Macondo Aftermath Descends into Farce

This business with the BP oil spill is turning into a farce.  If ever there was a need for some sensible heads on the shoulders of adults to prevail then this is it, but alas the whole affair resembles a circus.

First we had Obama saying he expects BP to pay for the loss of income to oil field workers resulting from his knee-jerk ban on new offshore drilling, thus introducing the concept of arbitrary law into US business planning.  BP has stumped up $100m for this cause, which will last about a week or two at oil industry rates.

Then we had Obama demanding that BP should pay $20m into an escrow account because – and this is a laugh coming from a politician – he thought BP might renege on its promises to pay or have the temerity to challenge some of the claims.  Not only was this demand illegal, but it is a guarantee that the funds in the account will be misappropriated, spent on the maintenance of a sprawling bureaucracy, disbursed according to political preferences, and unlikely to end up in the hands of those who need it.  And as The Hayride has pointed out, management of the fund has indeed been handed to a political flunky:

[T]hat escrow in the hands of Kenneth Feinberg is an absolute joke as a “third party” administrator. Feinberg works for Obama; he’s his TARP pay czar. Obama has an established record of widespread abuse when it comes to giving his administration access to off-budget money, and that’s precisely what this is. This is a slush fund with virtually no safeguards keeping that money from being misappropriated and stolen by ACORN and SEIU just like every other Obama slush fund has been; while BP might be too slow paying claims, at least we can be virtually sure that BP is going to try to keep its money going to people it actually owes it to.

Feinberg is Obama’s “pay czar” who thinks it’s OK for the federal government to cap salaries at $500,000 per year for Wall Street execs; while the TARP debacle is a completely different animal than BP claims are, if this guy starts trying to impose social judgements on who should get what based on his concept of fairness rather than the merits of the claim, it’s going to be a mess of gargantuan proportions.

Amazingly, BP agreed to this and have conjured up $20bn to pay into this account, seemingly by cutting CAPEX and selling assets.  On top of this, BP also caved in to criticism from idiot politicians by not paying a dividend to shareholders this year.  If this willingness to cravenly fold in the face of irrational, illegal, and politically motivated demands is not enough to convince shareholders, investors, and everybody else that the management of BP is piss-weak and incompetent then I don’t know what is.  Either way, the share price has taken a hammering and deservedly so.

As I said in my earlier post, share prices often reflect uncertainty rather than the scale of what is actually happening.  For a while the share price stabilised as the top-kill failed and the likely scale of the environmental damage became apparent, but since then the political uncertainty surrounding BP has increased tenfold.  One of the whackier calls has been for the US government to nationalise BP’s American assets (suits me, provided the UK government helps itself to the American assets in the North Sea plus the refineries at Fawley and Roscrowther).  But where is the certainty that some wannabe president won’t bring this up in all seriousness, Obama falls over himself to claim the idea as his own, and before you know it BP are conceding all their United States assets for…well, for what?  Why did BP cave in so readily?

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The Dangers of a Weakened BP

As I said in this recent post, in theory BP should have more than enough cash to pay for the environmental cleanup and compensation claims resulting from the Macondo well disaster.  But as I went on to say in this post, the manner in which the US government is hounding the company is sending their share price – and hence market capitalisation – into steep decline.

The Obama adminstration is swimming in very dangerous waters here.  The absolute priority must be to stop the leak from the well, followed very closely by cleaning up the damage and settling compensation claims.  It is much more desirable that a healthy, profitable company is in the position to do these things than one whose very survival looks to be in doubt.  But Obama and his chums seem more interested in sending BP into bankrupcy in order for them to look politically tough, and this is stupid in the extreme.  If the decline in BP’s share price continues with more vindictive outbursts from the White House, there will come a point where the BP shareholders will decide that the aforementioned priorities should shift.  If it starts to look like the company is facing an existential crisis, the shareholders are quickly going to try to save what they can and to hell with the cleanup and compensation claims.  What will they have to lose if the US government is determined to see their investment reduced to zero anyway?

