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What Happens If BP Fails… Again

by | published July 9th, 2010

Yesterday was typical of my days lately.

It began at FOX Business, where the interviewer wanted me to explain what will happen if the BP relief wells fail. Then I spent an hour as the guest on a radio talk show from Johannesburg, South Africa, detailing what options are available to BP. Later still, I gave a conference call consultancy to a Wall Street investment crew … on the status of BP’s relief wells.

Seems I simply cannot get away from BP (NYSE:BP) and its problems.

This is the major topic on everyone’s mind, and the reasons are pretty clear.

In addition to the environmental disaster already unfolding and the prospects of sovereign wealth funds acquiring BP assets, two other major problems are emerging.

And both will certainly affect how you invest in the oil sector.

Problem No. 1: The Armageddon Scenario

First, as yesterday indicated, the immediate question is whether the relief wells will succeed. I’m still giving the company no better than a 50/50 chance.

Here’s what they need to do.

The bottom of the production casing (what’s left of it) for the blown Macondo-1 well is 18,360 feet down – about 5,000 feet of water followed by 13,000 feet of seabed below. The relief wells are going to intersect the current pipe at about 17,500 feet down. The idea is to interrupt the oil flow and then stop the leak by pushing down a considerable amount of drilling mud and fluid. This is called a “dynamic kill.” It is not intended to stabilize the well for later production… it’s intended to end it for good.

But this outcome is hardly a certainty. To put it in perspective, BP needs to drill down three miles – having to do so blind for the more than 70% of the operation that is below the seafloor – while hitting, at the correct angle, a target no bigger than a salad plate.

What if the leak cannot be plugged?

The relief wells may still siphon off some of the oil flow, but the leak will continue… for quite some time.

The legendary oil firefighter Red Adair gave a series of lectures in Scotland, just as deepwater drilling was beginning in the North Sea some 30 years ago. Somebody asked him then the same question people ask me today: What happens if a relief well cannot stop a blowout?
His answer was direct: Nature will ultimately decline the pressure of the leak to a point at which the well can be capped. However, he added, that would take about three years.

Now here’s my answer. Based on flow rate and initial BP production estimates, my current projection holds that, should the relief wells fail, a 1,015-day continuous flow awaits before the blowout suffers a natural death. That’s about two years and nine months of spilling oil.
Additional relief wells would certainly be attempted in the interim. But each attempt would take two months or more.

Keep in mind, this is all dependent on whether the structure remains intact. And this introduces what is beginning to worry me more and more with each passing day.

I call it the “Armageddon Scenario.”

We can see in the video feeds that the blowout preventer (BOP) is intact. It sits on top of the wellhead. The leak comes from the place where the connection between the BOP and the riser pipeline used to be.

What we cannot see is the stability of the production casing below the wellhead. We don’t even know how much of that casing remains intact. The increasing oil flow over the past few weeks may provide some concerns about the continuing integrity of the well structure below the surface. If it begins to concave, the pressure will cause it to rupture, with debris and an accelerating oil flow moving into what is already a compromised annulus (the space between pipe and borehole surface) filled with cement. We already know the cement has fissures – that seems to be how the gas bubble reached the surface to cause the initial explosion back on April 20th.

Ruptured casing would cause the collapse of the surrounding ground, producing an implosion, a widening sinkhole, and a rapid rush of oil up to the surface.

Estimates now put the oil flow at as much as 80,000 barrels a day – including the volume being captured by BP. In my Armageddon Scenario, that figure would immediately double or even triple. And any attempt to combat that kind of spill, either on the surface or at the shoreline, would be futile and pointless.

Let’s hope that doesn’t happen.

Problem No. 2: A Severe Global Oil Shortage

Even if the production casing remains intact, and Armageddon is avoided, there is another major difficulty coming into focus.

All indications point toward deepwater drilling as the source for a rising amount of crude oil needed internationally. This is the reason companies are assuming the great risk and expense of drilling considerably offshore – because that’s where you find most of the major fields left undiscovered. The only net additions to U.S. production through 2015 were to come from deepwater drilling (800 to 1,200 feet) in the Gulf of Mexico. Worldwide, it was expected to accelerate – off of Brazil, Vietnam, Nigeria, Ghana, Russia, and a number of other locations. In five years, deepwater drilling was to have made up 10% to 12% of all global production.
And now, this is where the oil market impact of the Macondo blowout could have its most serious effect.

We are slowly moving out of a financial crisis that significantly cut oil demand. As the economic situation stabilizes, that demand will begin to return. It has already begun in a number of regions.

Total present worldwide crude supply tops out at about 91 million barrels a day (mbd), counting all of the Saudi spare capacity. Current demand is about 86.5 mbd… and rising.

Increased volume from deepwater drilling is an essential part of bringing on-line additional supply to meet that increasing demand. (Remember, the decline in demand resulted only from an international financial crisis. Not a sudden change in the oil market itself.) The collapse in oil prices in the fourth quarter of 2008, and their leveling off in the first quarter of 2009 – a period of less than six months – actually resulted in delaying new drilling by as much as two years.

Now, as demand levels surge, supply is questionable. That magnifies the problem from the BP spill. It is not the volume lost from that well alone. Rather, as the Macondo experience causes a rethinking of deepwater drilling production plans, the tragedy may result in the loss of a far greater volume of supply from elsewhere around the world.

With the demand-supply balance becoming a concern, another BP failure – this time at capping the well – would have widespread impact. And none of it will either lower prices or increase the available oil.

Against my better judgment… all this leaves me with no choice but to root for BP.

Kent

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