BP’s U.S. contract suspension seen aiding Valero to Shell

BP Plc (BP/)’s temporary ban from new U.S. government contracts is an additional stain on the British oil company’s record that may give competitors an edge in bidding for future federal work.

“Regardless of how long the suspension is, the government has put a black mark on BP’s record as a contractor that will never be erased,” said Charles Tiefer, a University of Baltimore law professor who focuses on government contracting.

The London-based company on Nov. 15 agreed to plead guilty to criminal charges after the worst oil spill in U.S. history. The Environmental Protection Agency followed up with the suspension yesterday, saying that BP had showed a “lack of business integrity” in the 2010 Deepwater Horizon well blowout in the Gulf of Mexico.

Eleven people were killed, and the spill became the nation’s largest environmental disaster.

The company “has made significant enhancements since the accident,” it said in a statement. They include key leadership changes and voluntary deepwater drilling standards in the Gulf “that exceed current regulatory requirements,” the firm wrote.

Christine Tiscareno, a Standard & Poor’s energy analyst in London, said in a note today she had talked to the EPA and BP and that she thinks the suspension will be resolved by the first quarter of 2013. BP said yesterday it’s working with the EPA to get the ban lifted and expects a draft agreement from the agency “soon.”

‘Meaningful’ Action

Even after the suspension is lifted, it may haunt BP, said Dan Gordon, former head of federal procurement during President Barack Obama’s administration. Contracting officers will know the company was temporarily barred, and “they will ask questions,” he said.

Gordon said it’s unusual for a parent company to be barred from contracting. One or more divisions is more likely to be punished, he said.
“It is meaningful,” said Gordon, now a dean at George Washington University Law School in Washington.

Among the companies that may benefit are San Antonio, Texas-based Valero Energy Corp. (VLO), San Ramon, California-based Chevron Corp. (CVX), and the Hague, Netherlands-based Royal Dutch Shell Plc. (RDSA) The firms are top suppliers to the U.S. military, the world’s single largest consumer of energy excluding countries.

Pentagon Supplier

BP shares rose less than 1 percent to 431.05 pence in London trading today. They fell less than 1 percent yesterday after dropping as much as 2.9 percent following the suspension announcement.

The temporary ban doesn’t affect existing contracts. The EPA didn’t say how long it would last, though suspensions generally don’t last more than 18 months or until the end of legal proceedings. BP and the government are still in a dispute over civil charges.

The Pentagon relies heavily on BP. The Defense Logistics Agency, which purchases most of the military’s petroleum, awarded 22 contracts to the firm in the fiscal year that ended Sept. 30, 2011, Mimi Schirmacher, a spokeswoman for the office, said in an e-mail.

The defense agency’s energy purchases are competitive, and the office “anticipates receiving offers from other suppliers to fill future requirements,” Schirmacher said.

‘Take a Toll’

BP on Nov. 15 reached a settlement with the Justice Department, agreeing to pay $4.5 billion to end all criminal charges and resolve securities claims relating to the Gulf explosion. At the time, the company said it hadn’t been advised of any U.S. action on contracts.

“BP’s lawyers lost a lot of credibility for saying at the time of the criminal plea deal that they didn’t know of any agency that was going to suspend or debar them,” Tiefer, who served on the U.S. Commission on Wartime Contracting, said.

Even so, the EPA’s action will “take a toll” on BP, Tiefer said. Government acquisition officers weigh contractors’ past performances as they evaluate bids. That track record is becoming more important as contractors face more competition for a shrinking pool of contracts, he said.

The suspension also curbs the company’s ability to win new U.S. leases. Had BP been the high bidder in an auction yesterday of oil and gas drilling rights in the Gulf of Mexico, a lease wouldn’t have been offered until the suspension was resolved, Tommy Beaudreau, director of the Interior Department’s Bureau of Ocean Energy Management, said on a conference call with reporters. BP didn’t participate in the sale.

Gulf Auctions

Work on BP’s existing leases can go forward, Beaudreau said.

“That suspension applies only to new contracts with the federal government,” he said. The U.S. plans to hold two auctions next year for Gulf drilling rights, the first scheduled for March.

Scott Amey, general counsel for the Washington-based Project on Government Oversight, questioned whether the suspension would have a lasting effect because the U.S. government relies on its services.

BP was the Defense Department’s biggest fuel supplier in fiscal 2011 with awards valued at about $1.35 billion. Its contracts with the military surged 33 percent from $1.02 billion in the previous year, according to data compiled by Bloomberg.

U.S. Revenue

The firm received 49 percent more in defense contracts in 2011 than the No. 2 fuel supplier, Valero Energy. The third- largest recipient of the contracts was Kuwait National Petroleum Co., followed by Shell, Miami-based World Fuel Services Corp. (INT) and Chevron.

“If I were a competitor, I would definitely play the suspension up,” Amey said.

Bill Day, a Valero spokesman, said it was too early to tell how the suspension would affect the company’s military contracts.

BP produces about 770,000 barrels of oil equivalent a day in the U.S., more than 20 percent of the company’s global output. The company had revenue of $131 billion in U.S. last year, more than a third of its global total.

News of the suspension follows a Nov. 23 announcement that Lamar McKay, head of BP’s U.S. operations, will move to London to become chief executive officer of the company’s exploration and production unit called Upstream. McKay will report to Chief Executive Officer Bob Dudley.

“This signal from the U.S. on management integrity has real significance,” said Peter Hutton, an analyst for RBC Capital Markets.

Previous Suspensions

The critical question is whether this is “a shot across BP’s bows to get settlement, or a more sustained stance,” he said.

Large companies or their divisions have been suspended or debarred in the past. The Air Force in 2003 suspended three units of Boeing Co. (BA) in response to allegations that several former employees conspired to steal trade secrets from Lockheed Martin Corp. (LMT) during a competition. The suspension was lifted in 2005.

Tyson Slocum, Director of Public Citizen’s Energy Program in Washington, said BP should be banned from contracting for a period of at least five years — the duration of the probation the company received when it pleaded guilty to criminal violations.

“The EPA’s statement was fairly vague,” Slocum said. “It’s important that the government provide more detail on what ’temporary’ exactly means.”