Monday, May 3, 2010

Initial Reflections on the BP Deep Water Gulf Blowout

It’s an environmental disaster.

Whether it will be greater than the Santa Barbara Channel Blowout, the Torrey Canyon, or Exxon Valdez oil spills remains to be seen, but the potential magnitude of the natural resources disaster exceeds any previous oil disaster.

Both the Exxon Valdez and Torrey Canyon involved supertankers with a finite cargo capacity. Santa Barbara and Exxon Valdez also had enclosed bodies of water, albeit large (The Exxon Valdez spill covered 1,300 square miles), with little chance of contaminating thousands of miles of coast line. While Santa Barbara was an offshore platform, it was close to land and at a shallow depth. Containment and capping could be achieved.

BP is 50 miles off shore with one mile of ocean before the drill hits a solid mass.

The BP potential for ecological carnage is seemingly infinite in comparison to the earlier disasters.

BP and its partners, Transocean, Ltd. and Anadarko, are at the cutting edge of technology, both for deep water drilling and then containment and capping. Red Adair and Boots and Coots were never hired to cap blowouts a mile under water. That is a challenge. The engineers will be studying this one for years, perhaps decades.
So will the lawyers. Over two dozen class actions have already been filed as the trial lawyers fall over each other to be first in line even if the basic facts aren’t known yet:

Why did the platform explode?
Why didn’t the emergency cutoff work?
Did a worker, now deceased, get to the cut off valve?
If so, why didn’t it work?
Why did the blowout preventer on the sea floor fail?
What checks and tests had been performed?
How close to completion was the well?
Would a $500,000 acoustic trigger, required by Brazil and Norway, but not the UK or US have made a difference?

The engineers will figure out these answers. They are very good with fault analysis, and other approaches to solving the causes of most major disasters, the one major exception being TWA 800.

Even if they don’t, the lawyers’ experts will advance theories.

This blowout is a true gusher for the lawyers, as black gold turns to green gold.

Forget Toyota and Goldman Sachs, this is the big one, the true Act of God.

Regardless of the technical cause(s), the underlying cause will be human error.

Exxon’s payouts on the Exxon Valdez will be petty cash compared to the BP settlements. Even if BP had substantial insurance, shorting the stock would be worth considering. BP claims to be self-insured.

BP is currently the largest corporation headquartered in the United Kingdom. That may change within a few years.

The other companies involved hopefully have large insurance policies, Transocean, owner of the rig, Cameron Industries, manufacturer of the blowout preventer, and Halliburton (Yes, that Halliburton!) who cemented the valve, and BP’s minority partners on the well, Anadarko and Mitsui.

Tony Hayward, the CEO of BP, is reported to have just asked: “What the hell did we do to deserve this?”

The answer is because it is BP.

BP has a recent history of safety violations.

BP’s Texas City, Texas refinery exploded in 2005 with 15 dead and 170 injured. The company incurred a $87 million fine.

BP’s employees warned the company in 2002 that repairs were needed on the pipeline in Alaska. A March 2006 leak of 267,000 gallons was followed by a larger spill on August 8, 2006. The government shut down the pipeline, and hence he oil field, and assessed a $20 million fine.

Hayward’s predecessor, Sir John Brown, poured money into ads, “Beyond Petroleum,” touting BP as the Green Oil Company. Its symbol was even in green. His goal was minting green. He replaced engineers with sub-contractors to cut costs.

He cut spending on safety and infrastructure though.

BP entered the American market through the discovery of the Prudhoe Bay oil field, and the acquisition of three large American oil companies, Sohio, ARCO, and Amoco. Amoco brought with it the Texas City refinery.

Captain Joseph Hazelwood of the Exxon Valdez may have been drunk in his cabin, or he may have been doing paperwork, when the third mate drove the supertanker on autopilot onto Bligh Reef in Prince William Sound at 11:00PM on March 24, 1989.

Why the third mate, and not the captain was at the helm, is partially a matter of bean counting, also known as safety cuts by Exxon. The oil company had progressively reduced the size of its tanker crews

Exxon, after the Exxon Valdez, changed its ethos. Safety is now an utmost priority on its drilling platforms.

An issue is unfolding about whether BP minimized the risk of off shore drilling.

This question is significant, but the real question is whether, regardless of what it said, did the company have a viable emergency action plan in place? Failing to plan, is planning to fail when it comes to emergencies.

Exxon and the Alyeska Pipeline Company were unprepared when the Exxon Valdez ran ashore.

Apparently, BP was somewhat prepared. Response efforts, with the assistance of the Coast Guard, were mounted rapidly. The company has tried to use submersible (robotics) to operate a shut off mechanism on the well.

Initial reports were no discharges occurred – not necessarily unusual with off shore accidents. BP immediately dispatched the robotics to the site to shut the blowout preventer.

Almost a week passed. Then came the “Houston we have a problem” call.

Then the reports were that 1,000 barrels a day were leaking out. Each barrel equals
42 gallons.

Then suddenly within a week, it was up to 5,000 barrels, and now it may be 10,000.

The implications for America’s energy future are ominous. Opponents of offshore drilling, which include many in the Obama Administration, will be emboldened.

Our Governor of California believes in wind power. He checks which way the wind is blowing and changes positions accordingly. Having supported drilling in the Santa Barbara Channel last year, he just came out against it for safety reasons in light of the Gulf blowout.

Santa Barbara halted much off shore drilling. The Exxon Valdez reinforced the opposition. Three Mile Island pulled the plug on any additional nuclear power in the United States.

Coal is a 4 letter word to many, and substantial opposition exists to solar and wind power.

So much for going green!

Green is a long term goal for America, but the future will not propel today’s cars
or generate electricity. Only petroleum can accomplish that.
Let us remember California at the turn on the New Millennium, when it ran short of electricity and America two summers ago when gas reached $5/gallon.

Commercial jets run on aviation fuel, not wind or solar.

Cars run on gas.

Trucks drive on diesel, not solar.

Without oil, civilization will revert to the Stone Age.

Without energy, 6 billion people on Planet Earth will starve.

Oil prices are already inching up.

A campaign is beginning to bring back “worse case analysis,” which really doesn’t tell us anything that we don’t already know. When asked why he didn’t believe in long range analysis, John Maynard Keynes was reported to say “Because in the long run we will all be dead anyway.” In environmental terms, the worse case analysis is a disaster of apocalyptic proportions.

The decision is not worse case, but a political call involving potential risks and benefits.

Risk exists in energy exploration; no activity is risk free.

Risk exists in energy development; no activity is risk free.

Risk exists in energy production; no activity is risk free.

Risk exists in oil refining; no activity is risk free.

Risk exists in energy distribution and transportation; no activity is risk free.

Risk exists in energy consumption; no activity is risk free.

Accidents happen, with the best of technology.

Planes collide.

Cars crash.

Ships sink.

Computers crash.

Shuttles explode.

Pipelines leak, explode, catch on fire.

Technology fails, even with the best of technology.

Forget energy independence in the near future. The United States will remain hostage to the Mideast and Hugo Chavez.

The issue is how much risk is society willing to bear to sustain our standard of living.

One final point reflecting the magnitude of America.

The Los Angeles Times today has a color photo of the Governor of Louisiana, a Republican, talking with the President of the United States, a Democrat.

The Governor of Louisiana, a descendant of Indian immigrants, talking with the African American President of the United States in Louisiana.

Isn’t America great!

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