Crisis-hit BP haunted by the 'smell of death'

• Oil platforms and boats surround the site of the Deepwater Horizon well head operated by BP in the Gulf of Mexico. Picture: Getty

BP stock finished the day down 13 per cent, wiping 12 billion from the company's value.

The slump led analysts to warn the crisis had "the smell of death" about it and could "break" the company and send shockwaves through the pension funds of virtually every adult in the UK.

During the day's trading, BP shares spiralled down by as much as 17 per cent, fuelled by the futility of efforts to halt the flow of oil and speculation that the company could face massive punitive fines as a result of the environmental catastrophe that American authorities now believe is the worst in the country's history.

The White House indicated president Barack Obama would seek prosecution if BP was found to have broken the law. The leaking oil has now flowed unabated into the Gulf of Mexico for 43 days.

Last night, the US government announced it was opening criminal and civil investigations. The statement by attorney general Eric Holder confirmed the probe, though he would not specify the companies or individuals that might be targeted.

"We will closely examine the actions of those involved in the spill. If we find evidence of illegal behaviour, we will be extremely forceful in our response," Mr Holder said in New Orleans.

Meanwhile, a spokesman for BP played down the market slump, saying: "The market is reacting to a bank holiday weekend and disappointment that the 'top kill' (bid to seal the well] didn't work. We are continuing with business and operating things normally. Obviously, the share price falling is not good, but the market is reacting to the weekend's news."

After closing at 4.95 on Friday, BP shares fell to 4.12 as the London markets reopened yesterday, before rallying slightly and closing at 4.30.

BP has now lost more than 40bn of its total value since the leak began, as it fought to repair its damaged reputation and considered the possibility that attempts to staunch the flow of oil may take until August. The firm also faces the possibility it may be barred from operating in the United States if Washington takes tough action against it in the wake of the clean-up effort.

As the largest deep-sea drilling operator in the region, the company has already been hit by a moratorium on activities in the Gulf announced by Mr Obama.

About 40 million gallons of crude has poured into the Gulf since the Deepwater Horizon rig exploded and sank on 20 April, killing 11 workers.

The operation has already cost the company $990 million (682.3m) and yesterday Crdit Suisse warned that the eventual bill could be as much as 14.3bn, taking clean-up costs, claims liabilities and criminal fines into account. That would be enough to virtually wipe out last year's BP profits of 16bn, leading to fears that UK tax receipts could be hit at a time the Treasury is struggling to cope with a budget deficit of 162bn.

In 2009, the company paid 5bn in corporation tax as well as 6.6bn in dividends to shareholders, many of whom are large institutional pension funds, serving millions of people across the UK.

That amounts to about one in every six pounds paid out in dividends by FTSE 100 companies. The index closed down slightly, saved from further collapse by stronger-than-expected growth figures from the US manufacturing sector.

Yesterday, Dougie Youngson, an oil analyst at Arbuthnot, said the situation had now gone "far beyond" concerns that BP's chief executive Tony Hayward could be fired, or dividend payments be cut. "It's got the real smell of death," he warned. "Given the collapse in the share price and the potential for it to fall further, we expect that it could become a takeover target – particularly if its operating position in the US becomes untenable."

Meanwhile, Tom McPhail, head of pensions research at Hargreaves Lansdown, said the consequences of BP's travails were far-reaching in the UK pensions market, given that the company was the third-biggest listed on the FTSE 100 index.

"It is a very significant investment and we are right to be concerned about it," he said.

"Part of the problem is we just don't know just how bad it is going to be. There are fears now if they haven't got the problem capped before the hurricane season kicks in, it could get a whole lot worse. And it's all about the litigation bill.

"Obama is talking tough and the American people want to see somebody suffer for this. What does this mean for pension funds? At best, it is not going to be good, and at worst it could be very, very bad."

He went on: "This is, first and foremost, an environmental and social tragedy for the people around the area of the leak. But what are we seeing now?

"That money flowing out of the well is our pension funds and our tax receipts. This disaster will have a material impact on both the government's finances and on the pension funds of most adults in the UK."

Tony Shepard, an analyst at Charles Stanley, added: "Investors have become not only concerned over BP's dividend pay-out but also its financial condition."

When the markets reopen today, they will closely monitor the latest efforts by the company to stem the leak. Its latest operation will be the sixth attempt to stop the flow, in an increasingly desperate struggle to contain the environmental disaster.

BP engineers' next move involves deploying remote-controlled submarines to carry equipment 1,500 metres down into the Gulf of Mexico to slice the leaking pipe before putting a containment cap in place.

It is estimated that the latest attempt, which began on Sunday, should take four days to complete, but BP has already warned that the plan's success is not guaranteed.

Yesterday, Mr Obama met the co-chairmen of an independent commission investigating the spill for the first time. He has already insisted that his government will do "whatever it takes" to help those affected and pledged to provide additional manpower to help lay more booms, clean beaches and monitor stricken wildlife.

Mr Obama has also ordered BP to pay the medical bills for any "ill-effects" caused to local residents by the crisis.

Speaking yesterday about latest preparations to cap the leak, Mr Hayward said: "BP's priority is to keep as much oil as we can from causing additional harm to the Gulf, the shoreline and the people of the region."

A seemingly intractable situation unfolds

April 20. Explosion and fire on Transocean Ltd Deepwater Horizon. 11 die

April 22. The Deepwater Horizon rig, valued at $560m sinks and a five mile oil slick appears.

April 25. Coastguard underwater cameras detect the well is leaking 1,000 barrels of crude oil a day.

April 28. Rig is leaking 5,000 barrels a day. Obama pledges 'every single available resource' to contain the oil.

April 30. BP Chairman Tony Hayward says the company takes full responsibility

May 6. Oil washes ashore on part of the Breton National Wildlife Refuge.

May 7. Containment dome lowered over the leak but the device is clogged

May 12. Senate energy committee chairman Jeff Bingaman says the explosion was due to "a cascade of errors, technical, human and regulatory."

May 26. Oil reaches the Louisiana marshlands. Part of the slick is swept up in a current headed for Florida.

May 28. Obama tours Louisiana: "I am the president and the buck stops with me," he says.

May 29. BP announces the 'top kill' manoeuvre has failed.

May 31. The US government and BP warn the oil may not stop leaking until August.

• Promise of prosecution if any laws were broken before oil spill disaster