The Big Oil Spill: the Market Value Consequences of the Deepwater Horizon Disaster

The Big Oil Spill: The Market Value Consequences of the Deepwater Horizon Disaster

An analysis of the returns to shareholders in the oil industry

Master Thesis in Finance

Name: Paul van Doorn

ANR: 897535

Faculty: Tilburg School of Economics and Management

Department of Finance

Supervisor: Dr. O.G. Spalt

Date: 4 December 2012 Abstract

This study examines the effect of ten major events in the period 2010-2012 on the share price of BP, its main competitors and suppliers in the oil industry. Five competitors and suppliers are chosen based on their market value in the first quarter of 2010. By making use of the event study methodology of Bowman (1983), this study shows that BP’s share price was significantly affected by the Gulf of Mexico oil spill in the short-term and recovered in the long-term. In contrast to BP, the share price of BP’s competitors was not significantly affected by the events concerning the Gulf of Mexico oil spill. Similar to BP, the share price of the suppliers in the oil industry has been significantly negatively affected by the Gulf of Mexico oil spill in the short- term. In the long-term, all of the suppliers, except Transocean recovered from their share price decline as a result of the Gulf of Mexico oil spill.

Table of Contents

Abstract ...... 2

1. Introduction ...... 4 1.1 Subject and relevance of the research ...... 4 1.2 Research questions ...... 5 1.3 Structure of the research ...... 5

2. The main players in the oil industry ...... 6 2.1 Early and modern history ...... 6 2.2 The main players in the oil industry ...... 7 2.3 Threats for the oil industry ...... 10

3. The BP story, from first oil to tomorrow’s energies ...... 11

4. Event description ...... 15 4.1 The explosion on the Deepwater Horizon drilling rig ...... 15 4.2 Short-term economic consequences for BP ...... 17 4.3 Long-term economic consequences for BP ...... 18

5. Literature review ...... 20

6. Event study methodology ...... 21

7. Event analysis ...... 25 7.1 How did the events concerning the Gulf of Mexico oil spill affect BP’s share price? ...... 25 7.2 How did the events concerning the Gulf of Mexico oil spill affect BP’s competitors’ share price? 29 7.3 How did the events concerning the Gulf of Mexico oil spill affect the share price of the suppliers in the oil industry? ...... 33

8. Conclusion ...... 36

References ...... 38

1. Introduction

This chapter will explain the subject and the relevance of this research. Consequently, the research questions will be presented. Last but not least, the structure of this thesis will be given.

1.1 Subject and relevance of the research

The Deepwater Horizon was an ultra-deepwater offshore oil drilling rig, located in the Gulf of Mexico. The rig was owned by Transocean and had been leased to British Petroleum, BP, since its construction in 2001. During its lifetime, the Deepwater Horizon had built a strong safety record. In 2009, the Minerals Management Service even heralded the Deepwater Horizon as an industry model for safety [1]. Nevertheless, roughly a year later, on the 20 April 2010, while drilling an explanatory well in the Macondo Prospect, it suffered a catastrophic explosion and sank a day-and-a-half later. Consequently, oil started leaking into the Gulf of Mexico for 87 days. By the time the Macondo well was closed and sealed, almost 4.9 million barrels (780,000 m3) of oil had already flown into the Gulf of Mexico. Therefore, it can be considered as the largest accidental marine oil spill in the history of the petroleum industry [2].

Until now, more than 2 years after the disaster, BP is still working on restoring the environment and facing lawsuits. The huge reputation damage and costs that BP faced as a result of the oil spill, has severely affected their market value, short-term as well as long-term. BP shares closed on April 20, 2010, just before the explosion at 655,4 pence on the London Stock Exchange. Barely two months later, on June 29, 2010, BP’s share price had more than halved and hit their all-year low at 302.9 pence. Even two years later, on April 20, 2012, BP’s shares closed at 434,8 pence and are still down by nearly a third. This would indicate a decline in market value of 33% which equals $60 billion. Obviously, this is an indication that the oil spill had a huge impact on BP.

It could be that the competitors and the suppliers in the oil industry had an advantage of this. Existing literature about the Gulf of Mexico oil spill mostly focuses solely on BP and other closely involved companies. In contrast, my study also includes other major competitors and suppliers that were not involved in the oil spill. Therefore, my study places the oil spill in its context by rather showing its impact on the oil industry as a whole. This already gives a good contribution to the existing literature. On top of that, whereas most existing literature focuses solely on the events in 2010, my study also includes the long-term economic consequences as it includes relevant events in 2011 and 2012 as well. To sum up, by conducting this event study I will generate more insight in the oil spill in the Gulf of Mexico in general, and the returns to shareholders in the oil industry in specific, while taking into account both the short-term and long-term.

1.2 Research questions

Main research question:

- What is the short-term and long-term impact of the deepwater horizon disaster on the return to shareholders in the oil industry?

In order to answer the main research question, I have come up with the following secondary research questions:

- Who are the main players in the oil industry? - What events took place concerning the Gulf of Mexico oil spill? - How did the events concerning the Gulf of Mexico oil spill affect BP’s share price? - How did the events concerning the Gulf of Mexico oil spill affect BP’s competitors’ share price? - How did the events concerning the Gulf of Mexico oil spill affect the share price of the suppliers in the oil industry?

1.3 Structure of the research

In the second chapter of this thesis the rise of the oil industry is discussed and its main players are identified. Consequently, in chapter 3, a closer look will be taken at the background of BP as it is the main player in the Gulf of Mexico oil spill. Next, the most important events concerning the oil spill will be identified in chapter 4. Chapter 5 provides a short literature review where the appropriate event study methodology is identified, which in turn is discussed in chapter 6. Finally, in chapter 7 the results of the event study will be presented and analyzed which answer the last 3 secondary research questions. Last but not least, chapter 8 contains the conclusion and provides an answer to the main research question. Further research topics are recommended.

2. The main players in the oil industry

First, this chapter gives an overview about the early and modern history of the petroleum industry. Next, the main players in the oil industry will be discussed. Aside from BP, five competitors and five suppliers in the oil industry with the highest market value in 2010 are identified and will be used in the event study in chapter 7. The chapter ends with discussing future threats to the oil industry in paragraph 2.3.

2.1 Early and modern history

Petroleum, in an unrefined state, has been used since ancient time to keep fires ablaze, and also for warfare. In its strictest sense, petroleum includes only crude oil, but in common usage, as well as in this thesis, it includes all liquid, gaseous, and solid hydrocarbons. Hydrocarbons are organic compounds containing both hydrogen and carbon. Nowadays, hydrocarbons are a primary energy source for current civilizations. To extract the maximum value from them, they are first refined into well known petroleum products. In oil refineries, for example, crude oil is processed to form the well known fuel products such as gasoline (petrol), liquefied petroleum gas (LPG) and kerosene, and other non-fuel related by-products such as plastics, lubricants and pesticides. Thus, petroleum has become vital to the maintenance of our industrial civilization itself.

An early petroleum industry had already been established in the 8th century, when the streets of Baghdad were paved with tar that was derived from petroleum. In the following century oil fields started to spread out from there, and were already being exploited in Azerbaijan to produce naphtha, a mixture of flammable liquids, similar to gasoline nowadays. By that time, Al-Razi, a chemist from Arabia, was the first person to extract petroleum products, such as kerosene, from crude oil by means of destructive distillation. Consequently, the kerosene was used in the oil lamp industry.

Nonetheless, it would take until the Industrial Revolution in the 19th century for the modern petroleum industry to emerge. The Industrial Revolution caused an increasing need for energy and petroleum was in great demand. In Azerbaijan, at the center of the petroleum industry, the production doubled in the early 19th century. At the same time petroleum industries also emerged in Europe, Canada, the United States and the Middle East. Petroleum, as the basis of many industrial chemicals and as an energy source for automobiles and commercial aviation, quickly rose in importance across society. By the 20th century petroleum had become one of the most valuable commodities traded on the world markets [3].

