The Future of U.S. Offshore Oil Drilling
by David Fessler, Energy and Infrastructure Expert
Friday, May 7, 2010: Issue #1255
Can you hear that scurrying sound?
It’s the sound of expensive shoes scampering across the floor of BP’s (NYSE: BP) legal department, as hoards of lawyers try to minimize the financial damage to the firm from the Gulf of Mexico oil spill.
Lawsuits against BP and the other companies responsible are arriving by the dozen. And environmentalists are predicting carnage for marine life in the Gulf.
Many onlookers, blitzed with TV images of wildlife choking and dying in thick sludge and Southerners fearful of losing their livelihoods, would probably subscribe to the “take ‘big oil’ to the cleaners” viewpoint.
And as shares of the companies involved get hammered on the market, few have much sympathy for them.
Let’s take a look at the facts as we know them… the ramifications for the parties concerned… and draw some less emotional conclusions about where we go from here with regard to the future of offshore oil drilling…
Deepwater… And Deep Trouble
Fifty miles off the coast of Louisiana stood the Deepwater Horizon oil rig.
Having discovered oil, a well was drilled some 5,000 feet below sea level in an attempt to extract the gloopy commodity that the world treats as its security blanket.
The well casing was being readied for temporary abandonment – a common operation with offshore wells and consistent with normal oilfield practices.
As part of that process, Halliburton Company (NYSE: HAL) was contracted to provide several specialized services on the rig. One of them was “cementing in” the final production casing of the well.
Halliburton invented the process of oilfield well-case cementing and performs thousands of successful jobs every year.
Halliburton says it did the Deepwater Horizon procedure in accordance with the well’s design. On April 19, tests to ensure the strength of the well casing were successfully completed. The rig explosion occurred roughly 20 hours later.
There is still no plausible explanation for the explosion that set off a chain of events that led to the sinking of the rig, and the tragic loss of 11 lives. But at the time of the explosion, Halliburton had not yet placed the temporary cement plug – the final step in the well abandonment process.
At this point, the focus of the investigation is centered on Halliburton’s cementing process, although it’s too early to draw any conclusions.
And the three ensuing leaks from the pipelines have led to the giant oil slick.
The Blame Game Centers on the Blowout “Preventer”
BP issued a statement saying the explosion was due to “equipment failure.”
Actually, make that a gigantic under-statement. I mean, who couldn’t have figured that out for themselves?
Still, until thorough investigation is completed, it’s the only answer we have.
And the culprit: the blowout preventer (BOP)…
Blowout Preventer This is a large valve that seals off a wellhead. Needless to say, it’s one of the most important pieces of equipment. They come in different varieties and have been used since the 1940s on virtually all wellheads, both on and offshore. The BOP used on the Deepwater Horizon rig was made by Cameron International Corporation (NYSE: CAM). BOPs are usually stacked together and most have acoustic actuators – a device that allows underwater crews to activate BOPs in the event of an emergency. Trouble is, the BOP stack on the BP well didn’t have an acoustic actuator. According to The Wall Street Journal, both Brazil and Norway require an actuator on all undersea wellheads. |
However, it’s not yet known whether any safety procedures were violated.
The BP-Exxon Valdez Comparison
The current spill has obviously drawn comparisons with the Exxon Valdez oil tanker spill in Alaska back in March 1989.
Assuming a constant rate of leakage, around 3.6 million gallons of oil will have leaked from the well by the time you read this. That pales in comparison to the Exxon Valdez, which leaked 11 million gallons.
The other big difference here is the distance from shore. Oil from the Exxon Valdez spill was catastrophic – it hit 1,300 miles of coastline, affected 28 wildlife species and reportedly killed more than 253,200 animals.
Most of the heavy concentrations of oil from the current spill are still out in the Gulf. And although some oil has made landfall, containment and oil boom crews have had more time to prevent most of it hitting shore.
Nearly 1,000,000 feet of containment boom has already been deployed and the thickest parts of the slick are being corralled and burned before they reach the shore. Small skimmer ships can handle most of the oil that reaches the containment booms near shore.
