Will BP's Oil Stain the Whole Industry?

After billions of dollars spent and many years working to define itself as an energy company that protects the environment by going "beyond petroleum," last month's oil rig explosion and subsequent spill in the Gulf of Mexico could leave oil giant BP (BP) with the unfortunate legacy as the oil industry's "biggest polluter."

It could also be the watershed event that negatively affects the oil industry's long-term profitability.

As the assessment of the amount of oil gushing into the Gulf changes daily, experts are now preparing for the eventuality that the spill could become a worse disaster than the Exxon Valdez tanker spill in 1989. Unflattering comparisons to Hurricane Katrina have already been made, so the impact this disaster will have on the long-term corporate reputation of BP could be enormous.

Effective Focus on Safety?

"BP's response to contain the growing oil spill in the Gulf of Mexico from its Macondo exploration well serves as a test to confirm whether the firm's safety-driven focus of the past few years has been effective," wrote Morningstar equity analyst Catharina Milostan in a recent note to investors.

"A longer-term cost could be on the reputational front after BP is reviewed on current efforts. Constraints on future offshore oil drilling in the United States could have longer-term effects, slowing drilling and production growth plans in this region. Deep-water U.S. production accounted for 11% of BP's total production in 2009, and major deep-water projects are underway to bring recent discoveries to production over the next few years."

BP has major interests in the Gulf of Mexico, including expansion of production at its Thunder Horse Field -- the largest oil field in the Gulf -- and start-up production at the Great White field in the ultra-deep-water Gulf, where it has a 33.3% ownership stake. The company's ability to quickly and effectively clean up the current spill may have an effect on the level of future drilling and exploration it's allowed to do at these other sites.

Reputation Survived Previous Disasters

Somehow, BP's reputation as an environmentally friendly company wasn't mortally wounded after the March 2005 Texas refinery explosion that killed 15 workers and injured 180, or the March 2006 Alaskan pipeline spill that resulted in the cleanup of 267,000 gallons of crude. But given the scope of the ecological and economic damage that's resulting from the current spill, BP won't be given the benefit of the doubt for this accident.

The British company's reputation with the general public has already been soiled. Brand Keys, a research firm that tracks customer loyalty, says that since the accident, BP has fallen from top to last in rankings of customer loyalty among the seven largest oil companies.

Investors have expressed their displeasure through stock trades, sending shares of BP down from $60.09 at the close on April 21 to $50.99 at the close on May 5. Shares of BP had fallen 83 cents to $50.16 in afternoon trading on Thursday.

Damage Extends to Entire Oil Industry

Ultimately, BP's damaged reputation as a company that can drill for oil safely may extend to the entire oil industry. Congress has already introduced new legislation to curb offshore drilling in the U.S. and to increase the liability limits for oil companies from $75 million to $10 billion.

"This spill may set back progress for offshore drilling by decades," said Phil Flynn, senior energy analyst for PFGBest Research. "This may do to offshore drilling in the U.S. what the Three Mile Island debacle did for nuclear plant production."