BP plc’s positive earnings in the first three months of 2010 were smothered last week by the company’s involvement in the Gulf of Mexico (GOM) oil spill, which threatens to cut into the oil major’s future operational performance for months to come and diminish its reputation for even longer.

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

“They’re a good set of numbers,” Hayward said of the company’s quarterly report, but are “clearly overshadowed by events.”

The “events” have followed the tragic incident in late April on Transocean Ltd.’s Deepwater Horizon rig (see related story). The rig had been drilling BP’s deepwater Macondo discovery in Mississippi Canyon Block 252.

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. It holds a 65% stake in the prospect; Anadarko Petroleum Corp. has a quarter stake and Mitsui holds the remaining 10% interest.

“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 an earnings conference call with analysts last week, 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, 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.”

BP’s response, Grote said, has two “dimensions”: stopping the flow of oil and “containing the environmental consequences.” At least three activities were under way last week 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 spreads its risk in a self-funded insurance pool.

“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 last week had 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 that was flowing out of the well was “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, had a thickness of “one to two hydro carbon molecules. That’s very tiny. It’s being addressed through the use of dispersements…”

To date the worst U.S. oil spill 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.

How much in recovery costs BP eventually will be responsible for remained a question last week. In an interview with Reuters on Friday Hayward said, “We are taking full responsibility for the spill, and we will clean it up and where people can present legitimate claims for damages we will honor them.

“We are going to be very, very aggressive in all of that.”

However, Hayward said he hoped that an effective response to the spill would reassure people about drilling risks.

“It would be bizarre to say it shouldn’t influence the debate,” Hayward said. “How the debate will come out, I think ultimately will be judged by the success we have in dealing with this incident.”

The CEO also told Reuters that he thinks drilling safety regulations will come under increased scrutiny.

“Rightly, there will be a reaction. Whenever you have something of this significance, it’s right that regulators should look very hard at what they can do to further ensure that something like this never happens again.”

Possible changes, Hayward told Reuters, “could relate to testing of equipment like the blow-out preventer on the ocean floor, which failed to operate correctly and shut off the flow of oil.”

Despite the tragic incident, there was no denying BP’s progress operation-wise in the first three months of this year.

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 1Q2010, 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.

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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