BP's Oil Spill Costs Add Up

Total potential liabilities could be up to tens of billions of dollars, and will take several years to resolve

Catharina Milostan 28 May, 2010 | 3:33PM
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While BP's latest "top kill" effort to stop oil flowing from the Macondo well may take a few more days to determine level of success, estimates for total oil recovery costs and potential liabilities continues to rise. We expect to increase our original estimate of $4-$11 billion for BP's total spill-related costs, to account for higher spill containment costs, potential liabilities and civil penalties. BP's oil spill recovery costs quickly rose again to $930 million from $760 million, as announced on May 24. This suggests daily costs rose to about $42 million per day during the four-day period beginning May 24, up from an earlier estimated daily rate of $22 million per day. Current "top kill" measures to inject drilling mud into the blowout preventer to stop the oil flow may have added to costs. Expanded oil containment costs in the Gulf of Mexico and along shorelines and new settlements could also be factors behind the cost increase. A successful "top kill" could reduce daily oil spill recovery costs, but the costs to contain oil already spilled continues. Another 60-90 days of oil containment efforts at current daily costs could bring near-term oil spill recovery costs up to $3-$4 billion.

Longer term, environmental costs are exceedingly difficult to estimate, and will depend on a number of factors such as how much oil makes it to shore, and extent of the oil spread across the Gulf of Mexico. We estimate that BP could face costs of up to $5 billion, depending on the severity of the shoreline impact. Actual costs could vary from this estimate greatly, as shoreline impact remains unpredictable. Similarly, estimating potential liabilities for lost earnings to the fishing and tourism industries is challenging, but to consider a worst-case scenario, we note that the Gulf Coast fishing industry pulls in roughly $2.5 billion a year, and tourism another $1 billion-$2 billion. Determining the amount of oil spilled into the Gulf of Mexico remains difficult. New government estimates suggest the rate of oil leaking from the well increased to 12,000 to 19,000 barrels per day, up from a previous estimate of 5,000 barrels per day. Total potential liabilities, which include civil penalties of up to $4,300 for every barrel of oil leaked into the Gulf, could be up to tens of billions of dollars, and will take several years to resolve.

Catharina Milostan is an equity analyst with Morningstar.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
BP PLC392.70 GBX1.06Rating

About Author

Catharina Milostan  Catharina Milostan is a stock analyst with Morningstar.

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