BP's (BP.) exposure to potential oil-spill costs and liabilities remains uncertain as recent hearings by the National Oil Spill Commission illustrates the complexity and length of time it will take to determine the responsibility between BP, its partners in the Macondo well, and oil service vendors. BP still faces a wide range of potential oil spill costs, civil penalties, and fines from litigation that may take several years to resolve.
We see three main concerns for BP at this stage. First, we believe near-term oil spill related costs could exceed the estimates embedded in $39.9 billion of pretax charges taken by BP in the second and third quarters. We believe oil spill efforts could easily get derailed by weather or logistics, pushing costs into 2011. Daily oil spill cleanup costs could range from $20 million to $45 million over the next two quarters, adding up to a range of $3.6 billion-$8.2 billion. This could force BP to take additional pretax oil spill related charges over the next two quarters. Future civil penalties and legal penalties could add another $10 billion or more to BP's reported pretax charges depending on the level of negligence to be determined.
Second, we're concerned that it could take years for BP to restore its reputation for operating safety, particularly in the US offshore. BP may have received a glimmer of hope that it can defend against gross negligence charges after Fred Barlit, the chief counsel for the National Oil Spill Commission, indicated that they have not seen instances where decisions were made in favour of dollars over safety. However, we caution that this is just the beginning of a year or two of investigations, followed years of litigation. New CEO Robert Dudley moved quickly to reset BP's safety culture by forming a new safety division headed by Mark Bly. However, this is BP's second try at installing a new CEO with a safety mandate after Tony Hayward took over from John Browne in 2007. No doubt the public and regulators are more sceptical of BP's ability to improve safety after the Macondo oil spill and will require proof that new safety measures are working.
Third, we need to see how BP reshapes its upstream project portfolio in the coming years after asset sales to determine its long-term growth path. Although the firm is off to a good start with agreements for $14 billion in asset sales, BP must remain on track to achieve targeted asset sales of $25 billion-$30 billion by year-end 2011. We believe BP's broad asset base may provide enough noncore properties for sale, but we recognise that more attractive growth assets could be sold to meet asset sale targets. We estimate BP's annual production growth rate to hover in the 1%-2% range from 2011 to 2014 after assuming that a slowdown in the US offshore could offset progress with projects abroad and onshore in the US.