2.2 The main players in the oil industry

The Seven Sisters From the mid-1940s to the 1970s, the global petroleum industry was dominated by seven private- owned oil companies. The so called “Seven Sisters” comprised Anglo-Persian Oil Company (now BP), Gulf Oil, Standard Oil of California (SoCal), Texaco, Royal Dutch Shell, Standard Oil of New Jersy (Esso), and Standard Oil Company of New York (Socony). The Seven Sisters were well organized and able to negotiate as a cartel which provided them considerable power over Third World oil producers [4].

Being well organized The Seven Sisters controlled around 85% of the world’s petroleum reserves. After World War II, the developing countries felt that they were being exploited by them. As a result, a trend of nationalizing oil industries arose and the Anglo-Iranian Oil Company was forced to leave Iran in 1951. Last but not least, the dominance of the Seven Sisters was further declined by the increasing influence of the OPEC cartel formed in 1960, which will be discussed next.

OPEC and the oil price OPEC, the Organization of the Petroleum Exporting Countries, was founded in 1960. OPEC initially consisted out of five founding members who had previously nationalized their oil industries: Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. For these countries, oil is the main marketable commodity and their vital key to development. Thus, they were dedicated to providing a stable petroleum market, with fair returns to investors in the oil industry and steady supplies to consumers at reasonable prices. On the one hand, if oil prices are too high, products would become more expensive and economies experience inflation. Oil producers would eventually increase their supplies and prices would decrease again. On the other hand, if oil prices are too low, investors would not be attracted to the industry and oil producers would suffer. Oil producers would eventually decrease their supplies until there was a price shock leading back to inflation. Taking into account OPEC member countries produce about 43% of the world’s crude oil, they soon became a significant international player in the international oil markets [5].

OPEC was often criticized for forming a monopoly. Its significance could be illustrated by oil crisis in 1973. In order to express their discontent about the Western support for Israel, the Arab member states of the OPEC inflicted an oil embargo to the Western countries. Consequently, a period of high oil prices initiated, in where they had a considerable influence on world oil markets. Eventually, in the 1980s, the oil price sharply dropped due to an increasing oil production from non-OPEC countries and a worldwide recession which led to a smaller demand for oil. As can be seen in the figure 1, the 1980s and the 1990s were periods with low but stable oil prices.

At the beginning of the 21st century the oil price gradually started climbing again as can be seen in figure 1. On the one hand, worldwide economic growth after the economic crisis caused by the burst of the dot-com bubble lead to an increasing demand for oil. On the other hand, supplies of oil are limited, and growing uncertainty about the world’s oil reserves has caused an increase in the price of oil. The credit crunch caused a sharp drop in the oil price during 2008, however, the oil price recovered in 2009.

As the increasing energy demand caused depletion of some of the easy accessible reserves, oil fields with higher operation costs started to be exploited. An example of that is the deepwater drilling in the Gulf of Mexico. Consequently, the exploration costs have been growing in the past few years. It can also be expected that exploration costs will continue to grow in the future, which in turn will have an upward effect on the oil price. Nevertheless, the 6 companies with the highest market value in January 2010, were able to profit from the high oil price as can be seen in figure 2. Importantly, in 2010 BP booked a loss for the first time since 18 years. This is already an indication that the Gulf of Mexico oil spill in 2010 had a big impact on BP, which will be further analyzed in chapter 7.

Nowadays, OPEC has 12 member countries: six in the Middle East, four in Africa, and two in South America. Their crude oil exports represent about 60% of the crude oil traded internationally. Therefore, they are still a key player in the oil markets and the recent run-up in oil prices has allowed them to reassert themselves as a major force in the oil market.

The “Big Oil” In the late-1990s a merger wave changed the petroleum industry. As a response to a severe fall in oil prices, large petroleum companies began to merge, often in an effort to improve economies of scale. As a result, six large companies were established, the so-called Supermajors or “Big Oil”. To illustrate, Esso and Socony became ExxonMobil in 1999. Furthermore, Gulf Oil and SoCal became Chevron in 1984 and acquired Texaco in 2001. As of 2012, the four surviving companies from the Seven Sisters, namely BP, Chevron, ExxonMobil and Royal Dutch Shell can be considered Supermajors. However, the dominance of the Seven Sisters was severely declined by the OPEC cartel and state-owned oil companies primarily located in the Middle East.

Whereas the Seven Sisters controlled around 85% of the world’s petroleum reserves, the Supermajors control only around 6% of the reserves [6]. Thus, the Financial Times used the label “New Seven Sisters” to describe a group of what it argues are the most influential national oil and gas companies based in countries outside of the OECD. These include Petrochina (China),

Gazprom (Russia), National Iranian Oil Company (Iran), Petrobas (Brazil), PDVSA (Venezuela), Petronas (Malaysia) and Saudi Aramco (Saudi Arabia). The other two Supermajors are Total S.A. and ConocoPhillips. All of them are based in Western nations and are vertically integrated companies: they are active in every segment of the petroleum industry from drilling and extracting crude oil, to refining it into petroleum products and distributing it to company-owned retail stations. This makes them the six largest publicly owned oil and gas companies which are all high ranked in the FT Global 500 [7]. They are sometimes collectively referred to as “Big Oil” which is usually used to represent the industry as a whole in a pejorative manner, i.e. the Big Oil Spill on April 20, 2010.

The set of competitors and suppliers As this thesis is about the market value consequences in the oil industry, I have decided to select a set of competitors and suppliers based on their market value in the first quarter of 2010. The set of competitors includes the five largest oil companies by market value, with the exclusion of BP, measured in the first quarter of 2010. These companies are: Chevron, ExxonMobil, PetroChina, Petrobras and Royal Dutch Shell. Similarly, the set of suppliers includes the five largest companies that provide services to the oil industry by market value, measured in the first quarter of 2010. These companies are: BakerHughes, Halliburton, Transocean, Saipem, and Schlumberger [8].

2.3 Threats for the oil industry

Oil is a limited resource, so it may eventually run out. The world’s proven crude oil reserves are estimated at almost 1.5 trillion barrels, where one barrel equals 42 US gallons, or 159 liters. OPEC member countries hold approximately 81% of the total proven crude oil reserves. Thus, the International Oil Companies, including the Supermajors, have only limited access to the world’s oil reserves. OPEC member countries produced 42.8% of the world total output which stood at 70.4 million barrels per day in 2011. At this rate of production, OPEC’s oil reserves would be sufficient to last for more than 109 years, while non-OPEC oil producers' reserves might last less than 19 years [9]. As the worldwide demand for oil is rising and their reserves will deplete, their long-term prospects are somewhat uncertain.

Last but not least, there is a rising importance of alternative energy. As of 2012, oil still accounts for a large percentage of the world’s energy consumption, ranging from 32% for Europe and Asia to 53% for the Middle East [10]. Nevertheless, alternative sources such as wind and solar energy or biofuels have become more important as fossil energy reserves are depleting and becoming more costly. This transition from the use of fossil energy towards the use of alternative energy can be detrimental for the oil industry in the long-term. However, according to research by IBIS World, alternative energy sources will not displace the oil industry in the near future [11].

3. The BP story, from first oil to tomorrow’s energies

In this chapter a closer look will be taken at the background of BP as it is the main player in the Gulf of Mexico oil spill. Its activities in each of the remarkable time periods as shown on the website of BP are described [12]. The last section will emphasize BP’s dismal safety record.