Once again I am indebted to The Hayride for posting the contents of this letter, which suggests politicians in Louisiana have similar concerns:

“It appears that the plan of the state and the federal government to stop the Deepwater Horizon oil leak, remediate its effects and compensate Louisiana citizens damaged by the leak is predicated on BP’s ability to pay for these objectives. I write because I am concerned about the solvency of BP. More specifically, I am concerned about the possibility that BP will seek the protection of the United States bankruptcy laws. A Chapter 11 filing by BP North America, a fully owned subsidiary of BP plc, could be used to protect the company from its creditors, including the United States government, the State of Louisiana, other states and individuals and businesses damaged by BP.”

– Louisiana state treasurer John Kennedy, in a letter to Gov. Bobby Jindal

How low will the share price have to go before the shareholders accept that BP in the USA is finished for good and they might as well cut bait and run?  If the US government keeps going the way they are, we might just find out.

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Barack Obama: taking America into the Third World

Recall, if you will, what I said a few days ago:

Unless there is some other serious setback, such as both relief wells managing to snap their drill strings downhole or any other reason preventing their completion, the share price should not fall much lower.  There might be some daft political factor which causes it to drop further – some knee-jerk legislation ordering BP out of the US, or something – but what we know now is enough to stabilise the share price.

And whad’ya know, we have just witnessed some daft knee-jerk political posturing which has sent the share price plummeting further:

Shares in BP have plummeted another 12% at the start of London trading, amid fears President Obama will impose massive penalties on the company.

In his latest comments, President Obama suggested that the oil company should pay unemployment benefits to thousands of oil workers laid off during a moratorium on deep-sea drilling triggered by the spill.

There is much to say about this, but I think a comment made over at The Hayride – which is doing a great job of covering the political shennanighans around this spill – put it perfectly:

This is the kind of incompetent, chaotic government which introduces the concept of “political risk” into capital investment decisions about getting involved in American markets that has never been at issue before. America was always preferable to some Third World sinkhole like Ecuador or Angola, simply because it was known that the rule of law would apply here, making decisions simpler and productive endeavors easier. But when nobody knows what the rules of the game are, which is how the Third World works, profit-seekers usually figure the only way to insure they won’t end up getting killed on their investment ventures is to bribe government officials.

Absolutely.  I would have no idea how many times I have complained either on my blog or to anyone that would listen that the biggest factor affecting investment into Russia – and thereby keeping it miles poorer than it should be – is the propensity of the government to make up the rules as they go along and clobber any company they feel like simply by applying the law to suit.  And now we have that idiot who currently occupies the White House doing exactly the same thing.  Vladimir Putin must be crying tears of mirth into his borsch, and I don’t blame him.  Next time any American criticises the Kremlin for destroying Yukos with crippling tax bills for political reasons, any Russian will be perfectly justified in saying that Barack Obama is doing pretty much the same thing with BP.

People used to criticise George W. Bush for destroying America’s reputation in, amongst other places, the third world.  Barack Obama is doing his best to ensure America joins it.

And as for the British bashing which is going on in the US at the moment, I don’t recall our government and press making hay about dumbass, redneck, cowboy Yanks when Occidental managed to kill 167 of ours on Piper Alpha, having refused to shut in production even when the bloody platform was ablaze.  If the aim of some in America is to isolate probably their only friend right now by being the arrogant, insular, pricks the rest of the world accuses them of being, then they’re doing a pretty fine job of it.  As John B points out, these idiots are going to put an almighty dent in British pensions if they don’t quit.

The Hayride has accurately commented that what we are seeing here is politics, when what is needed is governance.  What a disgrace.

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The Future of BP

There is a lot of speculation around over what will happen to BP once the dust – or rather the oil – settles after this Macondo spill.  Here’s my prediction: nothing.

A browse of any website discussing the subject will turn up what I hope is a minority of Americans gleefully hoping that BP will be forced into bankrupcy.  This is probably the worst outcome for anyone, not least those who expect to claim compensation of some sort: bankrupt companies tend not to be very good at settling legal claims, and if it is the claims and compensation which bankrupt them in the first place, there’s going to be a pecking order of claimants of whom the top few will receive handsome packages whilst the rest get nothing.  I read in an article in The Economist years ago that the asbestos claims went much the same way: a few high-profile multi-million dollar payouts to individuals which sent the companies under, leaving the rest with nothing.

