The prospect of up to $18 billion in new fines for the 2010 Gulf of Mexico oil spill could pressure BP to sell assets from the Americas to Asia and Russia, where its interests risk being dragged into a political standoff between Moscow and the West.
Natixis analyst Abhishek Deshnade:
“I wouldn’t be surprised due to the ongoing crisis in Ukraine and Russia if BP would like to reduce its huge 19.75 percent stake in the BP-Rosneft joint venture to cut their risks there, even though it is profit making.”
BP’s assets in Russia generate up to a quarter of its global production and the company has said it remains firmly committed to them despite the crisis in Ukraine, where separatists are being supported by Moscow. The West has imposed economic sanctions on Russia and Moscow has countered with its own restrictions.
BP declined to comment about assets sales.
BP’s Russian exposure an “overhang” and said that and the increasing costs of spill cleanup explained why BP’s shares are valued less than its peers, according to Citi analysts.
A reduction of the oil company’s Russian exposure would not be easy and buyers were limited. They could include China, if cleared by the Kremlin, or Rosneft itself, according to Deshnade, though the state-owned company is struggling because of sanctions.
BP has already divested around $50 billion of assets in recent years, slimming down to focus its growth on the Gulf of Mexico, Russia, Angola and the Caspian Sea.
Investors have demanded oil majors cut high costs and, after the ruling, BP may “look to extend the divestment program to cover an increase in fines,” according to Bernstein Research analysts.
Potential sales targets include BP’s 17 percent interest in the North West Shelf LNG project in Australia valued at $7.8 billion; its stakes in the Valhall and Skarv oilfields in Norway at a combined valuation of $4 billion and the Itaipu offshore project in Brazil for $1.3 billion, according to Bernstein.
Bernstein also valued BP’s stakes in the Azerbaijan BTC pipeline at $2.3 billion; the In Salah field of Algeria at $1.3 billion, and its Rumaila Iran asset at less than $1 billion.
In the United States, BP’s shale unit has so far failed to deliver and the Mad Dog 2 platform in the Gulf of Mexico was put on standby in 2013 because of cost concerns.
In Alaska, BP is a partner in a natural gas project that could cost between $45 and $65 billion.
BP has set aside $42 billion for cleanup, compensation and damages arising from the April 20th, 2010 oil spill in the Gulf of Mexico, including $3.5 billion for fines under the Clean Water Act.
The ruling could make BP liable for up to $17.6 billion in fines if an appeal fails, potentially leaving it with a significant shortfall. The maximum fine under a simple “negligence” ruling would have been $4.5 billion.
BP chief executive Bob Dudley to employees in an internal memo:
“This decision represents another step in the process, but there is a long way to go in resolving this issue.”
“A lengthy appeals process reduces the net present value of the fine. We note that Exxon took almost 20 years to settle the 1989 Valdez spill.”
Penalties based on how many million barrels spilled will be assigned after the next phase of a civil trial over the accident, scheduled for January.
Citi raised its rating on BP shares to “buy” from “neutral” following the news, and S&P also maintained its “buy” recommendation.
The ruling is unlikely to have much impact on BP’s dividend payments in the near term, as it had $27.5 billion in cash and equivalents at the end of the second quarter.
Citi in a note:
“We believe the financial implications of this ruling will remain significantly below the maximum — the Citi estimate is 8.2 billion — a sum that should not impact on BP’s ability to fund future growth ambitions nor shareholder dividends.”
But the $690 million annual dividend BP received from Rosneft in July is less certain going forward, according to Gimme Credit analyst Phillip Adams, as Rosneft has asked the Russian government for $42 billion in help to weather sanctions.
After the spill, the U.S. government barred BP from new work in the Gulf of Mexico and new contracts to supply fuel to the military. The ban was lifted in March. It is not clear if the court’s ruling could change that.
Basil Petrides, a Beaufort Securities sales trader:
“I’m not buying BP here. The ruling opens up the door in the United States to more fines for BP.”