1901-1908 First oil In 1900, the Englishman William D’Arcy, one of the principal founders of the oil and petrochemical industry in Persia, agreed to fund a search to for oil and minerals in Persia (Iran). Negotiations with king of Iran started in 1901 and led to the concession that D’Arcy would have the oil rights to the entire country, except for five provinces in Northern Iran. In return, the Iranian government would get 16% of the oil company’s annual profits. In 1903, a drilling team under George Reynolds was sent to Persia and a company was formed. By 1904, no oil was found yet, and D’Arcy finances had run out. It was the Burmah Oil Company, who had saved the expedition in return for much of the company’s stock. Years of searching for oil almost ended in a failure and lost fortunes, until on March 26, 1908, they struck oil.

1909-1924 Early history Within a year, in 1909, the Anglo-Persian Oil Company, APOC, was founded. It was established as a subsidiary of the Burmah Oil Company to exploit the oil discovery in Iran. Initially, after a long search for oil the struggle was not over yet. A pipeline and a refinery complex to turn the crude oil into a usable product had to be built. Due to the remote location of the Field of Naphtha, construction was often delayed and took two years. Nevertheless, at its completion, the Abadan refinery would be the largest in the world. Despite having plenty of oil, they had no one to sell it to. Firstly, automobiles were still too expensive to count as a mass market. Secondly, competitors such as Standard Oil of Indiana already controlled the oil market. Thirdly, oil from Persia couldn’t be sold as kerosene for home heating due to its irremovable sulphurous stench. Consequently, they were close to bankruptcy by 1914. The resolution of Churchill passed, and the UK government became a major shareholder. By the end of WWI, the brand British Petroleum was acquired. New investments were made in setting up a distribution network in the UK and a research laboratory to address scientific challenges. These investments would pay off over the next decade, as the age of the automobile would truly begin.

1925-1945 Through WWII In the 1920s and 30s, cars flooded onto the streets of Europe and the US. Consequently, BP-labelled gasoline pumps appeared in the UK and mainland Europe. In 1935, Persia changed its name to Iran, and APOC became AIOC: the Anglo-Iranian Oil Company. During WWII, gasoline was a rationed commodity. Furthermore, all fuel brands in the UK were consolidated together into a generic fuel labeled ‘Pool’. BP’s growth abruptly stopped as oil tankers, transporting oil to the UK from Iran, and the refinery at Abadan had become a prime target. Consequently, BP focused on small local oil fields in the UK. Thus, most of the oil and lubrication equipment used by the British army came from BP’s heritage company Castrol.

1946-1970 Post War BP’s growth soon recovered after WWII, as it started expanding internationally. Investments in refineries in France, Germany and Italy were made, and BP’s gasoline even went on sale in New Zealand. Nationalists in the Middle East began to question Western companies’ right to profit from their resources. Consequently, the Iranian parliament nationalized the oil industry in Iran in 1951 and the AIOC was forced to leave the country. As governments around the world boycotted Iranian oil, a consortium was established in 1953 under a new pro-Western regime, in which the AIOC had a stake of 40%. In 1954, the AIOC became The British Petroleum Company and the search for oil continued. It was the first company to strike oil in the North Sea in 1965. By 1969, they had tapped into their share of the large oil reservoirs along the edges of the Prudhoe Bay in Alaska. These new findings offered new prospects.

1971-1999 Late century From 1971 onwards, BP’s world would be turned inside out as the oil-rich nations in the Middle East nationalized their resources. Within the next 10 years, Middle Eastern oil went down from 80% of BP’s supply down to only 10%. The recent discovery of major oil fields, including the Prudhoe Bay in Alaska and the Forties field in the North Sea, offered new prospects. However, they first had to find a way to get the remote oil to the sites where it could be refined into gasoline and shipped. Through a large deepwater pipeline oil started flowing from the North Sea production platforms to the terminal at

Firth of Forth in 1975. It would take two more years for the 1,200 kilometers long Trans-Alaska pipeline to be built as it was being delayed by a national discussion about the environmental implications. When the oil started to flow from Alaska in 1977, a 25% stake in Standard Oil of Ohio, Sohio, ensured that they could bring the first Alaskan gasoline to the market. Eventually, in 1987, BP acquired Sohio and incorporated it into a new business, BP America. BP became fully privatized as the UK government sold the last shares it held in them. As competition increased in the late 1990’s a wave of mergers occurred. BP and Amoco merged in 1998 to form BP Amoco plc. Thus, BP had found a new momentum.

2000-present New millennium In the 21st century, BP had grown to become the third largest global energy company in the world, operating in more than 70 countries. At 25 July 2012 BP had a market value of $125 billion and was ranked 34th in the FT Global 500 list of companies with the largest market value.

Starting 2001, after acquiring Arco and Burmah Castrol plc, it formally renamed itself as BP plc. The Castrol brand was used to market a variety of lubricant oils, whereas the Arco and Aral brand were used for their service stations in the US and Germany respectively. Their identifier, here depicted on the right, became a green, yellow and white sunburst, symbolizing energy in all its forms. Under a new tagline, “Beyond Petroleum”, and banner BP took bigger steps towards addressing climate change. BP’s Alternative Energy unit was created and devoted to make from various types of low-carbon energy, such as solar, wind, natural gas and biofuels, a large-scale and profitable business. In the first decade of the new millennium BP managed stable profit growth. However, for the first time in the new millennium BP reported a loss equal to $ 4.9 billion due to costs related to the oil spill as can be seen in figure 2 in the previous chapter. Projects in Angola, Russia and the Gulf of Mexico also came on stream, of which the latter led to the Gulf of Mexico oil spill in 2010. This will be discussed in detail in the next chapter.

BP’s dismal safety record Prior to the Gulf of Mexico Oil Spill in 2010, BP was involved in a couple of incidents that severely damaged their reputation and instigated a serious reform. To illustrate, BP was named by the Multinational Monitor as one of the ten worst companies based on its environmental and human rights records in 2005. In that same year, BP’s refinery in Texas City exploded which killed 15 people and injured 180. OSHA, the Occupational Safety and Health Administration, concluded that necessary maintenance and safety at the plant had been cut as a cost-saving measure. BP pleaded guilty, paid $50 million in criminal fines and was supposed to fix their safety problems. Yet, OSHA fined BP an additional $87 million as it failed to correct the safety

13 hazards revealed in 2005. They found that two BP-owned refineries in Texas City and Toledo were responsible for 97% of willful safety violations by oil refiners between June 2007 and February 2010. According to Jordan Barab, deputy assistant secretary of labor at OSHA “the only thing you can conclude is that BP has a serious, systemic safety problem in their company” [13].

In order to investigate the safety culture of BP’s US refineries, an independent panel led by James Baker was formed. The Baker panel found that BP did a decent job on personal safety but lacked process safety such as adequate maintenance of equipment. In short, BP’s management did not create a sufficient safety culture within the company. As a consequence of these incidents, BP’s chairman Lord Browne resigned early in 2007. Tony Hayward was his successor and was eager to adopt a new leadership style to improve BP’s safety record. However, his tenure would end early in October 2010, due to his weak management of BP’s next big disaster: the Gulf of Mexico Oil Spill.

4. Event description

In this chapter the most important events concerning the oil spill are discussed. In paragraph 4.1, some events concerning the stemming of the leak will be given. In paragraph 4.2, events concerning the short-term economic consequences are discussed. In paragraph 4.3, events concerning the long-term economic consequences are presented. The ten most important events are shown in figure 3 and will be used in the event study which is presented in chapter 7.

4.1 The explosion on the Deepwater Horizon drilling rig

On 20 April 2010, an explosion occurred on the Deepwater Horizon drilling rig at the Macondo Prospect oil field in the Gulf of Mexico. Consequently, the rig, which was owned by Transocean and contracted by BP, caught fire and sank two days later on 22 April. By then, a large oil slick had already formed on the spot. On April 23, an underwater vehicle found no oil leaking from the well and sunken rig. Thus, Coast Guard Landry Rear Landry expressed cautious optimism of zero environmental impact. However, the next day Landry announced a very serious spill as oil had been found emanating from the well into the Gulf of Mexico [14].

