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Is the Deepwater Horizon the Offshore Oil Industry’s Three Mile Island?
Besides developing some great gas wells costing $1/MCF when it was selling for $2, the fruit of my four years of wildcatting in the Barnet shale was many great relationships in the energy industry. Over the years, I have not been wanting for great steaks at Nick & Sam’s in Dallas (thanks Billy Bob), skyboxes at Dallas Cowboys games, (thanks Jim Bob), and personally signed 8 X 10 glossy photographs of George W. Bush (thanks Rufus). Not only have these good old boys kept me in touch with the goings on in the hydrocarbon industry, they have also provided insights that help me understand the world at large.
I have to tell you that the grumblings coming out of the oil patch these days are not happy ones. British Petroleum’s (BP) Gulf disaster could well do for the offshore oil industry what Three Mile Island did for nuclear energy. At the very least, regulations are going to get tougher, inspections more rigorous, and taxes higher. The Oil Spill Liability Trust Fund, which is funded by an eight cent per barrel tax, is going to have to be replenished with higher fees. It will also raise the production and insurance cost of what is already the world’s most expensive oil, now around $80/barrel. The Senate is almost certain to raise the liability limit for these projects from $75 million to as much as $10 billion.
A populist wave could revive cap & trade, until last week thought dead on arrival. It didn’t help that BP was a notorious “green washer,” its $300 million budget for alternative energy going entirely into advertising. The big oil companies themselves have to be asking themselves if these ultra high risk, high return projects are really worth it.
The massive oil spill could not have come at a worse time. Just as the Obama administration was finally opening up new offshore tracts for lease, this had to happen. All new licenses for deepwater wells have been frozen, pending an investigation into the causes of the current blow out.
The 5,000 barrels a day that is leaking is, so far, just a tiny fraction of the 75,000 barrels that washed ashore in Santa Barbara in 1969, which I personally helped clean up myself. But its magnitude will surpass the 1989 Exxon Valdez disaster in a matter of days. I haven’t heard Sarah Palin say “drill baby drill” since last week, possibly because four red states are about to see their tourism industries destroyed by fouled beaches just as summer vacations begin (see map below). Ooops! Maybe all those tourists are now headed for California? There goes my parking spot at the beach.
Today’s cleanup estimate is at $4.6 billion. No doubt (BP), the lease holder, and Transocean (RIG), the subcontractor, will get absolutely taken to the cleaners over this. The insurers for the rig, probably Lloyds of London, will take a multibillion dollar hit on claims. Shipping rates for Suezmax crude carriers are already climbing, as the prospects of greater offshore supplies recede into the future. Some one third of total US oil production is offshore.
It is clear that either a blowout preventer valve was missing from this site, an insane cost cutting risk at this depth, or malfunctioned. It has long been a dirty little secret that offshore drillers routinely ignore regulations that are strictly enforced by the states on the US mainland. Anyone who has worked closely with these wells, as I have, knows that they can blow up at any time, and that you can’t spend enough on safety.
Too bad for RIG, which is a first rate company, with about half of its offshore rigs on long term leases to Brazilian oil company. Petrobras (PBR). As for BP, may they roast in hell. Not only is their safety record deplorable, I am still smarting from the $75,000 I lost as my personal underwriting share when Morgan Stanley took them public in 1987. But for the rest of us, this will mean more expensive gas at the pump.
To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on the “Today’s Radio Show” menu tab on the left on my home page.
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It is the Anti-3 Mile Island.
Best news for the nuclear industry since Jane Fonda and Gordon Gecko made that slanderous hack-flick "China Syndrome" Not a lot of Uranium issues I have heard of recently. Nope. Don't know of one death related to the industry (outside of that abortion of a plant in Chernobyl. Thanks BP.
I am all for solar energy, aka, nuclear. Fission now, fusion later.
Oil and water don't mix; the oil is not going anywhere; sooner or later it will hit shoreline, and it only takes a marginal amount to spoil a beach. And using a dispersant to create toxic rubber balls is completely asinine.
I'll be surprised if FL remains unscathed as this plays out. And I'll be very surprised if the super-duper-engineered cap prevails as it will have to be tethered as soon as it's placed. For the sake of the Gulf, I hope to find myself surprised and proven wrong next week.
