The Fourteenth Banker Blog

June 24, 2010

BP and Systemic Financial Risk

Filed under: Running Commentary — thefourteenthbanker @ 10:02 AM

I have been waiting for this.

Energy is ine of the largest trades and therefore must be the basis for massive derivative activity aside from end user hedging.

These low probability-high risks are a reason this kind of activity should be limited and transparent. No investor today can know what exposures are out there.


  1. Thanks for this link. Sinclair raises huge points. So far, my own delving into the spill financial problems has been just what might big oil do to counter their newly imposed risk. The systemic risk is really pointed out by the situation Anadarko is in. Big oil routinely take passive positions in other big oil ventures to balance out their own E&P risks but more importantly as a way to park longer term liquidity needs. The presumption being these passive positions will be quite marketable among themselves. While holding these positions big oil expects they will generate huge cash flows once producing. What better example than Thunder Horse.

    A very big question is the extent big oil bought CDS type protections since the fees were very , very cheap. I have not found much to indicate the extent big oil may have covered credit and investment positions they hold.

    Sinclair sees the huge problem of a bankrupted BP US holding company unit. What baffles me is the idea conveyed that the USG can fine for spillage beyond the direct unit involved. Based on experience, that seems a total stretch. So just what might the government be really able to do to BP? They might carry through their threat that they can cancel the leases and government business with BP. Today’s Supreme Court decision limiting the application of criminalizing mistakes will be an important indicator that the idea of lease cancellation beyond the properly capitalized business unit that perpetrated the misdeed is limited, or better yet, was just the usual bureacratic over reach. Any assessment of fines collection beyond the direct unit properly capitalized along with the similar over extension of lease cancellations will be litigated to the top.

    The big question then is. Did BP and others operating Federal leases agree that they can be totally put out of all leases across all subsidiary organization for the acts of a single subsidiary lessee? This undisclosed would be the ultimate deception of investors and creditors.

    Comment by Jerry J — June 24, 2010 @ 12:49 PM | Reply

  2. The Washington Post is carrying a story today ‘Drilling firms set stage for liability battle’ by David S. Hilzenrath and Kimberly Kindy. In sum total, the potential litigants are carrying only nominal insurance coverages From the article. “Robert P Hatwig,president of Insurance Information Institute,said companies involved in the project had “limited insurance in place” and estimated total coverage between $1. 5 billion and $3.5 billion.”

    Interestingly, Transocean is contractually responsible only for spills above the surface of the land or water. Subcontractors like Halliburton, have the usual very tight indemnity clauses common in contracting.

    So, there will be a chain of liability here. The operator BP owes those damaged unless proportionate damages are set by the court. BP must sue those it wishes to collect it’s damages from and has already started that process.

    While the article does not mention this, I cannot see how BP can waive spill liability limits for anyone but itself. Anadarko in it’s partnership agreement with Anadarko is expressly liable for it’s own damages from it’s gross negligence or willful misconduct according to the article. Given the very recent acquisition of it’s passive interest in the lease their is little leeway for negligence or misconduct of Anadarko, it would seem.

    This will take many years to sort out. I would think that if Obama pushes too hard , in light of today’s Supreme Court holding as to legal principle, the administration is way too far out in threats to cancel leases of other units of BP etc. The lease stripping law would be far more vague constitutionally than what upset every Justice in today’s opinion.

    There will be a legal war here over the oil spill cap waiver if indeed BP even tells Obama to buzz off and asserts the limit themselves.

    Comment by Jerry J — June 24, 2010 @ 9:27 PM | Reply

  3. Ran across another article on Bloomberg. ” BP Bankruptcy in UK is Obama’s worst Nightmare” By Caroline Baum”

    Even Kenneth Feinberg says ” That is not an option”. Not his call. Others point out that BP is the most reviled company in America. Why would they even worry about public relations at some near term point? House Judiciary Chairman John Conyers ( D, MI) introduced a bill to prevent a BP bankruptcy in UK. Really! BP is British domiciled. He must be of the same mindset as Mayor William Hale Thompson of Chicago who famously during Prohibition wanted to give George V a bloody nose.

    Comment by Jerry J — June 24, 2010 @ 10:01 PM | Reply

  4. Things get ever more interesting . Yesterday’s Wall Street Journal carries a front page piece,” BP Relied on Faulty U.S Data” by Neil King jr. and Keith Johnson . It seems BP and the other big oil participants based their plans for resp[onding to a big spill on government projections that gave very low odds of a spill hitting shores . This was a 2004 projection by the Minerals Management Service.

    This will be a litigation dream, above all a conspiracy type ecstatic experience.

    It would be very interesting to compare every spill plan prepared by operators in the Gulf. When the Regulators get involved, it just bureaucratic sense, that the Regulator does not want great excesses over their standard or the Bureaucracy looks bad. Smart folks have long tailored their paper trails so dear to the bureaucracy to give the bureaucracy what it desires. They may do more privately. But that can create headlines because they did not “follow the rules”. No bureaucracy is going to admit lesser competence.

    Comment by Jerry J — June 25, 2010 @ 1:15 PM | Reply

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