Stemming the flow of oil By April 25, the first attempt was made to stop the oil emanating from the well. Underwater vehicles had tried to close the blowout preventer valves on the well head, yet they failed. The next day, an oil containment dome was already under construction. By placing the dome over the largest leak and piping the oil to a storage vessel on the surface, BP thought it could capture most of the oil. However, this attempt also failed on May 5 as gas and cold water formed methane crystals which blocked the opening of the dome. BP had also started to drill two relief wells since May 2 and May 16 respectively, which could seal the well permanently, but it was expected to take until mid-August. Meanwhile, according to official estimates 1,000 to 5,000 barrels of oil per day were still leaking from the well [15].

Top kill By May 26, a second attempt was made to stop the oil emanating from the well via a method known as ‘top kill’. The method involved pumping mud and debris into the well before sealing it permanently with cement. However, after a few days it turned out their efforts to block the flow of oil by using this method was unsuccessful. Consequently, on May 29 BP officially abandoned the top kill method. By that time, government officials had increased their estimate of the leak of oil to be in between 12,000 and 19,000 barrels per day [16].

Top Hat 10 BP once again attempted to capture the oil. Ships like the Discoverer Enterprise inserted a riser insertion tube into the wide burst pipe and were able to collect about 22,000 barrels of oil. On June 3, a containment cap fitted onto the leaking well and successfully captured the oil.

According to BP’s Chief Executive Tony Hayward on June 6, the cap was producing around 10,500 barrels of oil a day to the surface which were being processed on the surface. He also announced to implement another containment system in the coming weeks, thereby capturing the vast majority of oil. Meanwhile, on June 15, official estimates of the leak were increased again to be in between 35,000 to 60,000 barrels per day. The next day the second containment system which was directly connected to the blowout preventer became operational. As of late June, official estimated that less than half of the leaking oil was captured and carried to service vessels where it was immolated in a clean-burning system. On July 10, after the failed reparation of the blowout preventer and the top kill mission, a third attempt, called Top Hat 10, was made to seal the well. BP removed the containment cap and began installing a 3 ram capping stack on top of the failed blowout preventer stack. In order to prepare the well for sealing, tests had started by raising the pressure inside the well. These test turned out successful and by July 15, the capping stack had sealed the Macondo well for the first time since April 20.

Static kill After the successful Top Hat 10 mission the well was sealed. It provided a temporary stop to the spill of oil in the Gulf of Mexico. However, this did not imply a permanent sealing. In order to permanently seal the well, it had to be sealed on the top as well as on the bottom. While BP was still drilling two relief wells to seal the bottom of the well with cement, it also announced a new plan in order to permanently sell the top of the well via the ‘static kill’ method. The static kill method is similar to the top kill method in the sense that drilling mud is pumped into the well, forcing the oil back into the reservoir, before sealing it permanently with cement. However, the key difference between them is that during the top kill the well was flowing. During static kill the well was shut. Consequently, there was less pressure to overcome and on August 3 BP announced that the static kill had been successful. On August 5, cement was pumped into the top of the Macondo well. Its top had now been sealed permanently.

Effectively dead As the top of the well was sealed permanently, the Macondo well was almost ‘effectively dead’. So far, two relief wells were being dug at the bottom of the well. Since intersection of the relief wells with the Macondo well could cause pressure, the U.S. government replaced on September 3 the failed blowout preventer. On September 16 the relief wells were finished and pumping of cement to seal the well began. Finally, on September 19 the U.S. government announced the bottom of the well was sealed. The Macondo well was now officially declared ‘effectively dead’ and posed no further threat to the Gulf of Mexico. According to the Flow Rate Technical Group, approximately 4.9 million barrels have been released from the well, making it the largest accidental marine oil spill in the history of petroleum industry [17]. Its short- and long-term economic consequences for BP will be discussed next.

4.2 Short-term economic consequences for BP

A drilling moratorium After the Deepwater Horizon explosion the Obama administration announced on April 30 a moratorium on new offshore drilling permits in U.S. waters unless safeguards are in place [18]. A thorough review of the oil spill would determine whether more safety systems are needed. BP remained the object of criticism as the oil spill continued and faced several lawsuits which will be discussed in the next paragraph. Consequently, a more severe measure was taken. On May 27, the Obama administration enforced a six-month offshore drilling moratorium. In other words, the ban on new offshore drilling permits continued and all offshore drillings in the Gulf of Mexico should be halted immediately. According to the Interior Department, offshore drillings in the Gulf of Mexico accounted for about 30% of domestic production in the U.S [19]. Obviously, those measures would have a major impact on BP and the oil industry in general. Therefore, a federal judge in Louisiana granted an injunction against the moratorium on June 22. However, the moratorium continued to exist as the Obama administration appealed against this decision. Furthermore, the House Committee proposed a bill banning BP from US offshore leases for 7 years due to its dismal safety record on July 14 [20]. The bill eventually didn’t go through, as on October 12 the Obama administration lifted the offshore drilling moratorium. Nevertheless, it would take some time to continue drilling as offshore operators would first have to submit new applications showing they had complied with tougher rules to prevent another disaster.

BP’s spill response fund As oil started leaking into the Gulf of Mexico, BP initially promised to compensate all those affected. On April 30, Chief Executive Tony Hayward announced: “we are taking full responsibility for the spill and we will clean it up and where people can present legitimate claims for damages we will honour them. We are going to be very, very aggressive in all of that” [21]. At that time the costs of the cleanup and claims were estimated to be $12 billion. During the congressional hearing on May 11, executives of BP, Transocean, and Halliburton, blamed each other with respect to who should be held accountable for it. Newman, executive of Transocean, stated: “offshore oil and gas production projects begin and end with the operator, in this case BP” [22]. Since BP was the lead project operator, it was responsible for all clean-up costs associated with the spill under federal law. Meanwhile, US politicians raised the pressure on BP to make sure that they would pay for the clean-up costs.

After a meeting with the U.S. president Obama on June 11, BP agreed it would meet all legitimate costs involving the oil spill. It was expected that BP would suspend its dividends to meet the claims. Finally, on June 16, BP agreed to create a $20 billion spill response fund and announced a dividend suspension for the remainder of 2010. For the fund’s payments, BP would cut its capital spending budget, sell $10 billion in assets, and drop its dividend. Consequently, rumors arose that ExxonMobil and foreign investors would take a share in BP, which caused an upward movement in BP’s share price [23]. A further upward movement was caused by the

17 departure of BP’s Chief Executive Officer, CEO, Tony Hayward on July 26, as his bad reputation was detrimental for BP. He was replaced by Bob Dudley on October 1.

4.3 Long-term economic consequences for BP

Although BP agreed to create a $20 billion spill response fund on 16 June 2010, BP was not required to pay all at once. In fact, BP said it would pay $3 billion in the third quarter of 2010, $2 billion in the fourth quarter, plus $1.25 billion per quarter for the following three years into the fund. Furthermore, the $20 billion fund, roughly equivalent to one year of BP’s annual profits, was not a cap on BP’s liabilities [24]. Consequently, the oil spill would have an impact on BP for many years to come.

After the oil spill BP announced a divestment program to sell about $30 billion worth of non-core assets by the end of 2013. On 25 October, 2011, Bob Dudley, BP’s CEO, announced it was raising its divestment target to $45 billion to prepare for the upcoming legal battle [25]. The proceeds of the disposals would be used to meet the spill costs, reduce BP’s borrowings and increase its ability to resume paying dividends. According to data compiled by Bloomberg, BP had sold over $24 billion in midstream assets and $10 billion in oil exploration and production assets by the end of 2011 [26]. This would create a new portfolio with a stronger growth potential from a smaller base. The Gulf of Mexico would according to Bob Dudley remain key part of BP’s global exploration and production portfolio.

