A Year of Shocks for BP

Shareholders of BP (NYS: BP) will remember 20 April 2010 for a long time to come. Until then they were a pretty satisfied bunch of people. The share price had been rising steadily over the past year, and closed the day before at 624p.

As oil prices recovered from the lows they had hit during the credit crunch, the commodities boom looked set to resume, and BP seemed a pretty good bet on rising crude prices. Everything looked set fair.

Disaster strikes
But then news started to spread of a serious accident in the Gulf of Mexico. A BP rig called the Deepwater Horizon had exploded, and 11 workers had been killed. Not only were the immediate effects of the explosion awful, but the wellhead had started to gush oil uncontrollably.

The spill would continue to spew thousands of barrels of oil a day into the Gulf of Mexico until July 15, 2010, by which time the BP share price had touched a low of 300p. The relief well that stopped the leak once and for all was finally completed on September 19.

So began what must have been the worst period in the history of BP. The oil major was made a pariah by the American government, as dire predictions were made of an ecological catastrophe.

A long-lasting impact
Although such forecasts were overblown, the accident was to have a long-lasting impact on BP and, indeed, the whole of the energy industry.

First of all, there was the financial hit. The total cost of the accident to BP has been estimated to be as much as $40 billion.

Then there was the effect on BP's reputation, which has been terribly tarnished, particularly in the States. It was largely because of this that the chief executive at the time, Brit Tony Hayward, was forced to resign, to be replaced by Bob Dudley.

And then there was the hit on the company's future growth. A substantial proportion of BP's business was in the U.S., especially off-shore, and this business was now out-of-bounds. Plus, the company had to sell off a range of non-essential assets to cover the costs of the Deepwater Horizon spill.

To compensate for the loss of reserves in the U.S., BP has been looking around the world for other sources of oil, which drove it into the arms of the Russia oil major Rosneft and the Russian government in a bold initiative to search for oil in the Arctic.

But then BP found that it had completely, and rather naively, misjudged Russian politics. The oligarchs that BP was working with in the pre-existing TNK-BP collaboration stubbornly blocked the new initiative, and Rosneft had to find a new partner, which ended up being U.S. rival ExxonMobil (NYS: XOM)

Lessons learned
So what has BP learned from all this? Well, perhaps the biggest lesson of all is that safety can no longer be just an afterthought. It has to be the No. 1 priority.

The Deepwater Horizon spill was just the last in a series of accidents, several of which have been fatal -- notably the Texas refinery fire in 2005, which killed 15 people. BP's processes and systems for dealing with safety were not up to scratch. To remedy this, Dudley has made maintaining safety a key objective in every employee's job scope.

The company has also learnt that it is becoming increasingly difficult to find new oil reserves to replace old, depleted fields. A lot of the easy pickings have either gone or are in the possession of national oil companies such as Saudi Arabia's Aramco or Malaysia's Petronas.

And as this is not the time to go deep-sea drilling in America, this leaves companies like BP having to deal with less welcoming regimes in countries like Nigeria and Russia.

Perhaps this is a sign that the much-debated theory of "peak oil" is correct, and that oil companies now have to look further and further afield to replace their dwindling oil reserves. I suspect that this could be the beginning of a long-term decline in oil reserves for companies such as BP.

Be creative
Several other Fools have highlighted just how cheap BP is at the moment -- at its current price of 405p, it is on a prospective P/E ratio of only 5.4 -- and I agree. That's why I am keeping hold of my shares in the company.

But when I think what BP could be, I look at its rival Royal Dutch Shell (NYS: RDS.B) . This company is already successfully thinking outside the box, making big investments in novel energy sources such as oil sands and liquefied natural gas.

In order to drive growth into the future, I think BP needs to be just as creative, and just as good at execution. But I see little sign of this yet.

What's your view of BP right now? Let us know in the comments box below.

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Prabhat owns shares in BP.

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