved in this accident.
This was an American rig (I believe Transocean are registered in Switzerland for tax purposes but they are an American company – I've worked on many of their rigs), which will have been staffed wholly by Americans, working in American waters, working to procedures drawn up by Americans in Houston offices, and approved by the American regulator (MMS). BP is registered on the London stock exchange and, as you point out, this is where the 'British' part of it comes into play and it will be small investors here who suffer.
If the massive CGT rise does take place then investors in BP shares may be doubly hit. Imagine the nightmare scenario that you lost a lot in banking shares then decided to go to the safe haven of BP, only to find them mired in this and no way to get out without taking a large hit from CGT. You can't even put money in the bank to make interest nowadays. Australia raising taxes on miners isn't helping matters.
Biscuit tin under the bed maybe?
May 31, 2010
And we came last in the Eurovision contest! Nobody loves us anymore. If we get knocked out early from the World Cup, expect a double dip, deep water depression to permeate our shores.
As far as Deepwater Horizon is concerned, I agree with Norman. Can we claim sovereign immunity, like the Mexicans did with the Ixtoc 1 blowout, back in 1979 🙂 . DH blowout looks like a re-run of Ixtoc 1. The latter was only curred by the relief well; it took months and a lot of concrete!
May 31, 2010
Norman included the sentence : 'Imagine the nightmare scenario that you lost a lot in banking shares then decided to go to the safe haven of BP, only to find them mired in this and no way to get out without taking a large hit from CGT.'
I agree with most of what you and John Redwood say here, but if one had shifted from banks to BP and now felt compelled to sell BP then you would be looking at capital LOSSES on the BP shares and so would have no CGT to pay! Also, presumably, the new CGT regime will take effect from next May.
Personally, as a small shareholder, I can tell you that most shareholdings have done dreadfully over the Blair/Brown era so whatever is done to CGT is unlikely to affect small shareholders too badly in the near term – second home-owners however may well feel quite some pain!
May 31, 2010
I should drink more coffee before posting! I realised that soon after I posted it that I'd boobed.
It did make me wonder if we can use Capital Loss Tax to write off any losses against our tax bills? It does seem as though it should work both ways – tax us on gains and let us write off losses against tax otherwise the taxman is playing with a stacked deck.
As an aside I'm having to post this from Internet Explorer, every time I try with Mozilla Firefox (v3.6.3 on one PC and v3.6.4 on another) I receive 'page not found' errors when trying to open the comments section.
June 1, 2010
Same here. Site is throwing back a lot of "404" errors JR. That is; we are finding your server, but the server is not finding the page on your site. BTW. You can claim the loss on the CGT form.
June 1, 2010
I got this. I saw the number of comments increasing and thought maybe JR had got sick of my rantings and barred me. LOL.
May 31, 2010
Another point to note is that if the oil doesn't come from deep water drilling in the Mexican Gulf, the most likely alternative is that it will come from Canadian tar sands, and that is much worse for the environment.
June 1, 2010
But it seems inexplicable that there is no effective contingency plan for the not unlikely possibility of a rig disaster – or in fact any major spill at sea.
With the billions of barrels and trillions of dollars in the oil industry surely we have the right to expect far better than this?
May 31, 2010
I think you’re right to point this out.
I spent my first ten years of work in the employ of BP, they sponsored me through university. They were a fine employer.
The concerning aspect to this, is the playing in the US media and in parts of the US government an anti “foreign” and even a hint of anti British sentiment. These criticisms may get louder if the leak is active until August.
I can’t recall a similar response from these shores when we had the Piper Alpha disaster, a rig owned by the US company, Occidental
The roll of the dice will ensure that in the long term accidents will happen, in the air and on the sea, it is unbecoming to score cheap points.
No doubt in due course, an inquiry will determine the cause of the disaster.
June 1, 2010
Re: Piper Alpha – the taxpayer actually financed much of the replacement platform, the cost being offset against PRT liability. The net cost to Occidental was quite small in comparison. Of course, the PRT tax take was much higher than royalties in the deepwater USG, so the UK government was effectively sharing the risk and the reward in a way that the US government hasn't.
P.S. I'm only able to make postings by clearing cookies. There is something being set in a cookie that is interacting badly with the site software, producing not found errors. JR – you need to ask a techie to sort it out!
May 31, 2010
I think all undersea oil extraction is fraught with risk. I read last week that a rig in the Norwegian sector had to be closed down and evacuated for high pressure oil/gas problems. Apparently their have been 4 similar incidents in as many months in the North Sea.
Don't believe that the USA is in favor of free world trade, rather they believe the rest of the world should be free to buy American made/organized goods.
They are protectionist, look at the Jones act, which forces maritime operations to use USA citizen crews, USA equipment and USA built ships.
In is coming out in hearings that the manning levels on the rig had been reduced at senior engineering grades, substituting less qualified mechanics.
June 1, 2010
This could be a bona fide 'black swan' event. Will America's love affair with crude change if this disaster does run for a couple more months?
How angry will they get? What if the anger becomes directed at 'oil' in general? This could be a catalyst that changes US (and western) energy policy significantly.
June 2, 2010
I have been very disappointed by the US response to this crisis. I have long argued that the 'special relationship' is hogwash and has been since Truman got his feet under the oval office desk (with a notable thaw between Reagan & Thatcher).
The US is a protectionist country, largely due to its size and the availability of natural resourses. It can afford to do what it likes to a large degree and allies are useful idiots to a sizable degree.
The Obama administration largely caused this disaster – there are oil reserves in much shallower waters but they will not allow them to be drilled. You won't hear that though, just the demonisation of numerous 'American' companies involved in this operation because they are 'British'. The American public laps it up and nobody questions it there.
How galling then to remember the horrible Hague 'suck up' to Hilary Clinton in Washington last month. The American people have always been the friend of the British. Their political classes are like ours have largely become – detatched from the feelings of their population.
June 3, 2010
It says something about our society that the 11 dead have been barely mentioned in the news while the miniscule amounts of oil reaching shore is everything. Watching the evening news we see TV crews rushing around the country to find one of the very few beaches where even small brown streaks of oil are visible.
Would that our media loving "environmentalists" spent as much time reporting on the dreadful state of so many of our beaches because sewer pipes are too short. That could be ended at a cost of millions not billions.
June 10, 2010
It is disappointing, if predictable, that our PM is reported as having endorsed Pres Obama's extravagantly hysterical and politically-motivated criticism of BP; sorry British Petroleum! Yes, it is a disaster. Sadly, our PM was still at school when an even greater disaster took place in the North Sea. On July 6 1988, The Occidental Petroleum-owned Piper Alpha platform exploded. 167 men were killed (15x as many as were tragically killed on the BP-hired rig Deepwater Horizon) by the explosion and resulting fire; this was out of a crew of 220-230. Not only was Occidental Petroleum a US corporation (NYSE: OXY), albeit working Piper Alpha via its UK subsidiary, but the platform was constructed by the wholly-owned UK subsidiary of J Ray McDermott (now McDermott International NYSE: MDR), a very US corporation. Did the PM, so that he could calm Obama down in the Press Conf, take the trouble to get himself briefed on Piper Alpha and the sympathetically unhysterical way with which the disaster was then addressed politically and in the press/tv? I'm afraid to say that "I doubt it" … but I very much hope that I am wrong! Charles (ex-specialist corporate stockbroker).