As of March 2012, the fund had paid $6.1 billion to 221,000 claimants out of nearly 1.06 million claims. Nevertheless, BP had already spent more than $22 billion on the spill: $14 billion on operational responses and $8.1 billion to individuals, businesses, and government entities. On March 2, 2012, BP and plaintiffs agreed to settle their lawsuits. BP estimated it would pay approximately $7.8 billion to roughly 100,000 claimants. However, the deal will first have to be approved in court in January, 2013 [27]. Whether or not BP will be found grossly negligent will be a huge issue in the government’s case against BP. A finding of gross negligence would significantly increase the civil damages owed by BP up to $21 billion under the Clean Water Act. However, on November 15, 2012, BP admitted already guilty on 14 criminal charges and agreed to pay a historic $4.5 billion penalty in connection with the fatal explosion of its rig and the catastrophic oil spill [28]. According to BP’s Chief Financial Officer Brian Gilvary BP best estimate for the cost of the spil is $37.2 billion [29]. Nevertheless, BP recovered from the oil spill in 2011 and realized a net profit of 25.7 billion. An important factor is the increase in the price of Brent crude oil which had jumped $40 dollar a barrel to $125 since the explosion.

The development of BP’s share price To sum up, I have identified ten events that are believed to have had a substantial impact on BP’s share price which are show in figure 3. BP shares closed on April 20, 2010, just before the explosion at 655,4 pence on the London Stock Exchange. As bad news accumulated, barely two months later on June 29, 2010, BP’s share price had more than halved and hit their all-year low at 302.9 pence. From that point on BP’s share price started to recover. However, two years later, on April 20, 2012, BP’s shares closed at 434,8 pence and are still down by nearly a third. This would indicate a decline in market value of 33% or 35 billion pound. In order to determine to what extent the events affected BP’s share price, an event study analysis will be provided in chapter 7. This analysis will also include the set of competitors and suppliers identified in chapter 1.

5. Literature review

This chapter provides a short related literature overview. The appropriate event study methodology to use in this thesis is identified.

The current state of the literature Aside from the Gulf of Mexico oil spill, several other industrial disasters of various sizes have taken place in the past in the oil industry. For instance, the Exxon Valdez disaster in 1989, the Buncefield oil depot explosion in 2005 and most recently, in 2010, the huge deepwater horizon disaster reached the headlines. Consequently, researchers have examined the effect of industrial disasters on stock prices. Interestingly, they came up with a methodology and varying results that can be applied to the more recent deepwater horizon disaster case.

To illustrate, Herbst, Marshall and Wingender (1996) examined the stock price reaction of Exxon and its competitors on the Exxon Valdez disaster [30]. They found that Exxon experienced significantly negative cumulative abnormal returns, CARs, immediately after the event. The negative CARs would reflect the market reaction on expected future losses for Exxon as a result of the Valdez disaster. According to White (1996) this effect on stock prices, as measured by CARs, lasted for 120 days [31]. He found that competitors with good environmental reputation suffer less from an industrial disaster. However, companies who were active on the same location as where the incident took place experienced a more negative market reaction than companies that were not active on that location. Surprisingly, according to Patten and Nance (1998) some competitors even showed significantly positive CARs for a period of 15 days after the event [32]. They suggested that Exxon’s competitors benefited from the increasing oil price resulting from the incident. However, factors as firm size, involvement in Alaskan operations, and a lack of environmental reporting showed to have a negative impact on the CARs of the competitors.

In a similar way, Capelle-Blancard and Laguna (2008) investigated the stock price reaction on the Buncefield oil depot explosion in 2005 [33]. They observed a negative average abnormal return on the first trading day after the event which was significant for the four oil companies involved in the accident. According to them, this effect lasted for more than 10 days. However, the negative shareholder returns results were much smaller than in the case of other industrial disasters like Valdez. This could be explained by the relative small size and costs involved with the Buncefield disaster.

6. Event study methodology

The remaining secondary research questions are about how the events during the Gulf of Mexico oil spill affected the stock price of BP, its competitors and suppliers. As seen in the literature review, in order to examine the effect of industrial disasters on stock prices we have to look at cumulative abnormal returns, CARs. Therefore, I will make use of the event study methodology of Bowman (1983) which consists of 5 steps [34]. Firstly, the events of interest have to be identified. Secondly, the security price reactions on these events have to be modeled. Thirdly, excess returns have to be estimated. Fourthly, excess returns have to be grouped and organized to determine the cumulative abnormal returns. Last but not least, I will analyze the results in order to be able to answer the primary research question. In the next paragraphs I will apply these five steps to the Gulf of Mexico oil spill.

Step 1: Identify the events of interest Firstly, in order to conduct the event study concerning the Gulf of Mexico oil spill, I have identified ten events. It covers the time period from the moment of the explosion on April 20, 2010 until a settlement is reached with the plaintiffs on March 2, 2012. Importantly, these events have been meticulously selected and take both short- and long-term events into account. The ten events are described in table 1 and depicted in figure 3 in chapter 4. As shown in chapter 4, they are major events in the Gulf of Mexico oil spill and are believed to have had a substantial effect on the share price of BP, its competitors, and its suppliers.

Table 1: Ten major events concerning the Gulf of Mexico oil spill

Event Date Description 1 April 20, Oil starts leaking from the Macondo well into the Gulf of Mexico after an 2010 explosion on the Deepwater Horizon oil rig. 2 May 27, The Obama administration announced a six-month offshore drilling 2010 moratorium. In other words, the ban on new offshore drilling permits continued and all offshore drillings in the Gulf of Mexico should be halted immediately. 3 June 16, BP creates a $20 billion spill response fund. For the fund’s payments, BP 2010 would suspend its dividend for the remainder of 2010, cut its capital spending budget, and gradually sell $10 billion in assets 4 July 15, Top Hat 10 succeeds. A cap over the Macondo well had temporarily 2010 sealed the well. For the first time since April 20, the oil leak was stopped. 5 July 26, The departure of BP’s CEO Tony Hayward on July 26 as his bad 2010 reputation was detrimental for BP. 6 August 3, Static kill succeeds. BP permanently sealed the top of the Macondo well. 2010

7 September BP permanently sealed the bottom of the well. The Macondo well was 19, 2010 officially declared ‘effectively dead’ and posed no further threat to the Gulf of Mexico. 8 October 12, The Obama administration lifted the offshore drilling moratorium. 2010 9 October 25, BP announces to sells $15 billion in assets in preparation for legal battle 2011 over Macondo spill. 10 March 2, BP and plaintiffs agreed to settle their lawsuits. 2012

Step 2: Model the security price reaction Secondly, by graphing the share price of BP, its competitors and suppliers together with the MSCI world index as a benchmark, from roughly 2010 till 2011, we can get a first impression how the events have impacted the returns to shareholders in the short and long run. The set of competitors includes the five largest oil companies by market value, with the exclusion of BP, measured in the first quarter of 2010. These companies are: Chevron, ExxonMobil, PetroChina, Petrobras and Royal Dutch Shell. Similarly, the set of suppliers includes the five largest companies that provide services to the oil industry by market value, measured in the first quarter of 2010. These companies are: BakerHughes, Halliburton, Transocean, Saipem, and Schlumberger.

Step 3: Estimate the excess returns Thirdly, excess returns have to be estimated. In order to obtain the estimations of the abnormal returns, I will adopt the event study method as presented by MacKinlay (1997) [35]. Abnormal returns are described as the actual return minus the normal return, which is also called benchmark return. According to Brown and Warner (1980), the normal return can be determined by using the market and risk-adjusted return method which takes into account price movements in the markets as well as the systematic risk of each share [36]. The benchmark return can be determined by constructing a market model, which is obtainable by regressing the daily returns of each security against the daily returns of the market index, in this case the MSCI World Index, over an estimation period. The estimation period (-267,-14) runs from 1 April 2009 until 1April 2010.

Then, normal returns for security i at day t can be computed with the following formula:

where and are the Ordinary Least Squares values over the estimation period.

