Consumer groups and lawmakers are rallying to terminate six existing contracts—worth $2.1 billion—and bar BP Oil International Ltd. from doing business with the U.S. government due to its role in the Gulf of Mexico Deepwater Horizon oil spill.
Citing the ongoing Gulf oil disaster and BP’s history of criminal convictions, Public Citizen, a nonprofit consumer advocacy group, today called on the Department of Defense (DoD) to suspend and ultimately debar BP and its subsidiaries from serving as a federal contractor, and terminate six current contracts.
Public Citizen bases its call on the federal regulation that allows debarment for an “offense indicating a lack of business integrity or business honesty that seriously and directly affects the present responsibility of a Government contractor or subcontractor,” as stipulated in Part 9 of the Federal Acquisition Regulation System.
BP known for violating safety rules
It is little remembered that BP, the company that champions itself as a steward of the environment, has run afoul in the past. In 2007, two U.S. subsidiaries of BP were hit with a $370 million fine in an environmental fraud case, stemming from a 2005 explosion at a Texas refinery, as well as a violation of the Clean Water Act for leaking crude oil in various areas in Alaska.
In 2009, another complaint was filed against BP for noncompliance with federal clean air and water laws, again for violations in Alaska. The complaint alleged that BP was grossly negligent by not implementing required safety measures.
According to Public Citizen, BP has paid $730 million in fines for a number of safety violations.
“BP’s entire operations—from exploration, to refining, to fuel transport, to commodity trading—have violated federal laws with frequency and severity,” said Tyson Slocum, a director of Public Citizen. “Given the company’s willful transgression of U.S. laws, it can no longer be presumed that BP will responsibly perform its contractor responsibilities.”
Boycott effectiveness
On May 14, Public Citizen called for a three-month boycott of BP and its associated brands, including ARCO (Atlantic Richfield Company), ampm stores, Castrol Wild Bean Cafe, and Aral AG. BP is called to task for refusing to install $500,000 worth of safety devices.
“A company that made $14 billion in profits in 2009—a bad year—refused to spend a fraction of a percent of its profits to safeguard against what is fast becoming the worst oil spill of all time. The sheer greed at the expense of safety and the environment is mind-boggling,” Slocum said in a May press release.
As of June 23, close to 21,500 people have pledged to boycott BP brands. By the beginning of June, over 400,000 people had signed up on the Facebook “Boycott BP” page. The goal is one million signatures.
According to a Knowledge@Wharton (KW) report, a Monroe Friedman study completed in 1985 found that 73 percent of boycotts were ineffective, and among the remainder, only a few were a complete success.
This is not to say that boycotts have no effect on a company. A 1986 study done by University of Missouri’s economics and finance professor Stephen Pruitt found that companies do lose share price during a boycott, which could translate into real monetary losses for shareholders and company executives.
“Boycotters gave the company [the equivalent of] a bloody nose,” Pruitt said in reference to his study in a recent KW article.
Media involvement increases the likelihood of a boycott to be successful. Professor Brayden King of Northwestern University suggests that companies will cave in to boycotters’ demands when faced with a media blitz.
KW implies that BP’s boycott may only have a marginal effect, as there is no relationship between a boycott and a specific result. For example, by boycotting BP gas stations, the owners of the gas stations, who have no connection to the incident—most BP gas stations are privately owned by franchisers—are being punished for something they had no control over.
“Boycotts tend to be more successful when there is a clear connection between the act of boycotting and some desired outcome,” according to Wharton management professor Lawrence G. Hrebiniak.
BP’s impact on insurers
Regardless of how BP aims to rectify the oil spill in the Gulf, the event is likely to have a profound impact on deepwater drilling, especially regarding how companies intend to insure against future accidents.
“Upstream insurers have been quick to describe the Deepwater Horizon loss as a market-changing event,” according to a recent Willis Energy Market Review report.
The fuel energy sector is divided into three sectors—upstream, midstream, and downstream. The upstream sector is involved in exploration and bringing the product to the surface.
Upstream insurers are faced with a $795 million bill from the BP oil spill, with $235 million from the Aban Pearl drilling platform, which sank in May in the Caribbean, and $560 million from the Deepwater Horizon disaster in the Gulf of Mexico. In addition, the Apache Corporation from Houston is filing for $150 million in insurance claims due to a loss from Hurricane Ike.
The losses are not faced by one upstream insurer alone, as most of the insurers had sold coverage to the upstream exploration sector.
Although the majority of large insurers have not changed insurance rates, any new commitment will see a major price hike, according to Willis. Most insurers were considering reducing rates on renewals of upstream insurance policies, but in the face of the Deepwater Horizon disaster, they are increasing insurance rates.
However, brokers are cautioned from jumping into raising rates too hastily. The Deepwater Horizon has far riskier—given its location—recovery than other upstream undertakings.
Willis suggests that going forward, insurers may refuse to insure certain upstream ventures as part of an insurance package. Instead, the insurance industry will insure higher risk ventures on a stand-alone basis.
At this time, the long-term effect of the Deepwater Horizon loss on the insurance industry has not become clear and may not truly play out until the end of this or beginning of next year, when insurers will be able to evaluate its cost and any related legislation that may arise from this incident.
“Buyers and their brokers perhaps need to analyze individual risk portfolios in some detail before simply going out and buying/placing as much insurance as possible,” Willis said.
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