It's all a good show, much the like Goldman - Congress production. Rhetoric and diversion to pull MSM in another direction while the real story is they are getting closer to cap & trade than most think. Technical explanations didn't hold water for 9/11 and they don't apply here either. TPTB from the US & UK will profit immensely from the pending "save the world" legistlation. BP is only a sacrificed pawn.
We didn't think the health care bill could be passed until we learned everyone has a price - wait until to you see cap & trade. MHFT only highlighted the tip of the iceberg, kiss the independent automakers goodbye.
Then again, it's only a theory.
Listen, I'm not an expert but to anyone who is... feel free to respond.
It's my understand that an "optimum" price for oil (please... uber-capitalists... just let it go and don't sidetrack the discussion by arguing that there's no such thing in a free market...) would be somewhere in the neighborhood of $45-$60/barrel.
Saudi oil still costs what... $7 to get a barrel out of the ground with existing infrastructure?
Obviously the deeper and more remote the oil, the more it costs to get at it; some oil might cost $45/barrel to get out of the ground... some might cost more.
Beyond fixed costs, there're R&D costs, hedge/speculation costs, and so on and so forth.
But bottom line... in simplist terms... (forget currency flucuations and the long term decline of the dollar for the moment)... I'm under the impression that oil price centered between $45-$60/barrel would be a reasonable, responsible target to shoot for if one is not fixated on an "extreme" let the markets reign ideology.
Assuming I'm right about the numbers... (and please, if anyone can offer more up to date, accurate assumptions please do!)... wouldn't it be smart for the Republicans to basically "platform" such a specific sentiment?
I mean I think it would be; any other thoughts?
BILL
When Gov and business create an incestous relationship, it brings industry to a new dimension... deepwater horizon and event horizon are in a similar fate.
http://www.youtube.com/watch?v=hitqMp6QS7o&feature=related
With all seriousness though, Commoncents22 has a point, limiting energy production in easy areas does play a role, but if you look at the shortfall curve that is imminently approaching, the oil companies are straining the boundaries of technology and we'll probably see more of these. Maybe the video clip isn't too far off after all.
Kaboom ...
AGE Refinery, Explosion and Fire in San Antonio, Texas
Wednesday, May 5, 2010
http://newsolio.com/age-refinery-san-antonio-explosion,9801
Cap and Trade?! Where is the logic of using a faulty economic scheme to clean up oil spills? Populist hopes? I hope not!!!!!
Another example of government setting private business up to fail.
Who thinks BP dreams about drilling in a mile deep ocean area? It is expensive and RISKY. the reason they drill there is because the NIMBY(not in my back yard) and govt regulation ropes off the on land and shallow shelf areas to drill. Those areas are much cheaper and safer. If something goes wrong it is much easier to deal with.
Again, the govt gets off scott free and demonizes another industry important to economic survival.
Gonna have to respectfully disagree with that one. The reason they're drilling in high-risk deepwater, cooking sand, and squeezing rocks is because "easy" oil supply is in terminal decline. Has been in the US for some time. As stupid as governments can be (and I'll grant you that's pretty freaking stupid), I don't think too many would consider oil as just "another industry important to economic survival". It is the unanimous hands-down world heavyweight champion of importance to economic survival, at least as measured by current (grow baby grow) standards.
"The 5,000 barrels a day that is leaking"
don't know where you're getting these numbers. Even BP have modified these significantly upward. And we all know it's in their interest to make those numbers as high as possible.... riiiiight.
"It is clear that either a blowout preventer valve was missing from this site, an insane cost cutting risk at this depth, or malfunctioned"
you forgot that this job, its depth and the pressures pushed the edges of our technology. We are taking bold new excavation risks because we are post peak desperate. We now have bold new challenges to cap at this depth and pressure
Rape and robbery are very" bold" things to do
There was a BP on that rig. It didn't work.
BP is the company operating the well.
The BOP (Blow Out Preventor) is device that sits atop the surface casing and may be used to shut in the well if it commences to flow. It was not missing.
