BP plc on Tuesday beat Wall Street's earnings expectations in 1Q2010 by more than doubling adjusted profits from a year ago, but the positive news was overwhelmed by the company's Gulf of Mexico oil spill, which threatens to cut into future operational performance for months to come.

The UK-based company's clean replacement cost of supplies, which strips out gains or losses from inventories and other nonoperating items, totaled $5.6 billion in the first three months of this year, well ahead of $2.39 billion reported in 1Q2009. Net cash provided by operating activities was $7.7 billion, compared with $5.6 billion a year earlier. Wall Street's average earnings forecast for BP in 1Q2010 was $5.06 billion.

However, CEO Tony Hayward said the focus for now is not on the company's continued financial recovery.

"They're a good set of numbers, clearly overshadowed by events," Hayward said.

The "events" have followed the tragic incident last week on Transocean Ltd.'s Deepwater Horizon rig (see Daily GPI, April 27). The rig had been drilling BP's deepwater Macondo discovery in Mississippi Canyon Block 252.

After the rig sank, close to 1,000 b/d of oil began flowing from a broken wellhead, which is close to 5,000 feet below the surface. As of late Monday a thin oil sheen measured around 80 miles by 42 miles.

The liability for the accident is not yet determined, but "in general," BP is responsible for the environmental clean-up because it is the well operator and it holds 100% interest in the prospect.

"We are going to do everything we can -- firstly, to control the well; secondly, to ensure there is no serious environmental consequence; and thirdly, to understand how this has occurred and ensure that it never occurs again," Hayward said.

BP is working "extremely aggressively" to contain the oil spill, said the CEO. "Our approach is to massively over respond..."

During a conference call with analysts, CFO Byron Grote was bombarded with questions about BP's response to the oil spill. After answering a series of questions, and perhaps realizing that the information he had provided still was not enough for analysts, Grote offered a lengthy reply.

"As a background, we believe that all accidents are avoidable," Grote said. "When they do occur, a company is judged on how it responds. And as such, we are deploying our full resources...to ensure that a tragic accident doesn't become a significant environmental event."

Currently, said the CFO, the top of the risers are laying on the sea floor, and "about 500 feet from the wellhead, the flow from the top of the riser appears to be around 1,000 b/d."

BP, he said, has two "dimensions" to its response: stopping the flow of oil and "containing the environmental consequences." Three activities are "currently progressing" to control the oil flow.

"First, we have five remotely operated vessels working to intervene on the blowout preventer and get it closed. And if we are successful on that -- and they've been working on it for several days now -- but if we are successful on that, that could resolve the oil flow problem in a short period of time.

"Secondly, we were looking to contain the flow by putting in place a large canopy with a riser over the oil leak -- this is sort of an inverted funnel -- and then processing it to the surface with a test separator."

The canopy has been engineered "in concept," said Grote, and previously was used successfully in shallow water. "The issue is to make certain that it can withstand the pressure of the much deeper water at the site and to be able to sort out the various topside processing issues...

"But presuming we can get all that squared away, and we remain confident we can at the current time, this could be a solution in four weeks or less."

The third method BP has deployed is mobilizing a rig that will "shortly spud a relief well in the reservoir and that will take somewhere between two and three months."

The costs for all of these efforts, separately or individually, were not disclosed by Grote, but Hayward said the relief well could cost $100 million. BP also faces the costs of keeping dozens of boats and planes, and hundreds of workers, on the clean-up operation for months. In addition, BP could face the costs to clean up any shoreline pollution, as well as possible fines, lawsuits and damage to its reputation.

The Deepwater Horizon rig was insured; BP is self insured, said Grote.

"The specific cost elements associated with this is something that we agreed with the joint incident command team that the Coast Guard will be posting on their websites very soon," said Grote. In addition to BP, the team includes members of the U.S. Coast Guard, the Interior Department's Minerals Management Service and Transocean.

In any case, at least one more well was planned at the Macondo discovery that was to be in addition to the well being drilled by Deepwater Horizon. There "obviously" are reserves in the well, Grote noted.

Besides stopping the flow of oil, a second response program by BP is to contain the environmental "consequences" of the oil that has reached the ocean surface, said Grote.

BP has deployed 32 vessels and five aircraft, "with the capacity to contain a much bigger oil spill -- 100 times bigger spill than the one we are currently facing," said Grote.

The oil now flowing out of the well is "light," with a "high gas to oil ratio," he said. "At the center of the spill, that's about 3% of the surface area of the wider sheen. The spill has an average thickness of .1 millimeter; that's about the width of a human hair...and it's subject to skimming operations."

The wider sheen, Grote said, has a thickness of "one to two hydro carbon molecules. That's very tiny. It's being addressed through the use of dispersements. In addition, we've got booms prepared for deployment to protect the shoreline as precautionary measures, if it gets to that."

To date the worst oil spill in U.S. history occurred in 1989 when the Exxon Valdez ran aground in Alaska. The oil tanker leaked 258,000 bbl of crude oil. The producer paid an estimated $3.5 billion in clean-up costs and faced punitive damages in the hundreds of millions of dollars.

While the oil spill consumed most of the questions, there was no denying BP's progress operation-wise in the first three months of this year. Production was higher than forecast, natural gas realizations were better than Henry Hub marker prices may have suggested, and the refineries had their best operational performance in six years, company officials stated.

Operational cost reductions, which have been an essential element in Hayward's restructuring plan for the past two years, will continue to help the company through 2010, Grote told analysts in the conference call.

BP's total gas and oil production was 4.01 million boe/d in 1Q2010, almost flat (down 0.1%) from the year-ago period.

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