Black days for BP

FLAMES engulfing the Deepwater Horizon oil rig, causing black oily smoke to roll into the clear blue sky before it collapsed into the sea, were only the beginning of Tony Hayward's worst nightmare.

• The disastrous slick has left the oil giant open to attack from all sides. Picture: Getty

The explosion, which killed 11 men last month, caused a nearly unstoppable gush of sticky black crude, as much as 20,000 barrels a day, slowly seeping its way to the US coastline.

On Friday night, oil hit the first of the Mexican Gulf islands, stymieing a massive attempt to keep the black stuff at bay with dispersants and a 700,000ft boom.

Outraged volunteers had already begun recovering dead tortoises from the beaches as the black poison seeped closer to Louisiana's delicate wetlands, threatening birds and one of only two breeding grounds in the world for Atlantic bluefin tuna.

As the oil slick – estimated to be the size of Liechtenstein – threatens habitat and the livelihoods of shrimpers and oyster farmers, clamour from the environmental lobby to shut down deep sea oil recovery is growing.

It wasn't supposed to be like this for chief executive Hayward, the University of Edinburgh geology PhD who took the top job in 2007 with the aim of cleaning up BP's reputation.

His predecessor, John "Sun King" Browne, had grown the business rapidly through acquisition but was tainted by the Texas City oil refinery blast in 2005 that had killed 15, and the Alaska pipeline spill a year later.

Hayward took the top job with the pledge to focus "like a laser" on safety. But he also drove BP further and deeper than the industry had gone before. Until this, BP has been staking its future on deepwater, making discoveries last year in some of the deepest water yet in the Gulf of Mexico and recently buying properties off the coast of Brazil and in the Caspian Sea.

Before it crumpled and exploded under extreme deepwater conditions, the Deepwater Horizon rig was a drilling depth of just over 18,000ft in 5,000ft of water. At BP's Tiber test well, the same rig had drilled to world record depths, showing that it could go that far. But the cause of the explosion last month is still a mystery and was worsened by the deepwater failure of the rig's blowout preventer. Mining the depths have come with a stringent cost.

As a result of the catastrophe, Washington has slapped a moratorium on new offshore drilling in US waters, turning around a controversial decision made just a few weeks before. The move threatens the industry as extraction of increasingly scarce hydrocarbons becomes more difficult – driving oil explorers into deeper waters, environmentally-toxic oil sands recovery, or more politically unstable geographies.

This week, BP, along with representatives from Transocean and Halliburton, the oil field services group responsible for cementing the blowout preventer that failed, will face the heat of a Congressional hearing. BP will be represented by Lamar MacKay, president of BP America. Hayward will be staying in Alabama, monitoring efforts to contain the massive slick from BP's incident command centre in Mobile.

Hayward, as if trying to avoid the condemnation received by Akio Toyoda when he appeared tardy in apologising for the Japanese car firm's mechanical failures, was quick to put his hands up. He flew out from his home in the UK to appear fresh-faced but worried on US television, where last Monday he confirmed BP was responsible for the clean up – but that Transocean was in the frame for causing the accident.

"This wasn't our accident," he said on ABC's Good Morning America. "This was a drilling rig operated by another company. It was their equipment that's failed; it was their systems and processes that were running it. We are responsible not for the accident, but we are responsible for the oil and for dealing with it and for cleaning the situation up."

Transocean, a global leader in deepwater drilling, is unusual in that it is based in landlocked but tax-friendly Switzerland. Its roots, however, lie in Louisiana.

It is BP that has the unlucky fate of having its name now associated with what is shaping up to be one of the worst oil spills in US history. US President Barack Obama refers to it as "the BP oil spill", while broadcasters and newspapers have lapsed into using the firm's historic name – "British" Petroleum, as if it has become a malign but camp film villain played by Alan Rickman.

Even Sarah Palin, one of the most pro-drilling politicians in the US, labelled BP as "foreign" and potentially untrustworthy – despite the fact her husband Todd worked for BP for over 18 years. The financial cost to BP is currently incalculable, as the firm faces the cost of loss of revenues, the cost of the clean-up, possible fines and a host of lawsuits – last estimates have as many as 20,000 claims lining up against the firm.

The US media has tended to sneer at BP's statement it would recognise "legitimate claims". Attorneys general from the five Gulf Coast states have urged BP specifically to define what is meant by "legitimate". Troy King, attorney general of Alabama said the word was "unacceptably nebulous".

BP has already set out an initial $25m for the four states most affected to help begin their efforts to prepare. But, King said, '"that's not going to be enough".

Although the cost is impossible to measure, Hayward has insisted BP will "bounce back stronger as a consequence of this, not weaker" Already analysts are attempting to mark out the damage – $2bn for the clean-up, similar to the costs associated with the Exxon Valdez 20 years ago – plus another $10bn for liabilities.

Compared with an estimated cash flow of $30bn, Panmure Gordon analyst Peter Hitchens insists: "Yes it is going to have an impact, but it is not going to cripple the company." He estimates that, taking into consideration tax breaks on the losses, this means BP could be left holding closer to $5.5bn rather than $12bn.

Nor is BP alone in bearing the costs. The well, the Mississippi Canyon 252, is 65 per cent owned by BP, while others include Anadarko, which owns 25 per cent, and Matsui Oil Exploration, which holds 10 per cent.

But there are other costs to face. Exxon, the firm behind the US's worst disaster when its tanker the Valdez spilled 260,000 barrels of oil on to the Prince William Sound, Alaska, still faces fines of $5.5bn – although Hitchens points out this has since been reduced to charges of about $1bn as it still goes through the courts. Yet environmental groups point out that some of the oil still lingers on the Alaskan coasts some 20 years on despite a vast clean-up.

"The question is who really pays for the clean-up?" says Hitchens. "We are not sure who is really responsible. BP contracted everyone to do it, so they should have been doing the job properly.

"Transocean were the drilling contractor, it looks like Halliburton's cement job didn't work properly. Is it Halliburton? Is it Cameron, which provided the blow-out preventer, it is Transocean who were doing the drilling?

"No-one is going to stick their hands up at this stage; they will wait to see who is responsible and take it from there. BP are fairly clear – they say yes it is our job to clean up the spill but we are not responsible for this action."