What was missing was an acoustic actuator for the BOP. The prmary means of actuation is located in the driller's shack in the drill floor. There will also be back up actuators located elsewhere on the rig.
The rig was also likely equipped with a "fail safe" actuator. If the physical connection between the BOP and the rig is severed for any reason this is sensed and results in the automatic actuation of the BOP.
What this rig was not equipped with was an acoustic actuator. This is a control box with a transducer. If you need to leave in a hurry you take to the lifeboats. From the lifeboat you place the transducer in the water and send an acoustic signal to close the BOP. Such acoustic controls are normal equipment in most other offshore jurisdictions and are required by regulation. They are not required in the USA because the USA privatizes profits and socializes losses; in much cruder terms the industry and its regulators had a circle jerk and decided they were completely happy with each other. This is what OTC is all about. Been there. Done that. It was fun.
Had to edit this as spelling is not my language of birth. Cynde is a nice name. Thanks for the memories.
yeah I know, I was quoting the madhedge man who states this was possible (and who also claims to have "worked closely with these wells"). Thanks for posting the oildrum comment. I had read that earlier. I thought some of the other comments refer to relationship between the pressures at these depths and the BP success.
These appologetics are annoying. The spill is at least 25,000 Bbl per day not the quoted 5,000 (just multiply the suface area of the slick by 1 micrometer and calculate the volume then divide by the number of days since the accident). If we get unlucky this spill could seriously damage if not destroy the entire mississippi river delta and all the wildife therein. If we get really unlucky it does that then gets into the loop current. Energy ain't much good if you destroy a goodly part of the Earth to get it. This thing is a freaking disaster and their lack of an acoustic shut off on the wellhead is just criminal. A lousy 500 large per well that they decided they couldn't afford. Just outrageous.
Screw the OFFSHORE.............
Like I said yesterday, another LAND find in N.D. nearly as large as Bakken, was discovered last week.
Between Oil Sands, Anwar, Bakken, and these new finds...
It's past time, DO we( GV't) REALLY want energy interdependence?
I say, NO.
Otherwise D.C. would tell the Enviro Nazi's to go to hades, and Drill baby Drill......
We KNOW we have more Natural Gas reserves in the US, than ALL of the middle east................convert the cars/trucks, to LPG.
Near ZERO emmissions,tons cheaper, and cleaner.
Face it, we are feeding the Royals.
Bakken was discovered a few years ago and has been living under a rock. Why we have not been gunho here is beyond me.... One thing for sure, I will be cutting the floor boards out of my vehicles so when the gas price goes over $6/gal, I can do my best immitation of the Flintstone's mobile... yabba, dabba, doooooo !!!!
Natural gas finds peaked in the 80s. There's no magic bullet and apparently, so far, our government has chosen to use the real ones instead.
http://www.theoildrum.com/story/2006/11/27/61031/618
read some time ago that the state of the drilling industries infrastructure, the age and condition of existing rigs, was reaching a critical point. from a (contrarian) investors point of view i couldn't see any real good reasons for them to replace those rigs, as the global recession has stifled demand, and perhaps drilling new wells was more cost efficent, than pouring money into old wells that were past their prime. additionally the costs of building these things is going up faster than the price of the product, or at least as fast.
don't worry the beaches in SoCal, Congressional Republicans from the coast districts were against drilling offshore before this happened.
if there are tighter regulations on drilling rigs you can bet there will be some nice subsidies along with it. in fact they will probably ask for some bailout money.
So you lost in the initial BP IPO way back in '87, did you MHFT? Blame Maggie Thatcher, not MS, who insisted the deal close during the carnage of the '87 crash.
For once taxpayers didn't get screwed over. It was the investors, for once, who bought the risk, and hoped for the reward, who lost.
Too bad. Capitalism worked that day.
How did this Happen..? some say a N. Korean Sub hit the oil rig
with a Torpedo.... Help me on this ... can a sub get past the
US Navy ? and Radar.. ? If N. Korea hit our oil platform
we should pay them a visit at 3 am ...
http://www.eutimes.net/2010/05/us-goes-to-cocked-pistol-alert-status-ove...
http://www.eutimes.net/2010/05/us-orders-blackout-over-north-korean-torp...