Also, I think people vastly underestimate the financial might of BP.  Its profits in 2009, a very bad year for the oil companies, were $13.96bn and in 2008 – a very good year – were $25.59bn.  So we can say a typical year’s profit is about $20bn.  The cleanup and other costs of this disaster are estimated to be between $10bn-$30bn.  BP has said it will pay all legitimate costs, and I am certain that it will make good on this promise, but you can bet your life they will have a team of crack lawyers ensuring that only compensation for those things directly caused by the spill will be paid, and all others fought tooth and nail in the courts.  For example, via The Hayride I came across this article:

VENICE (Louisiana) – LOUISIANA’S charter fishermen are slamming US media coverage of the Gulf oil spill for doing more damage to the tourism industry than the slick itself, with livelihoods at risk.

‘Before the spill, I had three days open this month. Now I got all kinds of days open,’ charter boat captain Chris Wilson told AFP, as he cut up a dozen-strong bounty of speckled trout, channel bass and even yellowfin tuna he caught with clients.

Venice Marina, proudly proclaiming itself ‘The Fishing Capital of the World’ is all deserted but for Mr Wilson – the only fisherman preparing a catch – and some bored restaurant staff standing around the empty wharf-side bar.

But Mr Wilson’s friend and Venice Marina’s former owner Dave Ballay does not blame the mammoth and growing oil slick in the nearby Gulf of Mexico. Instead, people here blame the media, which day after night for over two weeks has detailed the doom and gloom facing the coast and its beleaguered residents.

‘Ninety-five per cent of the state of Louisiana’s waters are still fishable,’ Mr Ballay said with a bemused but angered tone.

And as the guys at The Hayride said themselves:

[I]f these guys think that, even though BP has said it will pay all “legitimate” claims arising out of this disaster, the company is going to cough up for losses which have come out of the agenda-driven media’s overblowing the spill without a fight, they have another thing coming. A perfectly-clean Florida beach which can’t draw tourists because Charlie Crist declared a state of emergency and swore off offshore drilling ever again, creating the impression of pollution where there probably won’t be any, isn’t going to have a “legitimate claim” against BP. They might have one against Fox News or CNN or Charlie Crist, but not BP. And BP will fight that claim, as they should.

Quite.  Also, you can also bet your life that BP will be expecting Transocean and Halliburton to be coughing up for a portion of the costs if it transpires that they were at fault at any point before or during the spill.  The Halliburton cement casing seems to be coming under scrutiny at the moment, and I expect the significance of this will become apparent sooner or later as no doubt will other factors.  The legal wranglings over who was to blame for this are likely to drag out for months if not years, and the compensation claims will be challenged and fought over even longer periods.

So let’s assume that the total claimed costs of the spill are $30bn of which $10bn BP manages to hive off onto somebody else or get chucked out of court, leaving them with a bill of $20bn.  As we’ve just seen this equates to an average year’s profits, but will be paid out not at once but over the next decade with about half in the next 2-3 years, say.  So from 2010-2013 BP will be paying about $3.3bn per year (16.5% of annual profit) followed by $1.4bn (7% of annual profit) from 2014-2020.  This is not good for investors, but it’s not enough to bankrupt the company.

According to their annual report for 2009, BP were sitting on an $8.3bn pile of cash.  They have spent $1.25bn on the cleanup so far, some of which has already been spent on addressing claims and cleanup costs which will form part of the $20bn total cost.  Assuming they’ve been spending on full flow for 6 weeks now, they can afford to keep going like this for another 10 months using the cash they have lying about in their sock drawer.  Even supposing they did run out of cash, BP could easily borrow more, issue bonds, or sell an asset or two.  In other words, the immediate costs of the spill are not going to bankrupt BP either.

So the next issue to consider is the drop in BP share price, which has been significant, especially once attempts to top-kill the well failed (incidentally, those of us watching the live video feed knew this had failed a couple of days before the media and the markets.  If I’d known how, and if what people say about those with “inside” information is true, I could have made a killing.  Maybe.).  The company has lost 38% of its value since the spill, but its market capitalisation is still $120bn.  It is a wounded giant, and it is haemorrhaging fast, but it is still a formidable beast.