Consequently, the abnormal returns are defined as:

Step 4: Organize and group the excess returns

Fourthly, the cumulative abnormal return, CAR, of BP will be determined for each event. Every event will be analyzed with different event windows ( , ), where are the number of days before the event and are there number of days after the event. In this case, I will use three event windows. Namely, (-1,1), (-3,3) and (-5,5). Then, the formula for CAR is:

Similarly, for the set of competitors and suppliers we have to determine their cumulative average abnormal return, CAAR, for each event. The formula for CAAR is:

Next, to test whether the cumulative abnormal return is significantly different from zero, a one- sample t-test will be performed. Statistical tests will be executed to answer to find out whether the CAR or CAAR significantly differs from zero at the 99%, 95% or 90% significance level.

Therefore, we have two hypotheses. The null hypothesis and the alternative hypothesis .

Consequently, we have to compute the test statistic. If the computed test statistic has a smaller probability than that of the critical value, the null hypothesis will be rejected. The test statistic for BP is determined by dividing the CAR by its standard deviation for a certain event window. This is denoted by the following formula:

Where

And

Similarly, the test statistic for the set of competitors and suppliers is determined by dividing CAAR by its standard deviation for a certain event window. This is denoted by the following formula:

Where

Step 5: Analyze the results

Last but not least, the results can be analyzed in order to give a profound answer to the last secondary research questions. The results of the above steps will be analyzed in the next chapter.

7. Event analysis

This chapter presents the results of the event study. In paragraph 7.1 it will be analyzed how the events impacted BP’s share price. In paragraph 7.2 the impact on BP’s competitors will be analyzed. Last but not least in paragraph 7.3, the impact of the events on the suppliers in the oil industry will be discussed.

7.1 How did the events concerning the Gulf of Mexico oil spill affect BP’s share price?

Table 2: Cumulative Abnormal Returns for BP The CARs of BP for the 10 events with each 3 different event windows are displayed. The event windows (-x, y) range from x days before the event to y days after the event.

Event Event Window (-1,1) (-2,2) (-5,5) 1 -0,82% -1,25% -3,41% 2 -0,14% -0,67% -18,84%*** 3 -0,19% -11,42%*** -23,69%*** 4 -0,45% -2,68% -7,50%* 5 -0,83%** -0,82% -1,85% 6 -2,08% -0,85% -0,38% 7 -0,79% -0,15% -4,42% 8 -0,46% -2,83% -0,68% 9 -3,90%** -3,23% -5,22%* 10 -2,58%* -1,08% -0,93% Notes: *** Significant at the 0,01 level ** Significant at the 0,05 level * Significant at the 0,10 level

Event 1: the explosion on the Deepwater Horizon oil rig According to table 2, the explosion on the Deepwater Horizon oil rig did not have a significant effect on the shareholders of BP. However, BP did experience negative CARs and lost about 1.25% over the two days following the disaster. As shown in figure 4.1 below, the stock market response was not immediate. In the first few days after the explosion the scale of the events was not yet known as the oil leak was still unidentified. After the oil leak was identified on April 23, larger negative abnormal returns can be identified. The most extensive drop in market

25 capitalization was observed after April 28 when the authorities declared that the oil spill was of national significance and Obama made a clear statement that BP would be “ultimately responsible for funding the cost of response and cleanup operations” [37]. Figure 4.1: BP's abnormal returns following the Deepwater Horizon rig explosion 4

20-apr 21-apr 22-apr 23-apr 24-apr 25-apr 26-apr 27-apr 28-apr 29-apr 30-apr

-2 AR(%)

-4

-6

-8

Event 2: the announcement of a six-month offshore drilling moratorium In contrast with event 1, the announcement of a six-month offshore drilling moratorium did show a significant large negative CAR of -18.84% for the (-5, 5) event window. On May 27, all offshore oil drillings in the Gulf of Mexico were halted immediately, and no new drillings in U.S. waters were allowed. Obviously, this would have a major negative impact on the entire oil industry. This was reflected in BP’s share price as shown in figure 4.

Event 3: BP agreed to create a $20 billion spill response fund The announcement of BP to create a $20 billion spill response fund and suspend its dividend for the remainder of 2010 had the most significant negative CARs. For instance, the (-5, 5) event window showed a very significant CAR of -23.69%. This event could be interpreted as a $20 billion value transfer from BP’s shareholders to the victims of the oil spill. As a result, BP’s share price fell dramatically.

Event 4: the oil leak was stopped by temporarily sealing the well In contrast with the previous negative CARs, event 4 shows a significant positive CAR of 7,50% for the (-5, 5) event window. As BP had shown to take responsibility of the spill, BP’s share price recovered in the first two weeks after the event 3 as it increased with 35%. Furthermore, as the oil leak was stopped for the very first time BP would face lower future claims and clean-up costs. These two events explain the significant positive CAR of event 4.

Event 5: the departure of BP’s CEO Tony Hayward The departure of BP’s CEO showed a significant CAR of 0.83%. On the day of his departure there was an abnormal return of 4%. This is not surprising as his reputation was detrimental for the company. The general opinion was that he was not doing enough to stem the leak and he would always be the face of the spill. The share price had fallen about 30% since event 1. Hayward was replaced by the Gulf of Mexico clean-up chief Bob Dudley. He planned a big reorganization by selling off non-core assets which could create a more vital BP who could deal with the costs of the spill. This would be a good time to buy BP shares as its price was expected to rise soon. As a result, a positive CAR was found in the (-1, 1) event window.

Event 6: BP permanently sealed the top of the Macondo well For event 6, the static kill of the Macondo well, no significant positive CARs are found. After the oil leak was stopped and temporarily sealed, it would only be a matter of time until the well was permanently sealed. The financial markets had already incorporated the impact of event 6 on the share price in the weeks after event 4. Therefore, event 6 did not have a significant effect on BP’s share price.

Event 7: BP permanently sealed the bottom of the now ‘effectively dead’ Macondo well In addition to event 6, event 7 also did not show any significant positive CARs. From the beginning of July it was already clear that the well eventually would be permanently sealed. Therefore, the event was already incorporated in the share price of BP. As shown in figure 4, after event 4 BP’s share price developed in the same way as the MSCI World Index.

Event 8: the offshore drilling moratorium is lifted Similar to events 6 and 7, event 8 also did not show any significant positive CARs for BP. After event 4, it was expected that the moratorium would soon be lifted as it had serious consequences for the U.S. oil production. Thus, the event was already foreseen by the financial markets.

Event 9: BP announces to sells $15 billion in assets For event 9 significant positive CARs for BP are found. This is not surprising as the new CEO Bob Dudley announced an operational turning point for BP. BP would sell off non-core assets and use this for reinvestment and to meet claims regarding the Gulf of Mexico oil spill. By refocusing on its strengths and investing in new deepwater drillings in Brazil and Angola, it could generate higher future returns to shareholders.

Event 10: BP and plaintiffs agreed to settle their lawsuits Event 10 shows a significant positive car in the (-1, 1) event window. Obviously, it was good news that BP made an agreement with most of the plaintiffs that would be beneficial for both parties. According to BP’s CEO the event represented “significant progress towards resolving

27 issues from the Deepwater Horizon accident and contributing further to economic and environmental restoration efforts along the Gulf Coast” [38].