Beware the next link. gave my cp the shivers, alarms went off.
Eutimes.net link may be harmful
Breathless conspiracy theories always abound around these types of events. Come on.....
The sub torpedoed the rig from 130 miles away, waited 2 days, then went right in under the rig and blew itself up?
Really?
Really?
If you're gonna go down that road, it's just as easy to believe that Greenpeace or some other radical earthfirst group blew the rig up so that the recent Obama administration decision to start drilling offshore would be DOA.
Get a grip, folks -- this was incompetence and lack of oversight, not a conspiracy or sabotage.
No, Haliburton screwed it up, as they have had similar failures same thing before.
To help offset the increase in 96 octane at the pump for my various 4 and 2-wheelers, and every plastic thing I consume, is it too late to short RIG and BP?
Isn't that a slam dunk?
Haliburton / Dick Cheney is tied into this oil leak... see youtube..
There is more bull shit surrounding this issue than a cattle ranch. All interests are in wide open throttle propaganda mode. And MHFT is adding to it all. Start with the fact that the oil spill isn't going to destroy tourism in four states. The spill is likely to affect only LA and MS whose only beaches are made of mud from the river, and who's tourist industry is limited entirely to gambling. Neither is there any evidence that there were no BoP valves and if MHFT was an oil man as he claims, then he should know better. NO offshore well is EVER drilled without a blow out preventer. Did you even bother to listen to the interviews of the rig crews? They gave complete details on what went wrong and why.
OK, so you got a hard on for BP; I don't like that outfit either with their phoney green ad blitz; its pure hypocrisy. But BP basically had nothing to do with this accident as it was entirely in the hands of the drilling crew. But you do everyone a disservice and damage your reputation by spreading even more BS. And by your comments you display your ignorance of that which you claim to be somewhat expert.
Quote
But BP basically had nothing to do with this accident as it was entirely in the hands of the drilling crew.
EndQuote
The above is a nonsense statement that reflects a complete lack of understanding of contractual relationships in the offshore oil industry.
The rig is under contract to BP. BP is responsible for obtaining all permits and meeting all extant regulations. The daily direction of the drilling unit is under the direction of a "company man" a direct employee of BP who manages BP's interests on the rig and either makes all decisions regarding drilling or is in the chain of command and communication if the issue has to be bounced back to the beach for a decision.
In all offshore contracts I have ever seen the drilling contractor (RIG in this case) is indemnified against all legal actions. This is in recognition of the fact that any actions taken are undertaken at the sole discretion and direction of the operating company, BP.
"There is more bull shit surrounding this issue than a cattle ranch. All interests are in wide open throttle propaganda mode. And MHFT is adding to it all"
+1
MHFT will tell you he also cured polio, that is if you mention it.
I work in the oil field, and I won't comment about this. IF MHFT was really connected he would have mentioned Houston, not Dallas. I also like how we all have redneck names cause' we all just a bunch'a oilmen from down from Texas.
The Offshore Technology Conference (OTC) is being held in Houston this week. It is the worlds largest energy technology tradeshow, and it is a muted party from the excitement of 100 $/bbl.
Everyone on this board should be careful about being an 'expert'. One day you might actually be talking to one.
I agree Noah, WTF is MHFT? He writes as if he is a modern day Francis Bacon, but my BS meter goes off every article I read of his.
Any verifiable bio MHFT.
BTW I worked at a hedge fund, a commodity firm and spent 10 years in the equity options pits at the AMEX then the CBOE.
Currently I trade and call out bullshit.
there were massive failures that led to this catastrophe dude and it was not just the drilling team. BP passing the buck is ridiculous and this isn't the first time they frakked up with safety. Stop living in denial, or eat a lot of oysters and shrimp from the gulf.
If the spill reaches the loop current, the Florida Keys and Miami could get damaged.
