April 30th, 2010
04:46 PM GMT
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A major oil spill in the Gulf of Mexico is expected to cause substantial environmental damage along the Florida coastline. Here CNN's Jim Boulden explains the circumstances behind the leak and the consequences for oil giant BP as efforts to limit the disaster get underway.

What caused the oil spill?
It seems workers on the Transocean Deepwater Horizon drilling rig (not owned by BP) were attempting to cap this new exploratory well when it suffered a "blow" causing the fire and sinking of the rig and the rupture of the line which brings extracted oil to the shore. Investigators will want to see what caused the explosion.

What are BP's offshore operations?
BP took over two big American oil companies in the 1990's, ARCO and AMOCO which gives BP access to many U.S. oil fields and refineries. There has been a slew of new oil and gas finds in the Gulf of Mexico in deep water. BP, like many of its competitors, is drilling exploration wells there to gauge the oil and gas potential. The well, known as Mississippi Canyon (MC) Block 252, is in the 'Macondo prospect'. The well in question is 65 percent owned by BP and has other oil companies as minority partners. It’s the norm these days for competitors to invest in these speculative wells.

Will BP have to foot the bill for the clean up?
BP CEO Tony Hayward was quoted on Friday as saying BP will take full responsibility for the spill and that they will honor "legitimate" claims for compensation. Then there are all the lawsuits filed and to be filed and compensation for the families of the dead. BP says moves to clean all this up is costing the owners of MC252 $6mn a day. U.S. law also states that oil companies have to pay for the use of help from the U.S. military. The total cost to BP is unknown as its not clear how long the situation will last.

Will anyone face legal action over the spill?
 This is the United States after all.

What effect has it had on BP's share price?
 BP shares are like an oil tanker most days – they don't move much and tend to trend with the oil price. But BP shares have been falling for days and at last count the company's shares have lost some 8 percent this week.

Why does something like this impact on share price?
BP may have to spend billions of dollars to make this right. Also, BP could cut its very generous dividend to preserve cash, if it comes to that. The Texas City Refinery fire in 2005 has cost BP some $1.5bn and counting.

Will it have an impact on BP's profits?
 This was not a working well, so BP will not lose any amount of oil and gas in its portfolio. But at some point it will have to"'book" the costs of all this and that will have an impact on its bottom line. Having said that, BP earns $5-7 billion from "ongoing activities" EVERY quarter ($27.7 billion in total for 2009). It had a $5.5 billion "replacement cost" profit in Q1 2010. It can afford this.

Filed under: Business


April 30th, 2010
12:14 PM GMT
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It is a complicated puzzle that has taken months to put together - and a few critical pieces are still missing

Greece has been negotiating the terms of a European Union bailout since the end of last year and in that time interest rates and the cost of borrowing have soared.

At a press briefing in Davos at the end of January, I remember asking Greek Prime Minister George Papandreou if Germany and France would lend their political support to his country. His answer - like the countries at the time - was non-committal. France did come on board; Germany is just warming up to the idea.

We know at this juncture that the road ahead for Greece is a painful one. We are looking at one out of five government jobs being eliminated. The coveted 14-month salary for government workers will be cut and taxes will continue to increase to  close a 13.6 percent budget deficit from 2009. The target for 2010 is cut of almost five percent, which is incredibly difficult to deliver when your economy is still contracting.

Left out of today’s debate is why we are in this position in the first place.

The reality is that the architects of the Euro made a political decision to be inclusive with the new currency union probably a full decade ahead of actual convergence with Greece, Spain and Portugal - dare I say even Italy, a G-8 member.

As a result of being pegged to a single currency and therefore German monetary policy, the Greeks have enjoyed the full benefits of a strong and stable currency without - until today - any of the pitfalls. Most notably, real estate prices and wages have continued to rise over the past decade, without the necessary openness and flexibility to attract foreign direct investment.

Greece trades a great deal with its southeastern European neighbors - especially in food stuffs. But the country cannot live on olive oil and the food sector alone.

During an interview with CNN, Papandreou talked about developing a green economy and tapping the growing market for solar energy. Practically speaking, it makes sense, but the building blocks for reforms need to be put in place first.

I spoke to one leading Greek businessman who produces high-tech software and sensors from his manufacturing base outside Athens. He recognises the burden of the budget deficit and the mess left over by the previous government. We have seen the protesters on the streets. But he notes - and the polls reflect this - that those shouting the loudest are in the minority. The Prime Minister still has a majority of the population, which supports change.

But herein lies the caveat: The International Monetary Fund is pushing for steep budget cuts and reforms. Papandreou with the support of his European counterparts can use this opportunity to start and complete what should have been done more than a decade ago. As one Greek chief executive said: “Better a showdown with the extremists today than a slow death of our economy in the future.”

Business leaders talk of opening up the property sector. The government and the Church of Greece reportedly own and sit on €250 billion of real estate.

Selling some of those assets would help bring down the deficit and ease the unrealistic level of prices brought on by the single currency. Secondly, many sectors remain closed or overly controlled in Greece. The transportation business lacks competition and prices remain artificially high - thanks again to the strong euro.

No one wants to see Greece exit the single currency. An exit would be a failure for Greece and the European Union as a whole. As one executive noted this past week, “it is absolutely not an option.” If that option is off the table, the Prime Minister has few cards to play at this juncture. Job cuts, higher taxes and yes long-term reforms need to take place for the country to rebuild confidence after the crisis.



April 30th, 2010
10:11 AM GMT
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