I could be wrong, but my guess is that the numbers of wildlife that will ultimately be affected will be far less than the Exxon Valdez spill back in 1989.
And then there’s the dome…
The Containment Dome Cometh
BP successfully plugged the smallest of the three leaks in the pipeline on Wednesday.
But to stuff the biggest leak, BP has recruited Wild Well Control, an oil services company specializing in oil disasters.
It’s constructed a giant 98-ton, 40-foot tall steel dome, which is being lowered over the largest leak. A pipe is being connected to it and will bring the oil to the surface, where it will be loaded into transport ships.
If everything goes as planned, it will plug up 85% to 90% of the leak. By that point, we might be dealing with a total of about five million gallons of oil in the Gulf. And in addition to the measures I mentioned a moment ago, the waves will break up some of the oil and it will sink to the bottom of the Gulf.
Given my engineering background, I tend to view something like this a problem to solve and I’m betting on success here.
The question then becomes: What’s next for the future of U.S. offshore oil drilling?
The Future of Offshore Oil Drilling
In order to reverse the renewed negativity towards U.S. offshore oil drilling, we need to know two pieces of information…
- What caused the initial oil rig explosion that led to the loss of life and spill?
- Why didn’t the blowout preventer didn’t operate as designed?
Now let’s cut past the 24/7 media frenzy and political chest-thumping for a second…
Just because a problem happened, it doesn’t mean offshore drilling is going to stop. In fact, it will continue unabated around the world.
When asked about the future of offshore drilling, Democratic Louisiana Senator Mary Landrieu told CNBC’s “Squawk Box” on Wednesday morning: “It’s time for the yellow light, not the red light.”
Oil Spill Bargains
Now let’s don our investor hats…
But beforehand, let me head off any potential comments, bashing me for being a cold, callous capitalist, looking to profit from a disaster in which lives were lost and the environment and livelihoods are affected…
I’m as concerned about this event as anyone and I truly hope the damage is minimized.
But in watching and reading the media coverage, I just don’t think this situation will be anywhere near as bad as some are saying. And once it’s over and the hype dies down, we’ll return to the age-old issue of America’s homegrown energy resources.
So once this event is history, where will the investment opportunities lie?
Quite simply, as the world continues to quench its seemingly endless thirst for oil, a host of oil and oil service companies will continue to benefit. There’s an ETF that represents them – the Energy Select Sector SPDR (NYSE: XLE). Its portfolio contains oil giants like:
- Exxon Mobil (NYSE: XOM),
- Chevron Corp (NYSE: CVX),
- ConocoPhillips (NYSE: COP),
- Schlumberger (NYSE: SLB),
- Anadarko Petroleum (NYSE: APC)
- And Devon Energy (NYSE: DVN).
Any if you’re looking for individual investments, other oil firms with strong positions include:
Good investing,
David Fessler
Related Investment U Articles:
- The BP Oil Spill… One Year Later
- The Risks of Deep Water Drilling
- A Crash Course History Lesson in Oil Spills
- Who Needs Offshore Oil Drilling Anyway? Not These Guys…
- The Gulf of Mexico Oil Disaster: The Fallout From This Damaging Oil Spill
10 Responses to “The Future of U.S. Offshore Oil Drilling”
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David Fessler is the energy and infrastructure expert for Investment U.
The 1600 ducks that were killed in the tailing ponds of the “dirty oil” of the Athabasca Oilsands
looks pretty tame in comparison. Oh yes, it is also transported by safer pipelines.
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A BOP is made of two parts, one which is the core is fixed on the base plate, and on top of it the second part which has two very important hydraulic lines, the kill & chocke lines.Their purpose is emergency, within minutes you can either kill the well or close it.
Like everything malfunction can happen, it is mostly due to bad maintenance rarely seen in fact.
Clearly this manipulation hasn’t been done, why ?