IS GOLDMAN SACHS WALL STREET'S DEEPWATER HORIZON?:
http://williambanzai7.blogspot.com/2010/05/toxic-spill-costs.html
I think there will be the same reaction that we had for 3 Mile Island and Santa Barbera. I believe it was an over-reaction, but it will happen again. BP became too complacent. Their shareholders will be paying the price. Perhaps the dome they are now building should have already been built and on standby. Perhaps every field development should start with drilling a relief well to the intermediate casing level. Perhaps there should have been more containment assets in place to begin with. Maybe an additional BOP stack should have been required. I don't know. I've only drilled onshore. But keep in mind that drilling in these deep waters would be less of a necessity if the states of Florida and California would let us drill in the shallow waters of those states.
writing from The Kingdom of Saudi Arabia
CEO of the Sofa
Someone posted on here somewhere that BP self insures.
NLC playing a big part of the clean up.
If the leak is fixed soon NLC wins
If the leak goes on for months NLC wins
If BP shifts the blame and financial risk to someone else, NLC wins
If BP doesnt manage to shift the blame, NLC wins.
anyhoo.. if the bear market takes hold NLC share price dont win.
ps. is there anywhere you havent been posted to or evacuated from?
Some interesting technical discussion at the oil drum:
http://www.theoildrum.com/node/6430
I received the same info. Today I got a slightly different version but very similar which I've attached:
I continue getting calls asking what happened on this problem so here’s a response from a friend in the oil business with possible inside info on the blowout. Please keep in mind this is an “UNOFFICIAL” report so this may or may not be factual. However, the scenario as written makes reasonable sense as far as I am concerned. The focus needs to be on well control now and not speculation as to what may or may not have happened. BP, the MMS and most likely a third party will certainly provide a very in-depth investigation which will be the official report. Having said that I would certainly not look forward to a copy of that report as it will be furnished only to those in need due to the possible liabilities of the findings.
Details as conveyed to me:
This well had been giving some problems all the way down and was a big discovery. Big pressure, 16ppg+ mud weight. They ran a long string of 7" production casing - not a liner, the confusion arising from the fact that all casing strings on a floating rig are run on drill pipe and hung off on the wellhead on the sea floor, like a "liner". They cemented this casing with lightweight cement containing nitrogen because they were having lost circulation in between the well kicking all the way down.
The calculations and the execution of this kind of a cement job are complex, in order that you neither let the well flow from too little hydrostatic pressure nor break it down and lose the fluid and cement from too much hydrostatic. But you gotta believe BP had 8 or 10 of their best double and triple checking everything.
On the outside of the top joint of casing is a seal assembly - "packoff" - that sets inside the subsea wellhead and seals. This was set and tested to 10,000 psi, OK. Remember they are doing all this from the surface 5,000 feet away. The technology is fascinating, like going to the moon or fishing out the Russian sub, or killing all the fires in Kuwait in 14 months instead of 5 years. We never have had an accident like this before so hubris, the folie d'grandeur, sort of takes over. BP were the leaders in all this stretching the envelope all over the world in deep water.
This was the end of the well until testing was to begin at a later time, so a temporary "bridge plug" was run in on drill pipe to set somewhere near the top of the well below 5,000 ft. This is the second barrier, you always have to have 2, and the casing was the first one. It is not know if this was actually set or not. At the same time they took the 16+ ppg mud out of the riser and replaced it with sea water so that they could pull the riser, lay it down, and move off.
When they did this, they of course took away all the hydrostatic on the well. But this was OK, normal, since the well was plugged both on the inside with the casing and on the outside with the tested packoff. But something turned loose all of a sudden, and the conventional wisdom would be the packoff on the outside of the casing.
Gas and oil rushed up the riser; there was little wind, and a gas cloud got all over the rig. When the main inductions of the engines got a whiff, they ran away and exploded. Blew them right off the rig. This set everything on fire. A similar explosion in the mud pit / mud pump room blew the mud pumps overboard. Another in the mud sack storage room, sited most unfortunately right next to the living quarters, took out all the interior walls where everyone was hanging out having - I am not making this up - a party to celebrate 7 years of accident free work on this rig. 7 BP bigwigs were there visiting from town.
In this sense they were lucky that the only ones lost were the 9 rig crew on the rig floor and 2 mud engineers down on the pits. The furniture and walls trapped some and broke some bones but they all managed to get in the lifeboats with assistance from the others.