But it is interesting to look at what is happening with the share price.  I have captured the graph as it stands today (click the graph for a bigger version):

Share prices often reflect uncertainty rather than the scale of what is actually happening.  Up until the top kill attempt failed, everyone was hoping BP could stop the flow of oil and limit the amount of oil needed to clean up.  Until they failed to do so, nobody knew what the final costs might be.  Nobody wanted to offload their shares and find the well had been capped and the cleanup costs were now looking like only $10bn.  So when BP announced the top kill had failed and effectively they would not be able to stop the flow until the relief well was drilled, the share price took a steep drop on 27th May to account for that but a degree of uncertainty was removed: everybody now knows there is another few weeks of 12,000-19,000 barrels per day going into the sea (BP’s efforts to collect some of that notwithstanding) and the initial worst case cost estimates of $20bn-$30bn are now looking likely.  So the share price dropped steeply, but has since stabilised: people now have a better idea of what the true costs will be.  Unless there is some other serious setback, such as both relief wells managing to snap their drill strings downhole or any other reason preventing their completion, the share price should not fall much lower.  There might be some daft political factor which causes it to drop further – some knee-jerk legislation ordering BP out of the US, or something – but what we know now is enough to stabilise the share price.  And if it does drop much lower out of general fear by risk-averse investors, you can be sure there are a few people who will think the stock is undervalued and will be snapping it up (which seemed to be happening before the top kill attempt failed, probably by people gambling on its working).

So, assuming its current value of $120bn holds steady for a while, is this low enough to attract a take-over bid?  I don’t think so.  Firstly, nobody is going to go near the company until the well is capped, and once the well is capped the share price should rise a little: another area of uncertainty is removed.  Secondly, Tony Hayward is probably a bit busy at the moment and wouldn’t be able to spend much time talking about a take-over and his discussing the finer details of his severance package might just attract some criticism at this time.  By the time the company is in a position to negotiate a take-over bid, the worst of the Macondo disaster will be behind them and the company will be in a stronger position.

But most importantly, who would be in a position to buy them?  There is a short article on the FT blogs discussing this which contains this useful little graphic:

As the FT’s Kate MacKenzie says:

While it might be a technically viable, and attractive, target for some companies, there are enough drawbacks to make it difficult to see who might be seriously interested.

Indeed, and I’d agree with the pros and cons identified in the graphic.

With one exception: PetroChina.  Whilst it might seem obvious that buying a company allows you to acquire expertise and technology, it is usually not so simple.  For what does the expertise actually consist of?  People.  The Macondo accident notwithstanding, BPs expertise in deepwater drilling lies in its employees.  They know how the technology was developed and how it is operated and the philosophies behind their employment and operation.  Most of this information is stored in half a million procedures and manuals on the shelves of the BP offices, but it is the people who know how and when to apply them.  The manuals tell you what to do, it is the people who know how to do it.  Good implementation is as important as the asset itself.  So if you want BP’s expertise, and you want to make use of their technology, you need to ensure you are buying their people.

And how many BP staff want to work for a Chinese company?  Not too many, I’ll bet.  In the event of a PetroChina takeover of BP, most staff would want to head for the exit door.  True, most of them would have no choice but to stay because the industry does not have enough vacant places for a staff the size of BP’s to move elsewhere (and especially not right now).  But the experts who PetroChina would be hoping to acquire?  They’d likely be off like a shot.  The chap who has spent 20 years in the development of deepwater directional drilling, his mate who has 15 years under his belt on seismic mapping of reservoirs, and the brilliant young process engineer who performed so well on the last LNG project?  They’ll be banging on the doors of Exxon and Chevron within twenty minutes of the Chinese taking the keys.

