Who’s not trading with BP? | FT Alphaville

Who’s not trading with BP?

Tuesday’s six-notch rating downgrade of BP by Fitch to BBB, appears to have spooked some of the firm’s oil trading counterparties.

According to Reuters, Bank of America Merrill Lynch supposedly told traders to stop entering any new oil trades with BP that extend beyond June 2011.

As the newswire reported:

The order to the bank’s traders came from a high-level executive and was made on Monday, according to a source familiar with it. It told traders not to engage in trade with BP for contracts beyond one year from this month. The directive didn’t state a reason for the limit on longer-duration trades with the oil company, which comes as the British oil giant scrambles to stop an oil spill in the U.S. Gulf of Mexico for which it could eventually face billions of dollars in economic liabilities.

Of course, BofAML is not really a huge player in the industry — and the fact that it won’t deal beyond 2011 with BP will hardly be a blow for the company. As Reuters also points out in the story, it’s certainly not one of BP’s main counterparties.

The majority of those, we hear, are still trading as usual with the firm. If anything they’re keen to explore insurance options in the CDS market to protect their deals, rather than limit trades completely.

Calls for more collateral, however, could be expected in the weeks to come — especially if other ratings agencies follow Fitch’s extreme downgrade with similar moves.

As FT Alphaville pointed out on Tuesday, Fitch’s previous downgrade of BP on June 3 had been swiftly followed by actions from Moody’s and S&P.

What’s the liability?

Of course, if Matt Simmons, of peak oil theory fame, is to be believed, oil traders could be right to be worried.

He told Bloomberg TV on Tuesday that the oil leak has created a giant ‘oil lake’ about 1,100 metres under the surface of the sea, and covering up to 40 per cent of the Gulf of Mexico.

He added the speed of the flow more likely indicates a leak equal to 120,000 barrels a day.

He maintained that because the leak has no casing — and is effectively an open hole — a relief well will not work. Hence the only possible resolution remains a small nuclear explosion to convert the rock to glass. Something which presumably would wipe out future Gulf of Mexico projects as well as the viability of current projects.

In punishment for BP’s arrogance and stupidity, Simmons concludes the government “will take all their cash”.

Of course, if things really come to the crunch they could also confiscate BP’s existing assets in the Gulf of Mexico or even US production assets completely.

This would knock BP sideways.

According to UBS, in the last three years alone US upstream assets have generated up to 28 per cent of BP’s total net income. Gulf of Mexico assets, meanwhile, have contributed to 10 per cent of BP’s production. But it’s also critical to point out that these are among the highest valued barrels in the group’s portfolio.

A note from BofAML on Wednesday sets out the reality glaringly.

The truth is, no-one really knows the scale of the potential liability. So far, an indication of the cost can be inferred from the current flow rates originating from the Macondo well. As they observe:

Based on new scientific analysis from well data, the US authorities now estimate the Macondo well flowrate at 35-60kb/d (from the previous 12-40kb/d). Flowrates are the single largest factor in determining the potential cost of the spill and the new estimates are materially higher than the 19kb/d mid point used in our published base case cost estimate of US$28bn – see GoM spill: 50 days later, 10 Jun 2010. We estimate that each 10kb/d increase in flowrate add some 10% to our base case estimate. As a result, the new flowrate could push cost estimates to US$35-60bn. Assuming, for example, that BP were to pay 65% of this cost, this could equate to a potential 50-100p/sh economic impact on BP.

But in reality, the truth is we’re in the dark about just how bad this could get.

Related links:
US targets $20bn BP pay-out
– FT
BP and the vortex of fear – FT Alphaville
A further, further BP indignity — in CDS – FT Alphaville