The safety shut ins on the BOP were tripped but it is not clear why they did not work. This system has 4 way redundancy; 2 separate hydraulic systems and 2 separate electric systems should be able to operate any of the functions on the stack. They are tested every 14 days, all of them. (there is also a stab on the stack so that an ROV can plug in and operate it, but now it is too late because things are damaged).
The well is flowing through the BOP stack, probably around the outside of the 7" casing. As reported elsewhere, none of the "rams", those being the valves that are suppose to close around the drill pipe and / or shear it right in two and seal on the open hole, are sealing. Up the riser and out some holes in it where it is kinked. A little is coming out of the drill pipe too which is sticking out of the top of the riser and laid out on the ocean floor. The volumes as reported by the media are not correct but who knows exactly how much is coming?
2 relief wells will be drilled but it will take at least 60 days to kill it that way. There is a "deep sea intervention vessel" on the way, I don't know if that means a submarine or not, one would think this is too deep for subs, and it will have special cutting tools to try to cut off the very bottom of the riser on top of the BOP. The area is remarkably free from debris. The rig "Enterprise" is standing by with another BOP stack and a special connector to set down on top of the original one and then close. You saw this sort of thing in Red Adair movies and in Kuwait, a new stack dangling from a crane is just dropped down on the well after all the junk is removed. But that is not 5,000 ft underwater.
One unknown is if they get a new stack on it and close it, will the bitch broach around the outside of all the casing??
In order for a disaster of this magnitude to happen, more than one thing has to go wrong, or fail. First, a shitty cement job. The wellhead packoff / seal assembly, while designed to hold the pressure, is just a backup. And finally, the ability to close the well in with the BOP somehow went away.
A bad deal for the industry, for sure. Forget about California and Florida. Normal operations in the Gulf will be overregulated like the N. Sea. And so on.
Nice find. Some of those people are going to be under gag orders once the lawyers get ramped up.
I was tempted to junk myself because its too long, but I don't think there is a way to shorten such a discussion effectively. Anyway here is a shot, based on that comment section (accepting the Monday QBing there as it is):
This did not involve submarines or terrorists. There were multi-systemic gross malfunctions starting with an extremely difficult cement job gone awry along with a probably breakdown in the casing which resulted in more than one huge explosions. The failsafe mechanisms existed and recently worked when tested as late as 2 weeks ago, but for some unexplained, yet to be determined reason, failed, or only partialy worked.
The odds are that this "cone" solution will likely not work and the drilling of a relief well is more likely to work, but no guarantee either.
Submitted by madhedgefundtrader on
The DailyMail says 200,000 barrels a day:
http://www.dailymail.co.uk/news/worldnews/article-1270917/BP-vows-clean-Gulf-Mexico-oil-slick-3-months-cap-leak.html
With expected 3 months to fix.
So, assuming that correct: 200,000 * 30 * 3 = 18,000,000 barrels.
How much oil would it take to kill the entire Gulf? How about the Atlantic?
Revelation 16:3:
"The second angel poured his bowl into the sea. It became like the blood of a dead body, and every living thing in the sea died."
http://www.youtube.com/watch?v=UORj053XoYY&NR=1
April 1st, 2010, Obama in Portland after passage of "health reform":
http://prescriptions.blogs.nytimes.com/2010/04/01/obama-to-boehner-wheres-the-armageddon/
Now the Republicans can't do that stuff. So who was he really mocking here? Was this a "Bring It On" to God?
Cracks in earth? Iceland volcano, April 14.
He also got his asteroids, over Midwest states, on April 24:
http://edition.cnn.com/2010/TECH/04/15/midwest.fireball/
April 1st: Obama expands offshore drilling:
http://www.tulsaworld.com/business/article.aspx?subjectid=49&articleid=20100401_49_E1_Presid162879
April 20th, the BP oil rig explosion off our coast.
Daily Fail states "200,000 gallons of oil", which is 5,000 barrels.
Now, I don't want to upset religious people, but leave religion out of scientific discussions, please.
You're right the actual article says gallons, although it says 200,000 barrels in one of the bullet points above the article.
But, a Coast Guard commander says it could climb as high as 100,000 barrels a day:
Isn't it helpful that the spill is in round numbers? What are the odds?