August 14, 2006 | Mark Paradies

MONDAY ACCIDENT & LESSONS LEARNED: BP Pipeline Corrosion

I don’t have any inside information. I don’t know any more than is available in press reports 1), 2), and 3).

What do I know???

I know there is a lesson that all senior executives should learn.

And I know the pipeline leak is costing BP much more than they ever imagined.

Let’s look at some estimates of the cost…

The most obvious is the lost production. The hit to BP’s bottom line. If they loose 200,000 barrels of production (1/2 the field) for 20 days, that equals 4,000,000 barrels of oil that will not be sold. At a price of $70 per barrel, that is $280,000,000. That’s a sizable hit in a quarters earnings. But that is just the tip of the iceberg of costs.

Perhaps the biggest loss to BP is that this spill could provide the bad publicity that keeps drilling in the Arctic National Wildlife Refuge from happening. If it is assumed that BP would lead that effort, an estimate of the loss is 1,000,000 barrels per day of production over a decade or more. A quick calculation …

1,000,000 barrels per day X 365 days per year X 10 years X $40 per barrel = $146 Billion.

But there is even a bigger loss to the US and world economy. The loss of the ANWR oil supply impacts the economy. Oil prices went up 3% on the news of a loss of production of 400,000 barrels per day. If the loss of 1,000,000 per day is figured into the price of oil, that’s a 7.5% increase in the price of oil over a 10 year period. I’m not an economist, but I can make an attempt estimating the impact on the average family…

If I assume $3 per gallon gas and the price is passed through to consumers, that’s a 22.5¢/gallon price increase over 10 years. If families in the US fill up twice a week at 15 gallons per fill up, that’s over $300 per year per family. That might sound small. But would BP reimburse all of us? All they would have to do is make a car payment once a year for every family in the US. Or maybe they should buy a new car for 10% of the families every year. I think that would make BP a bigger auto supplier than GM or Toyota. Got the idea … big impact!

Of course there is also a more personal side to this story. Within BP a big impact like this won’t go unnoticed. Somebody’s career – or maybe several careers – will be ruined.

And what about BP’s corporate reputation for protecting the environment? Didn’t they pay for a bunch of commercials about how environmentally friendly BP is? Kiss that PR champaign goodbye. I’ve already seen pictures of workers cleaning up oil from the pristine tundra. This probably won’t be as bad – PR wise – as Exxon’s Valdez oil spill (the North Slope is more remote and there aren’t very many cute animals), but it will be a big black eye.

So what should senior management (CEO’s, COO’s, CFO’s, …) be learning?



Give me your opinions as comments by clicking on the comment link below…

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