There’s some anecdotal evidence to back this up.  When Gazprom took over the ownership of Sakhalin Energy from Shell in the summer of 2007, both the expatriate staff and the Russians thought it was going to get worse for them, and it did.  It took a year or so to get going, but there was a campaign to squeeze the terms and conditions, especially things like travel and medical, which became a bloodbath when the oil price crash came and Gazprom could not afford the operating costs of the company.  Those who were not fired found their benefits axed, contracts renewed for only a few months each time, salaries effectively cut as the rouble fell, training courses cancelled, overtime forbidden and working practices take a step away from what was the norm under the Shell management systems, changes which were not for the better in any other area but finance.  Almost as soon as this started there was an exodus of those who could get a job elsewhere (which in the climate was not an easy task), and interestingly it was the Russians who were the most unhappy.  They had purposefully applied to a foreign company because they didn’t want to work under Russian management, and their fears were realised once Gazprom started flexing its muscles.  At the time most had no choice to stay, but as the global oil and gas industry slowly picks up, its best employees are now leaving for elsewhere if they haven’t gone already.

Of course, there is no guarantee that PetroChina would start to squeeze the employee terms and conditions currently enjoyed by BP staff in the event of a take-over, but it is likely.  They would also want to start bringing their own management into play, which would cause enormous problems and employee tensions due to cultural differences if nothing else.  The biggest job PetroChina would have on their hands were they to take over BP would be to retain their best staff, but supposing they couldn’t?  Does it really matter?  Well, yes it does.  The US government is going to be very nervous about allowing any oil companies to be drilling in deep water after the Macondo disaster, and the beefed-up regulators are going to be breathing down their necks with every turn of the drill bit.  Even if we disregard the political objections to PetroChina buying BP and operating in US waters, it is highly unlikely they will be able to negotiate a permit having bought somebody else’s license and assets and watching the expertise who made it all happen walk out the door to be replaced by people who have no deepwater drilling experience whatsoever.  And you could extend these concerns with deepwater drilling in US waters to other areas of the global industry, such as the operation of refineries and LNG terminals.

So my prediction is BP will not go bankrupt sooner or later, and will not be subject to a take-over.  Their reputation in the US will probably be ruined for good so you might find them selling off their American operations, but as a company they will survive, be battered and bruised for a few years, but be as strong as they ever were when the next disaster hits – hopefully for them – somebody else.

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Time to Cooperate

When the Enron scandal brought down Arthur Andersen, it was an open secret that the hearts of the other four of the “Big Five” accounting firms skipped a beat.  Arthur Andersen had done nothing that the other four hadn’t also been doing, but Arthur Andersen was the unlucky company which got caught, prompting the others to change their work pratices pretty damned quickly.

A friend of mine tells me that Shell has sent an internal memo around saying there is a time to be a competitor, and there is a time to show support, and now is the time to show support for BP over the Macondo well disaster.

I am certain that the other five supermajors will all be contributing everything they can to help BP, which is why suggestions to hand everything over to ExxonMobil are pretty daft (even assuming that Exxon really want a runaway well spewing crude all over the Gulf of Mexico dumped on their desk because they happen to be American and acceptable to the more nationalistic of the US public at large).  It is the entire industry which is under scrutiny here and the ramifications of this disaster will be far reaching and affect all oil companies severely.  It is very much in everybody’s interests to get this thing under control and minimise the damage.

Also, I expect when the technical aspects of the accident become known to the other majors they might well see some similarities, or maybe even little difference, with their own operating practices.  Maybe one or two of them will be able to relate what happened to BP to a situation they had previously.  Guaranteed they will be changing their procedures as we speak, but I wonder if there are any oil company executives waking in the night in a cold sweat thinking “That could have been us.”

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The Nutters Emerge

BP is clearly struggling to get the Macondo well under control, and it’s latest attempt at a “top kill” has unfortunately failed.  Last night I was watching BP’s live video feed from the ROVs which are on the bottom of the sea around the well (Yes, I need to get a life.  Or a job.  I’m working on it, okay?  Watching ROV feeds is free, drinking beer all night long costs money) and I watched an ROV attempt to cut a clamp fixing one of the pipes to the BOP with a circular saw.  They managed to drop the thing and break it, and without a spare in the toolbox a mile under the sea they had to go back to the surface (a 30 minute trip) to either get it fixed or get another one.  For anyone interested in subsea engineering it was pretty interesting stuff, and it is rare you get to see a live feed of this work going on.  A bunch of like-minded folk, or geeks, have set up a live chat page where the activities of the ROVs can be commented on in real time.  It’s far more amusing than you think.  Clearly, I was not the only one who thought the ROV wielding a circular saw in the eerie light of its headlamps looked like an outtake from Terminator, and when the saw was dropped everybody chorussed “Butterfingers!”  Well, it was funny at the time.  I guess you had to be there with an engineering degree and a healthy interest in subsea well-head repair.