The results of the event study underline the negative share price development of BP as show in figure 4. The ten vertical lines highlight the events considered in this event study. BP eventually lost over one third of its market value, which equals about $60 billion, because of the Gulf of Mexico oil spill. A major reason for this loss is the installation of a $20 billion spill response fund in the short-run. This event could be interpreted as a $20 billion value transfer from BP’s shareholders to the victims of the oil spill. As BP’s shareholders anticipated the end of the spill and BP showed it was prepared to deal with the victims, the share price started to recover a bit from that point onwards. As can be seen in figure 4, BP’s share price started to develop in the same way as the MSCI World Index which explains why there are no significant positive CARs for event 6, 7 and 8. However, even two years later, on April 20, 2012, BP’s shares were still down by nearly a third compared to its initial level on April 20, 2010. Obviously, the end of the oil spill was not the end of its consequences for BP. BP’s new CEO Bob Dudley announced an operational turning point for BP in 2011 [25]. This had a positive effect on its share price. BP would sell off non-core assets and use this for reinvestment and to meet claims regarding the Gulf of Mexico oil spill. Nevertheless, even in 2012 BP was still dealing with plaintiffs and could face costly criminal charges up to $21 billion under the Clean Water Act in the trial set for January 2013. Just recently, on November 15, 2012, BP admitted guilt to 14 criminal charges and agreed to pay a historic $4.5 billion penalty [28]. Thus, BP’s share price is also severely affected in the long run.

7.2 How did the events concerning the Gulf of Mexico oil spill affect BP’s competitors’ share price?

Table 3: Cumulative Average Abnormal Returns for the selected competitors of BP The CAARs of Chevron, ExxonMobil, PetroChina, Petrobras and Royal Dutch Shell for the 10 events with each 3 different event windows are displayed. The event windows (-x, y) range from x days before the event to y days after the event.

Event Event Window (-1,1) (-2,2) (-5,5) 1 -1,03% -0,44% -0,01% 2 -0,67% -1,11% -0,48% 3 -0,17% -1,11%* -1,94% 4 -0,49%** -0,46% -1,51% 5 -0,10% -0,47% -0,27% 6 -1,91%** -1,52% 1,51% 7 -0,21% -1,27%** -2,39** 8 -0,58% -2,76% -1,04% 9 -0,60% -0,75% 0,19% 10 -0,57% -1,28% 0,11% Notes: *** Significant at the 0,01 level ** Significant at the 0,05 level * Significant at the 0,10 level

Event 1: the explosion on the Deepwater Horizon oil rig The explosion on the Deepwater Horizon oil rig did not have a significant impact on the share price of BP’s competitors. Initially, the leak was unidentified and it explosion appeared to be an accident that would not have any major consequences for the oil industry.

Event 2: the announcement of a six-month offshore drilling moratorium Although the announcement of a six-month offshore drilling moratorium had a significant negative impact on BP’s share price, no negative CAARs were found for BP’s competitors. A possible explanation would be that BP’s competitors, such as Petrobras and Petrochina, did not have their most important oil reserves in the U.S waters. Whereas BP had a major share in the Gulf of Mexico, Petrobras and Petrochina had their most important reserves in Brazil and China respectively [39]. Therefore, the new regulatory measures in the U.S. had only little effect on the operations of BP’s competitors. Furthermore, on April 30 the Obama administration had already announced that no new drillings in U.S. waters would be allowed unless safeguards are in place

[18]. Consequently, the financial markets had already taken into account the effect of new regulatory measures on the share price of BP’s competitors.

Event 3: BP agreed to create a $20 billion spill response fund Event 3 shows a small significant negative CAAR for the (-2, 2) event window. However, the event itself did not have a significant effect on the share price of BP’s competitors. BP’s competitors were not directly involved in the Gulf of Mexico oil spill. Therefore, they were not held responsible for funding the cost of response and cleanup operations.

Event 4: the oil leak was stopped by temporarily sealing the well Although a small significant negative CAAR is found for event 4, the event itself was good news for the oil industry. Therefore, it is expected another event could have negatively affected the share price of BP’s competitors. For instance, on the same day of event 4 there was a forecast of the International Energy Agency that predicted a smaller global demand for oil [40].

Event 5: the departure of BP’s CEO Tony Hayward For event 5 no significant CAAR is found. Therefore, the departure of BP’s CEO does not seem to have affected BP’s competitors’ everyday business.

Event 6: BP permanently sealed the top of the Macondo well Whereas event 6 did not have a significant impact on BP, a significant positive CAAR is found for BP’s competitors in the (-1, 1) event window. This could be explained by since the end of the oil spill was good news for the oil industry. However, other reasons might have caused this reaction. After event 4 it was expected that the oil spill would finally come to an end in the coming months. Therefore, event 6 could already have been foreseen by financial markets and incorporated in BP’s competitors share price.

Event 7: BP permanently sealed the bottom of the now ‘effectively dead’ Macondo well A significant negative impact on the share price of BP’s competitors is found for event 7. It is expected that the positive news of event 7 was already incorporated in their share price prior to event 7 as the event was foreseen. Therefore a negative impact on their share price due to other reasons on that date is possible.

Event 8: the offshore drilling moratorium is lifted Although event 8 was beneficial for the oil industry and had a positive effect on the share price of BP’s competitors, the effect was not significant. This could be explained as financial markets had already foreseen this event shortly after event 4 when the oil leak was stopped.

Event 9: BP announces to sells $15 billion in assets For event 9 no significant CAAR is found. Therefore, BP’s announcement of an operational turn around by selling off non-core assets in the future did not affect BP’s set of competitors operations and share price in the present. Most of the assets have been sold to much smaller competitors that are not included in this set of competitors like Plains Exploration and Production Co.

Event 10: BP and plaintiffs agreed to settle their lawsuits For event 10 also no significant CAAR is found. Therefore, the settlement between BP and plaintiffs does not seem to have affected BP’s competitors business.

Taking into account the results of the event study and the share price development of the competitors as shown in figure 5, the conclusion can be drawn that they were not seriously affected by the events concerning the Gulf of Mexico oil spill. In the short-term, share prices went down in the same pattern as the MSCI World Index. This is an indication that the events concerning the Gulf of Mexico did not have a significant impact on the competitors’ share prices. Rather the downward movement can be attributed to the negative sentiment on the global stock markets due to the Greek debt crisis. Thus, the events itself did not seriously harm the competitors’ operations. Also in the long-term, no significant impact of the events is found on BP’s competitors. By the end of June 2010, the share prices of most competitors recovered from the price drop in a similar way as the MSCI World Index. Only PetroChina and Petrobras did not recover from the initial drop. However, they were not directly damaged by the events concerning the Gulf of Mexico oil spill. Unlike the other competitors, PetroChina’s main purpose is to fuel China, not necessarily to create more shareholder value [41]. Petrobras in its turn was having problems to pay off its debt in dollars due to inflation problems and had cut its dividend which had severely affected its share price [42]. Therefore, the conclusion that the oil spill did not have a significant impact on BP’s competitors’ share prices is still valid.

7.3 How did the events concerning the Gulf of Mexico oil spill affect the share price of the suppliers in the oil industry?

Table 4: Cumulative Average Abnormal Returns for the selected suppliers The CAARs of BakerHughes, Halliburton, Transocean, Saipem, and Schlumberger for the 10 events with each 3 different event windows are displayed. The event windows (-x, y) range from x days before the event to y days after the event.

Event Event Window (-1,1) (-2,2) (-5,5) 1 -4,03%*** -4,41%** -4,93%* 2 -6,00%** -3,05% -10,39%*** 3 -2,96* -2,89% -3,55%** 4 -0,81% -0,19% -1,45% 5 -3.02%* -4.30%** -0.58% 6 -0,65% -0,19% -0,60% 7 -0.14% -0,73*** -1,59%* 8 -1,48%* -1,61%* -1.06% 9 3.37%* -3.86%** -3.41% 10 -2.14% -3.52% -2.75% Notes: *** Significant at the 0,01 level ** Significant at the 0,05 level * Significant at the 0,10 level

Event 1: the explosion on the Deepwater Horizon oil rig According to the results in table 4, event 1 has a significant positive impact on the suppliers in the oil industry. A possible explanation is that a statement was made in that week by the CEO of Schlumberger saying the margins for the suppliers in the oil industry were growing [43]. Although Transocean, the owner of the Deepwater Horizon, experienced negative abnormal returns during the first few days after the explosion, most of the other suppliers experienced positive abnormal returns. As a result, positive cumulative average abnormal returns are obtained.

