BP Banned; the Difficult Road Back

This morning, the EPA announced that BP has been banned from acquiring any new U.S. government contracts due to its "lack of business integrity." The agency said the ban will continue until BP proves that it can meet government established business standards. The ban does not effect current contracts. BP does business with the government in two primary areas; first, they are one of the largest suppliers of fuel to the U.S. military, providing about 10 percent of total fuel purchases. The second area, and more important, are the oil and gas leases that the company has with the government in the Gulf of Mexico. Under U.S. law and international treaty, the federal government owns the mineral rights under U.S. controlled waters. It leases those mineral rights to private companies for a royalty on production to be paid into the U.S. Treasury. Leasing new areas is how oil and gas companies grow their reserves and production, and without new leases, their production (and cashflow) will begin to decline.

Over the next five years, the Department of Interior plans 15 lease sales. With BP on the sidelines, unable to acquire new leases (at least for the time being), they are at a competitive disadvantage to other offshore operators like Chevron, Shell and BHP. The time that they are delayed will likely cause their long term reserves and production to fall behind their competitors and cost them pretty seriously. While I agree with the EPA's decision, we, as a nation, are certainly in a conundrum. I say that because BP needs to remain viable in the U.S. so they can continue to pay for clean up, environmental fines, criminal fines and civil penalties. To remain viable, they need to clean up their own organization and change the culture to permanently reduce their operational and safety risks so they can get back to business. That's not easy, even in a small company. In a global corporation with headquarters far removed from local operations, that task is almost impossible.

It's going to take a huge effort on the part of BP to re-qualify to do business with the U.S. government. While I believe it's a small risk, if the company doesn't meet the EPA's requirements in a timely manner, the U.S. taxpayer could be left holding the proverbial bag should the company decide to withdraw from U.S. operations and not meet its obligations to victims, the environment, and the U.S. taxpayer.