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Fri, 16 Jul 2010 - 18:00

BP Cap Oil Spill - For Now

At 14:25 on Thursday, US time, BP was finally able to stop the flow of oil into the Gulf of Mexico that has been raging since 20 April. It is estimated that between 90 and 180 million gallons of oil have been spilled, which makes it the biggest spill in the US in history.

This plug has been developed not to stop the flow, but rather to capture all of the oil, and for now it has succeeded in stopping the oil pouring into the sea. BP is now in the middle of conducting a very important 48 hour observation process to ensure that all the oil and gas is, indeed, being captured. The 'plug' capturing the oil needs to be able to withstand the Macondo well's pressure, and BP also needs to ensure that the pressure on the 'plug' remains constant, as any drop in pressure would indicate that there are one or more fissures in the well, leading to leaks elsewhere.

The current longer term plan to stop the Macondo well is to drill a relief well nearby, pump mud into the well, and seal it with cement. They have begun this process, but stopped during the plugging of the well to avoid any potential mishaps while the plugging took place. Current plans are for the relief well to intercept the Macondo well at 18,000 feet (nearly 5,500 metres) below the surface. Clearly these are extreme circumstances, and best and worst case scenarios can widely vary. Let's hope that the best case scenario - from here - pans out.

The costs of this spill can be crudely (pardon the pun) split into three cost centres. The first is the cost not only of stopping the oil spilling, but the opportunity cost of not being able to drill for oil for the last three months at Macondo, and the possibility that deep sea drilling projects will be curtailed in the future.

The second leg of costs are those immediately associated with the cleanup of the spill. Footage shown on Carte Blanche last Sunday show just how devastated some regions are. These two cost centres are fairly well known, and can be estimated with a reasonable degree of certainty (once the oil has completely stopped flowing).

The third cost centre is future liabilities arising from this oil spill. BP has set up a US$20bn fund to deal with claims arising from this spill. While this is a large amount, the size of claims and lawsuits that it will face in the future is unknown. I am sure that there are many costs - particularly environmental - that haven't been felt now, but will be felt in the future as the impact of the oil spill seeps through the system.

In investments we always need to compare the value of the company with the price that it is currently trading at before making a purchase. At these levels there are investors who no doubt believe that the share price offers upside potential, and will therefore be buyers. Others will be wary that the future liabilities could sink BP. Still another set of investors may believe that the share price offers value, but won't be investing in the share from a moral standpoint.

While there are clear merits and pitfalls to the BP investment case, it's situations like this that indicate that price is not always the only consideration when buying a share. Environmental and other sustainable investing considerations can sometimes move to centre stage.

Enjoy your weekend.

Take care,

Mike Browne info@seedinvestments.co.za www.seedinvestments.co.za 021 9144 966

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