Now once the rig is in fire there isn’t much to do. While sinking it probably tore everything apart, then you got the blow out. The crater produced can be monstruous and the cheese cover plate they brought down is a joke.
I have seen the result of a blow out, with a crater deeper than 500 meters, this means the diameter was 1.5Km !! You may figure out now how ridiculous this toy cap is !
This well will leak until it finish, once the well pressure will be equilized with the sea bed pressure, thats it.
They better pump as much as they can and as long as it last, avoiding to lose it all.
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I would be incredibly surprised if the scenario plays out as you described it today 5/7/10. The volumes of oil already expelled(so far they ahve misled the public of volumes) into the gulf will do tremendous long lasting damages and the visible affects haven’t even begun to show yet for natural reasons. I believe the entire gulf coast and some of the Fla Keys will be dessimated for generations and surely our lifetime. The valve and the Box are a joke, a subterfuge to try and gain political and public sympathy at a later date. If you had any real engineering background you would surely know this. There is already more than enough oil in the water to do the damages I describe, probably beyond our wildest imaginations. By the way, BP stock has been going UP and or hanging on during 200-500 plus down periods, during last 3 days not down even in the light of the last 2 huge days. Something is very wrong with this scenario as in manipulation bigtime. When all is said and done, BP will get hammered and could go BK. I expect their stock to be below 40 very shortly, possibly next week. I am short BP huge and already ITM because I got in early. I think you are doing your readers a great disservice with horrible information and an unrealistic assessment. Just my thoughts, but I am sure you will have a large amount of egg on your face and a lot of explaining to do and ridicule.I could be wrong as well? But one thing is for sure. Time will tell and I don’t think we have to wait very long to find out. Good Luck Steve Baze
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I am a small inveter by Wall Street measure, but at 86 yrs old this has had a lift time blow to me. I always have a stop limit and many of my stocks hit that point. Not only will I be stuck paying taxes on these sells, but I will never be able to buy them back at the original price I had Now I am not so sure stop loss is a great ting. I am sure RIG and BP will recover but there are many like me that won’t./
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The half has not been told if the Coast Guard closes off the west side entrance to the Mississippi. If all the oil tankers and ships that service the many refineries cannot enter then their goes the price of gas to an easy 5 to 7 bucks a gallon. It has only halted access once in the past and it was a short span. (Couple of Days)
I hope everyone knows how much gasoline prices are affected if the numerous refineries are unable to receive these tanker ships up the Mississippi. It was brought up in the local news today, and I too hope the spread that is moving west can be contained.
I know no one in Louisiana is crying for the halt of oil exploration as it is a vital key to jobs and income for the state. None of our elected officials in Washington have dared go past, lets slow down and re-evaluate these operations, to make them safe and prevent another accident of this magnitude. Trust me American’s cannot afford the cost of fuel if you remove us from the picture.
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my dad was a jar head driller –then a production super—wells have been blown out sence the start of drilling—that is why safety is important —i was a training manager for years –90% plus of all accidents can be prevented —training –the right equipment —and safety drills –it nearly always comes down to human error or faulty equipment —then not being prepared for the accident
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where is the article on the super highway to span the u s
couldn’t find it
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Investment in good oil company is a strategy, but greedy on oil price will bring disaster.
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It seems that the cap to catch the spilling oil got blocked with Ice, I assume this will be gas such as Propane mixed with the oil will have a freezing effect when pressure is released, as happens when blowing off a propane bottle, but may thaw out after a while ?
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I’m so glad you can all be so glib talking about the future of oil drilling in the gulf. I could care less about your future in oil profits.
I live in NW Florida and what I forecast from this disaster is far worse than just oil jobs being lost. Thousands of people will lose their jobs in tourism and fishing, our seafood industry will disappear for decades, property prices will further plummet, and we will live in a wasteland. Tourism is already being affected for the beaches, with daily cancellations, and all the jobs that depend on tourism are threatened by this: restaurants, clubs, malls, galleries, airlines.
You all deserve a similar disaster in your own home towns for all your greed. Why don’t you all just move to Dubai?
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