Anyway, BP’s struggles to regain control of the Macondo well has given license to various nutters to come out with bright ideas on how to fix it.

First we have this (currently just a rumour):

Hayride sources indicate that today’s effort at a “top kill” of the Macondo gusher carries with it gigantic stakes for BP – as if no measurable progress is made on the spill through that method, President Obama will announce when he comes to New Orleans on Friday that the federal government will seize control of the response from BP and turn it over to the U.S. Navy.

Secretary of the Navy Ray Mabus has reportedly floated the idea of sinking a battleship directly on top of the Macondo well in order to drop 80,000 tons on it and crush the drill pipe and the blowout preventer alike.

Yes, one way to improve a situation where you have a leaking well, a damaged BOP and a broken riser is to change things whereby you have a leaking well, a damaged BOP, a broken rise, and a ruddy great 80,000 ton battleship sat on top of it all.  That’ll really test the skill of the ROV operators! I am almost certain that Mr Mabus is contemplating no such thing, but it hasn’t stopped people in various comments threads around the internet nodding their heads enthusiastically at the simplicity of it all.

But some of these suggestions are more than just rumours and are being made in all seriousness.  There is a chap called Matt Simmons who thinks the “only thing we can do” is to explode a nuclear weapon in the well to seal it up:

Simmons said the US government should immediately take the effort to plug the leak out of the hands of BP and put the military in charge.

“Probably the only thing we can do is create a weapons system and send it down 18,000 feet and detonate it, hopefully encasing the oil,” he said.

So kick BP off the job and then “create a weapons system”.  Then let it off “hopefully encasing the oil.” Like all good ideas, it’s obvious when pointed out.  And of course, the effects of letting off a nuclear bomb in an enormous oil and gas reservoir beneath the seabed are all known and quantified, are they?  Somebody said the oil would just evaporate, presumably thinking “evaporate” means “cease to be” instead of “turn from a liquid into a gas”.  Then where would the gas go?  We’re not told.

“If you’re 18,000 feet under the sea bed, it basically wont do anything [on the surface],” he said.

Well, that’s reassuring.  Mr Simmons is … wait for it … an investment banker.  An investment banker?!!  Aren’t these the chaps who created a global toxic mess all of their own a while back?  Why the hell is anyone listening to him?

The problem is the story has gained traction because apparently nukes have been used to collapse a well before by, you guessed it, the Russians.  Whenever there is some batshit daft idea floating about that involves nuclear weapons doing something that nuclear weapons are not meant to do, somebody always digs up a story where the Russians have done it.  One would be forgiven for thinking the Russians spent three decades playing a huge episode of Mythbusters where they tried to do all kinds of crazy stuff with nukes.  The story originated in Komsomoloskaya Pravda, but it wouldn’t surprise me if the editor had seen Borat and thought he too could make westerners look like ignoramuses by peddling a story about the Soviet Union that would be swallowed whole.

Weapons labs in the former Soviet Union developed special nukes for use to help pinch off the gas wells. They believed that the force from a nuclear explosion could squeeze shut any hole within 82 to 164 feet (25 to 50 meters), depending on the explosion’s power. That required drilling holes to place the nuclear device close to the target wells.

A first test in the fall of 1966 proved successful in sealing up an underground gas well in southern Uzbekistan, and so the Russians used nukes four more times for capping runaway wells.

“The second ‘success’ gave Soviet scientists great confidence in the use of this new technique for rapidly and effectively controlling ran away gas and oil wells,” according to a U.S. Department of Energy (DOE) report on the Soviet Union’s peaceful uses of nuclear explosions.

A last attempt took place in 1981, but failed perhaps because of poor positioning, according to a U.S. Department of Energy report.

Sadly, a search of the Department of Energy’s website using a variety of terms, including the sentence supposedly quoted from a DoE report, reveals nothing of Soviets blowing up their wells with nuclear weapons.  Still, the story has legs because there is a small but vocal group of people (which includes some Americans) who think all Americans are as thick as pigshit and everybody else, especially the Russians, are ten times smarter.

