x Abu Dhabi, UAE Thursday 20 July 2017

Ownership of BP drifts eastwards amid spill crisis

The "West-East" tilt theory postulates that global economic power is sliding away from North America and Europe towards the dynamic economies of India and China.

A sign voices homeowners' concerns about the value of their investments since the BP oil spill in the Gulf of Mexico.
A sign voices homeowners' concerns about the value of their investments since the BP oil spill in the Gulf of Mexico.

The "West-East" tilt theory postulates that global economic power is sliding away from North America and Europe towards the dynamic economies of India and China. Over the past couple of days, we have seen that theory operating in practice with the developments at BP. The giant oil company is increasingly beleaguered in the US and is looking eastwards for a means of salvation from the awful mess it finds itself in as a result of the Deepwater Horizon oil rig accident in April. Its gaze has fallen on the Middle East as a potential rescuer.

The share price performance on Monday tells you a lot about the course of things to come. After The National broke the story that BP was looking to Middle East investors for support in its hour of need, the stock - which has fallen in value by half since the oil well blowout in the Gulf of Mexico - was in heavy demand by Asian and Middle Eastern buyers. By lunchtime in London, the shares were up 5.3 per cent, their best performance for weeks.

But then they encountered a bout of selling by western investors who clearly want nothing more to do with what they consider a "tainted" investment. The shares retreated by the time London closed, although still 3.3 per cent ahead on the day. You can expect that pattern to repeat itself daily over coming weeks: Asian and Middle East buying followed by western selling. American investors account for about 40 per cent of the share register, but that will fall. Ownership of BP is slowly but inexorably slipping away from Europe and the US towards the east. At the moment, it has come to rest in the Middle East.

The company, with its 100-year presence in the region, knows all about the huge financial reserves of the Gulf as well as the oil reserves here. It has been doing business with the UAE, Qatar and Kuwait for decades. What better investors could it find than the big financial institutions of those countries? They would be supportive, injecting a healthy dose of capital into the company at just the right time; they would be long term, in contrast to the fast-turnover merchants of the West who like to "flip" equity investments on a much shorter time scale; and they would be non-interventionist and free of the political baggage of US shareholders.

From the point of view of the new BP shareholders in the Gulf, there is a convincing case for buying shares or increasing their stake in BP. Many energy analysts argue that the great sell-off in the stock has gone too far. They say that the level of financial damage done by Deepwater has been exaggerated and that BP will be able to meet its obligations in the US - in short, that BP will get through this crisis in good shape.

You can argue all you like about that, and especially the question of financial damage. BP has already spent more than US$3 billion (Dh11.01bn) on clean-up and other costs and has pledged to put $20bn in escrow to meet future liabilities. Maybe that will be enough, maybe not. The pessimists reckon the total liability could be as much as $60bn. But those final calculations are years away. Much more pressing is the matter of capping the leaking well, which BP expects to do next month. If and when that has been done, you can expect an immediate bounce-back by the shares. It makes an investment now, at such comparatively low prices, look a very good deal.

In reaction to the fuss caused byThe National story, the company was at pains to point out yesterday that it had "no current plans" to raise new equity as part of this appeal to the Middle East. No doubt BP was worried about what might happen if it were suggested to nervous existing shareholders that their holdings were about to be diluted and new shareholders offered attractive terms to take big stakes in the company. When Qatar and Abu Dhabi bought their stakes in Barclays early last year, there was a similar outburst from institutions that felt hard done by.

But BP has left open the possibility that, at some future stage, it will invite new shareholders in on preferable terms. It worked for Barclays, seeing it through the worst days of the crisis and keeping it out of the hands of the British government. The crisis BP faces is no less serious, and offering a chunk of new equity to, say, Abu Dhabi, Qatar and Kuwait could have the same effect as it did for Barclays. Whether a big purchase by Libya would be as acceptable is open to doubt.

For the time being, BP has made its case. Middle East investors are aware that the company would like them to buy shares, and they will probably do so in days to come. A "floor" at about the current share price has been set. Now BP can get on with the other pressing matters it faces: clearing out the old board, capping the well and realising some asset sales. It will emerge from this crisis a very different company, under new management and with ownership far to the east of New York and London.

fkane@thenational.ae