Oil Spill InsightsSubmitted by Grunden Financial Advisory, Inc on July 30th, 2010
Saddened by the oil spill in the Gulf of Mexico, many Americans follow closely the progress emanating from British Petroleum (BP) on containing the leak. Grunden Financial Advisory, Inc. has the benefit of serving some clients in the oil and gas industry including one who actually worked on the Deepwater Horizon rig that sank in the explosion. Our client was not on the rig when it went down, but is a regular to drilling rigs in the Gulf as a paleontologic consultant. We asked him to share his insights with you and here is what he had to say.
The first thing we learned: this type of accident is extremely rare. There were several failsafe systems in place to prevent a disaster like this, but each failed. From Congressional and other testimony, it appears there were mechanical failures and some questionable decisions made. Our paleontology client compared this failure to the likelihood of a commercial airliner filled with passengers suddenly running out of gas on a cross country flight…it just never happens. Typically, the more dangerous aspect of deep sea rigs is the actual drilling. The greatest fear of any rig personnel is exactly what happened; taking a "kick", which occurs when fluids under high pressure deep in the earth encounter insignificant resistance, i.e. mud in the pipe to hold the oil back until the wellhead is properly secured, creating the oil spill disaster.
On May 27, 2010, the Obama administration enacted a new six month drilling moratorium and at the same time pulled existing permits for rigs that were already drilling. Six months is a long time to halt all Gulf drilling. The longer term effects of this are not understood by the public. The moratorium not only nails the oil industry and severely hurts the local economy of Louisiana, but may possibly lead to higher energy costs and a higher dependence on foreign oil supply.
BP leased the Deepwater Horizon drilling rig for around $500,000 per day. Rigs similar to this won’t sit idle off the US coast for six months and risk losing up to $90 million of revenue over this time period. Instead, they may navigate to the coast of South America and West Africa where they could be hired to perform work there. Further more, the drilling work these rigs may find in other parts of the world won’t suddenly stop after 6 months, allowing them to come back to the US. A more likely scenario is that it will take months after the moratorium ends for the rigs to finish up their contract work before considering a move back to the Gulf of Mexico. Even then, the cost and downtime to move the rigs thousands of miles back to US waters may negate any potential income earned. There is a chance once an oil rig bears the cost to move to a new destination, it will stay there for the foreseeable future. Having fewer drilling rigs in the Gulf Coast directly impacts the United States’ ability to produce domestic oil and increases the need for imported oil, possibly from nations that aren’t friendly to the US.
“Big oil” might suffer some from the moratorium, but many have international sites they can focus on instead. No drilling for six months may impact the local economy more and not just the drilling rig crew. Drilling rig operators regularly shuttle technicians, scientists, and other staff by helicopter and crew boats out to the site. If this fleet of helicopters isn’t flown for 6 months, the pilots who fly them, the mechanics who service them, and the heliport personnel will have a dramatic reduction of work. Work boats routinely bring the rigs food and supplies will also be adversely affected. There will be much less work for the captain, his crew, and the transportation companies needed to bring the supplies from around the country to the docks. The list goes on to include hotels used by workers the night before reporting, laboratories, processing and analyzing data, and so forth. The negative trickledown effect hasn’t really been reported much by the national media.
It is terribly unfortunate to have an accident of this magnitude occur, but hopefully the industry will become safer from what they learned. Thousands of rigs have produced oil in the Gulf without incident for a long time. Our country needs to learn from BP’s mistakes and continue to lessen our dependence on foreign oil as well as provide meaningful jobs in the energy industry. We can only hope that the disaster in the Gulf of Mexico is contained or minimized soon and that production can return to where it was but at a safer level.