Komsomoloskaya Pravda suggested that the United States might as well take a chance with a nuke, based on the historical 20-percent failure rate.

Somehow I doubt the Americans are thick enough to be taking advice from a Russian newspaper on the use of nuclear weapons in oilfield applications.

UPDATE

I stand corrected: it seems there is a DoE report describing Soviet use of nuclear weapons in peaceful applications, including for shutting off runaway gas wells.  Fascinating stuff.  Although I think the use of such a device at the bottom of the Gulf of Mexico on the Macondo well would be insane.  That the Soviets did something is not usually a reliable indicator that it was a good idea.

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The Evacuation of the Deepwater Horizon

There is another good article in the Wall Street Journal which describes the chaos on the Deepwater Horizon during the evacuation, based on interviews with people who were on board at the time.  It is worth reading in full, but I must take issue with a summary the WSJ has made:

An examination by The Wall Street Journal of what happened aboard the Deepwater Horizon just before and after the explosions suggests the rig was unprepared for the kind of disaster that struck and was overwhelmed when it occurred. The events on the bridge raise questions about whether the rig’s leaders were prepared for handling such a fast-moving emergency and for evacuating the rig—and, more broadly, whether the U.S. has sufficient safety rules for such complex drilling operations in very deep water.

Let’s hold on a minute, shall we?  126 people made it off the rig via the lifeboats, a liferaft, or jumping into the water.  11 people were killed, 10 of whom the article confirms were killed by the initial explosion (the fate of the eleventh is not mentioned).  In other words, of those who could have made it off the rig alive, all but one did so and that one is very much open to question.  On a rig that’s just had a huge blast rip through it and is now on fire, that’s pretty damned good going.

The chain of command broke down at times during the crisis, according to many crew members. They report that there was disarray on the bridge and pandemonium in the lifeboat area, where some people jumped overboard and others called for boats to be launched only partially filled.

Well, yes.  There probably was pandemonium and a lack of cool heads on a rig which has exploded and is on fire with an out-of-control well underneath it.  If I was in the lifeboat with 250ft flames shooting out of the well hole I’m not entirely convinced I wouldn’t be yelling for them to release the damned thing instead of – literally – hanging about waiting for others who might not come, selfishness be damned.  That the lifeboat didn’t leave half empty is testament that some people running the evacuation process kept a cool head, and whoever they were they deserve the utmost praise.

I’m not sure what else is expected during a rig fire.  Perhaps a couple of colonial British officers, calmly sipping gin and tonics:

“I say, old boy!  That was an awfully loud bang, rattled the ice in my glass, it did.  And now that blasted heat has it all melted, and you know how difficult it is to get ice out here in the Gulf of Mexico, eh what?!”

I hope before long the industry will thank those who ensured that 126 lives were saved, and I am slightly dismayed by how little positive coverage the evacuation received in the press.  Twenty years ago a rig fire like that would have left few survivors.

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Fateful Decisions on the Deepwater Horizon

For all my dismissal of the mainstream media in their coverage of the Macondo disaster, it appears (thanks to Gringo in the comments) that the Wall Street Journal is doing a pretty fine job of it.  This article is probably the most comprehensive and technically accurate account of what happened before the well blowout, and they have achieved something of a scoop by managing to interview not only people who know what they are talking about but those who were actually there.

All the signs are pointing towards corners being cut at the behest of BP representatives to complete work on the well which was already behind schedule and over budget.  I highly recommend reading the article in full, because I am only going to quote certain parts of it here.

Firstly, a brief summary of what they did wrong:

BP, for instance, cut short a procedure involving drilling fluid that is designed to detect gas in the well and remove it before it becomes a problem, according to documents belonging to BP and to the drilling rig’s owner and operator, Transocean Ltd.

BP also skipped a quality test of the cement around the pipe—another buffer against gas—despite what BP now says were signs of problems with the cement job and despite a warning from cement contractor Halliburton Co.