Event 2: the announcement of a six-month offshore drilling moratorium Event 2 has a significant negative impact on the suppliers in the oil industry. For the (-5, 5) event window a CAAR of -10.39% is found. Obviously, the drilling moratorium implied a substantial loss of business for the suppliers in the oil industry.

Event 3: BP agreed to create a $20 billion spill response fund In contrast to event 2, event 3 has a significant positive impact on the suppliers in the oil industry. Both Transocean and Halliburton were as suppliers of BP involved in the oil spill. Clearly, the creation of the spill fund by BP was beneficial for them as it implied that BP would take the major burden of the costs. The other suppliers were not directly affected by event 3. Nevertheless, they also show small positive abnormal returns, leading to an overall positive CAAR.

Event 4: the oil leak was stopped by temporarily sealing the well Event 4 did not have a significant impact on the set of suppliers. In the beginning of July it was already clear that the oil flow could be stopped and the well was going to be sealed. It was expected not to have a major impact on the shareholder value of the suppliers.

Event 5: the departure of BP’s CEO Tony Hayward Event 5 shows a significant negative CAAR. Nevertheless, event 5 itself did not have a major impact on the shareholder value of the suppliers. Their share price rather followed a drop of the MSCI world index as shown in figure 6.

Event 6: BP permanently sealed the top of the Macondo well Event 6 did not show a significant impact for the set of suppliers. The event was foreseen and it was expected not to have a major impact on the share price of the suppliers.

Event 7: BP permanently sealed the bottom of the now ‘effectively dead’ Macondo well Event 7 shows a significant negative impact on the share price of the set of suppliers. This is surprising as the official end of the oil spill was expected to have a positive impact on the set of suppliers as business opportunities would increase. It is likely that the share price of the set of suppliers did not react on the event and rather followed the general pattern of the MSCI World Index as shown in figure 6.

Event 8: the offshore drilling moratorium is lifted Event 8 shows a significant positive impact on share price of the set of suppliers. This could be explained by the fact that the end of the drilling moratorium meant an increase of work and profits for the suppliers.

Event 9: BP announces to sells $15 billion in assets Event 9 shows a significant positive CAAR in the (-2, 2) event window. It is believed that the business of the set of suppliers was not affected by BP’s change in strategy. The positive CAAR could be explained by the opening of new facilities of Transocean in Kuala Lumpur [44]. Furthermore, the CEO of Schlumberger bought 6,000 shares and announced third quarter revenue growth by growth in Iraq on the event date.

Event 10: BP and plaintiffs agreed to settle their lawsuits In contrast event 10, shows a negative impact on the set of suppliers, although not significant. No apparent reason can be found for the little dip in the share price of the set of the suppliers around the event date as shown in figure 6. The ten vertical lines highlight the events considered in this event study.

In contrast to BP’s competitors, the share price of the suppliers has been significantly negatively affected by the Gulf of Mexico oil spill. Transocean suffered the most significant decline in share price as it owned the Deepwater Horizon. Furthermore, it was also held responsible for a substantial part of the costs concerning the spill. These costs were incorporated in their share price and eventually led to a long-term loss of about 20% of its shareholder value. As shown in figure 9, the suppliers experienced a larger downward movement in their share price than the MSCI World Index in the short-term. This was demonstrated by the significant negative CAAR of event 2, the announcement of an offshore drilling moratorium. From event 3 on the share price started to recover as BP would take the major burden of the spill costs and there was no more bad news from that point on. In the long-term, all of the suppliers, except Transocean recovered from their share price decline as a result of the Gulf of Mexico oil spill.

8. Conclusion

In the beginning of this thesis the following research question was formulated:

What is the short-term and long-term impact of the deepwater horizon disaster on the return to shareholders in the oil industry?

Although the explosion on the Deepwater Horizon oil rig did not have a significant effect on the shareholders of BP, its market capitalization quickly decreased after April 28, 2010, when the authorities declared that the oil spill was of national significance and Obama made a clear statement that BP would be “ultimately responsible for funding the cost of response and cleanup operations”. Barely two months later, on June 29, 2010, BP’s share price had more than halved. A major reason for this loss in the short-run was the six-month offshore drilling moratorium in U.S. waters and the installation of a $20 billion spill response fund. The latter event could be interpreted as a $20 billion value transfer from BP’s shareholders to the victims of the oil spill. BP’s share price started to recover from that point onwards. BP’s shareholders had anticipated the end of the spill which explains why the sealing of the well and the end of the drilling moratorium did not have a significant effect on BP’s share price. However, the end of the oil spill was not the end of its consequences for BP. In 2011, BP’s new CEO Bob Dudley announced an operational turning point for BP. In order to meet claims regarding the Gulf of Mexico oil spill it would sell off non-core assets worth up to $45 billion in total. This event showed a significant positive return, as well as the proposed settlement with plaintiffs in March 2012. Nevertheless, even two years later, on April 20, 2012, BP’s shares are still down by nearly a third. This indicates a long- term loss in market value of $60 billion.

In contrast to BP, the share price of BP’s competitors was not significantly affected by the events concerning the Gulf of Mexico oil spill. Initially, their share prices did decrease, however, this was similar to the developments on the global financial markets. Furthermore, the events did not seriously harm the competitors’ operations. Consequently, their share price was not significantly affected by the events concerning the Gulf of Mexico itself. As the oil spill came to its end, the competitors’ share prices also did not significantly react on the good news. By the end of June 2010, the share prices of most competitors recovered from the price drop in a similar way as the global financial markets. Therefore, the conclusion that the oil spill did not have a significant impact on BP’s competitors’ share prices is still valid.

Similar to BP, the share price of the suppliers in the oil industry has been significantly negatively affected by the Gulf of Mexico oil spill. Initially, the suppliers experienced a larger downward movement in their share price than the global financial markets. This was reflected by the significant negative reaction of the suppliers’ share price on the announcement of the drilling moratorium. This implied a substantial loss of business which caused a decline in their share

36 price. From the installment of BP’s spill response fund on, the suppliers’ share price started to recover as BP would take the major burden of the spill costs. Moreover, the end of the drilling moratorium caused a significant positive effect on the suppliers share prices. Eventually, Transocean suffered the most significant decline in share price as it owned the Deepwater Horizon. Furthermore, it was also held responsible for a substantial part of the costs concerning the spill. These costs were incorporated in their share price and eventually led to a long-term loss of about 20% of its shareholder value. In the long-term, all of the suppliers, except Transocean recovered from their share price decline as a result of the Gulf of Mexico oil spill.

Further research topics

It is important to note some remarks about the results and the comparisons made in this research. Moreover, this research could be developed into a bigger research project.

First of all, this research has examined the effect of a couple of major events on the share prices of a couple of major companies in the oil industry. I have decided to select a set of competitors and suppliers based on their market value in the first quarter of 2010. However, it is also possible to choose a different set of competitors and suppliers. Alternatively, it might be interesting to examine how the entire oil industry reacted on the Gulf of Mexico oil spill.

Secondly, earlier research indicates that the results on companies can differ because a good reputation in the field environmental responsibility. Because of the Gulf of Mexico oil spill, oil industries might adopt new safety standards in the future. Therefore, further research could include the influence of safety standards of oil companies on their financial performance.

Finally, the selected events all took place between 2010 and 2012. Although many important events were included, there are still some other, more recent, important events which could be interesting for further research. An example of that would be November 15, 2012, where BP already admitted to be guilty on 14 criminal charges and agreed to pay a historic $4.5 billion penalty in connection with the fatal explosion of its rig and the catastrophic oil spill. Furthermore, in January 2013 a trial is scheduled in where it will be determined if BP has been grossly negligent. A finding of gross negligence would significantly increase the civil damages owed by BP.

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