Once gas was rising, the design and procedures BP had chosen for the well likely gave this perilous gas an easier path up and out, say well-control experts. There was little keeping the gas from rushing up to the surface after workers, pushing to finish the job, removed a critical safeguard, the heavy drilling fluid known as “mud.” BP has admitted a possible “fundamental mistake” in concluding that it was safe to proceed with mud removal, according to a memo from two Congressmen released Tuesday night.

This speaks for itself.  Industry best practice and the advice of the specialist contractors were not followed and warnings were ignored with disastrous results.  This is not looking good for BP.

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The Wisdom of Academics

Upstream Online provides us with a good example of the type of rubbish which is being bandied about regarding the Macondo well (emphasis mine):

Estimates for the flow rate have been controversial since the spill began after a blowout at the well on 20 April.

BP and the US Coast Guard first estimated the flow rate at just 1000 bpd and then later revised that figure to 5000 bpd, but admitted that there was a wide margin of error around that figure.

Academics and outside experts had said they believed the flow could be as high as 70,000 bpd to 100,000 bpd, despite the fact that the record production for a well in the US Gulf is a little bit more than 40,000 barrels per day.

What kind of academics and outside experts were these?  Can we at least name them so we know to disregard anything they say in future?

UPDATE

Named.  Can we now start the shaming?

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BP’s Assets

I’ve just watched a CNN video of Barack Obama addressing a group of journalists about the federal government’s response to the Macondo oil spill, and he has reiterated that the government just does not have the assets that BP has which can be used to stop the leak (I can’t find a transcript of the video).

Firstly, are there really people out there who think the US government owns a few semi-submersible drillships and a fleet of ROVs which lie idly in a harbour in the event of an oil spill?  Why is it those who are so keen on government intervention usually have the least idea what of the government can actually do?

Anyway, Obama went on to say that it is a valid question to ask whether the government should acquire assets such as those BP has in the event of another major offshore spill, and he will look into that.  But I fear Obama has got something fundamentally wrong here.  BP also does not have the assets which are being used to rectify the leak in the Macondo well which is proving so technically difficult.  Almost all the vessels and equipment working at the site are owned not by BP but by their subcontractors.  The Development Driller III, the Discoverer Enterprise, and the Development Driller II are owned by Transocean, the company which owned the Deepwater Horizon which was drilling the well and was lost when the well blew out.  The Q4000 is owned by Helix.  The ROVs seem to be owned and/or operated by Oceaneering.  All BP are providing is specialist knowledge, key personnel, and – crucially – the management and direction of several dozen contractors involving the expenditure of millions of dollars per day.  The assets themselves were kicking around on the open market available for hire to anyone who needs them and can afford them.

Something Obama said later in the video suggested he understood that BP’s oil spill response involved the rapid execution of many contracts that were already in place for this precise purpose, but I’m not convinced he or many others realise that BP did not suddenly show up with a load of kit they had lying about, but instead embarked on an impressive feat of contract management (which only oil companies can really manage) in order to bring all the necessary expertise and equipment to where it was needed in record time.

It is not assets that the Federal Government needs, it is an emergency response plan which will allow them to engage the immediate services of the companies which have the expertise and equipment to get the job done.  This might work well for cleanup and containment activities, after all the environmental protection agencies and the coast guard have much of the expertise to be able to coordinate such a response.  But shutting off a rogue well a mile under the sea?  If the government wants to be in a position to be able to coordinate contracted companies to do this sort of stuff, they’re going to have to create a government department stuffed full of oil industry technical experts, project managers, contract managers, and cost controllers at great expense who will set up the response plan before putting their feet up for a decade or two waiting for the next big spill.  Actually, that sounds pretty much like many a government department and a cushy role to boot.  Maybe I can get myself in there?

It isn’t going to work, a government just isn’t suited for a role this complex.  Better to make sure all companies who have a license to operate have a proper emergency response plan in place which enables them to get the necessary men and equipment to the scene should the need arise.  Oh, wait: they already have this requirement, which is why BP was pretty slick in getting vessels and other equipment to the site once the accident happened.

So what should the government do?  Want my advice?  Get on the phone to Rex Tillerson and ask if ExxonMobil wouldn’t mind, for a fee, being on call 24/7 to jump in and manage the next offshore blowout on behalf of the US government.  But don’t start buying semi-submersible drillships because you think BP owns some.

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