Yesterday's fire on Mariner Energy's Vermilion 380 production platform in the Gulf of Mexico thankfully resulted in neither loss of life nor another big oil spill. However, the timing of this event seems likely to complicate the debate over the drilling moratorium that has been in place since the Deepwater Horizon accident, and that the government had been showing signs of relaxing or ending early. Based on the reactions so far, this latest accident also provides a Rorschach test on attitudes concerning offshore oil. Those convinced that the risks of offshore drilling outweigh its benefits are citing it as further evidence, while supporters of drilling are likelier to see it as proof that accidents offshore needn't be catastrophic. In reality, the two situations were so different that I'm not sure how much light one sheds on the other.
Although information on Vermilion 380 has been somewhat sketchy, we know from statements by the company and Coast Guard that unlike Deepwater Horizon, which was a floating deepwater drilling vessel, this facility is a fixed production platform in relatively shallow water, tapping a smallish oil and gas field with proved reserves of 33.2 billion equivalent cubic feet of gas--the equivalent of about 5.7 million barrels of oil, with more than half of that consisting of natural gas. The platform had recently undergone restoration work after having been damaged by Hurricane Ike in 2008. It was not engaged in exploration or any other kind of drilling, but instead producing oil and gas from previously-drilled wells. A company press release indicated that production in August averaged 9.4 million cubic feet per day of gas and 1,400 bbl/day of oil and condensate. This is orders of magnitude smaller than the Macondo field and its blown-out exploration well. In its particulars, Vermilion is more typical of the thousands of oil & gas platforms in the Gulf than the big, complex drilling rigs like Deepwater Horizon that we've been focused on since April.
Under the circumstances, another distinction between Vermilion and Deepwater Horizon is even more important than the ones above. While every accident is one too many, the outcome of yesterday's was precisely what the designers of such facilities work hard to enable and offshore oil & gas workers undergo intensive training to be able to execute: The wells were apparently secured, the crew evacuated safely, and damage was limited to the surface hardware.
This accident will be investigated, and I'm sure its lessons will find their way into the ongoing reassessment of offshore oil & gas practices and regulations. But without jumping to conclusions about its causes, yesterday's incident provides no proof at all for the argument that every offshore oil & gas well is a potential Macondo-style blowout, and every facility a potential Deepwater Horizon calamity waiting to happen.
Meanwhile, as my US readers head off for Labor Day weekend I suggest reading Technology Review's assessment of the energy aspects of the US economic stimulus, about which I had originally planned to write today. It raises important questions concerning the impact and effectiveness of the stimulus, including on employment, as well as the sustainability of efforts begun with its impetus. Expect to hear a lot more about this later this year, as eligibility for the Treasury renewable energy grants and other stimulus programs draws to a close, and recipients and their advocates call for temporary or permanent extensions.
Showing posts with label macondo. Show all posts
Showing posts with label macondo. Show all posts
Friday, September 03, 2010
Friday, August 20, 2010
Oil Plumes and the Fate of the Spill
I'm as reluctant to insert myself into the debate over what happened to all the oil that leaked from BP's Macondo well between April 22 and July 15--when the second cap stopped the flow--as I was concerning the earlier controversy regarding flow-rate estimates. At the same time, I find the coverage of this story lacking in crucial details that could help us to understand how much of the oil evaporated into the warm air of the Gulf or degraded naturally, how much was collected, and how much potentially remains in the sea. The assessment issued by the National Oceanic and Atmospheric Administration (NOAA) on August 4, 2010 has been disputed by some scientists, and reports of lingering oil plumes add to the public's apprehension that the pieces don't quite add up. But although I don't have nearly enough information to conclude which group is closer to being right, I feel much more confident in pointing out where their arguments seem weak.
Let's begin with the estimate of the total quantity of oil leaked into the Gulf, which lately seems to have become cast in stone at 4.9 million barrels (205.8 million gallons.) This is the crucial starting point for any analysis of how much of it remains in the Gulf. This figure appears to be based on the estimate by the Flow Rate Technical Group of an average rate of around 58,000 bbl/day for the 85 days that the well was leaking. NOAA indicates an uncertainty for this figure of +/- 10%, but with all due respect to the scientists who worked on it, that seems excessively precise for something that was never measured directly.
There are only two ways I know of to measure such a flow, as distinct from estimating it. The most accurate involves gathering all the oil flowing during a given interval--say, a day--and gauging the tanks into which it flowed at the beginning and end of the interval. From a quick review of the transcripts of BP's technical briefings, it appears that the largest quantity of oil that was actually collected in a 24-hour period equated to a flow rate of about 24,000 bbl/day, though this represented only a portion of the total flow, with the remainder continuing to leak into the sea due to containment limitations. So we know the rate must have been higher than that figure, but not how much higher. The other way to measure oil flow is with a flow meter. It's a pity that BP's "Lower Marine Riser Package", the second cap and valve assembly installed on the well, didn't include this capability. I don't even know if it would have been feasible, given the pressures and high flows of oil and natural gas involved.
In the absence of direct flow measurements, the Flow Rate Technical Group had to rely on sophisticated techniques for calculating the flow, based on the observed velocity of the fluid leaving the well and a complex set of assumptions--grounded in a limited amount of actual data--concerning the gas:oil ratio of the fluid, the rapid expansion of the gas coming out of solution within the space over which the velocity was determined, as well as the changing pressure and temperature within this regime. Tricky stuff, particularly considering how much of the observed flow was attributable to gas, rather than oil, as I noted in May. I'd also note that since the estimated 58,000 bbl/day flow rate is at the top of the range of flow rates observed from other oil wells in the history of the industry, it's quite possible that the range of uncertainty for the total amount leaked is not only wider than +/- 10%, but also non-symmetrical, with more downside than upside. I'm sure we will hear much more about this in the future, not least because the size of the fine BP would ultimately pay for the leak depends on it. That's not the concern of the moment, however.
The pie chart in NOAA's report indicating the breakdown of the different fates of the oil that leaked has gotten a lot of scrutiny. Some reports have interpreted it as indicating that only a quarter of the oil remains in the marine environment. I wouldn't read it that way. Instead, I'd see three distinct categories for the oil's current status. The first and least ambiguous concerns the oil physically collected directly from the well, skimmed from the surface, or burned off, constituting an estimated--and only partly measured--25% of the uncertain total discussed above. This oil is clearly no longer in the water. The next category is oil that is likely no longer in the water, and that is the portion of the "Evaporated or Dissolved" segment that evaporated. If the oil had all reached the surface, I wouldn't be at all surprised if most of that segment should be attributed to evaporation; this was, after all, light, sweet oil with a high proportion of volatile fractions. The problem is that we don't know how much of the oil that leaked a mile down made it to the surface. The portion that didn't, which in NOAA's parlance was dissolved, naturally dispersed or chemically dispersed--potentially up to 49% of their total estimate--could still be in the water column, along with the 26% "Residual"--less the unknown portion actually broken down by bacteria and other processes. And it's some of this remaining oil that makes up the plumes we've been hearing about.
The undersea oil plume currently in the news was found in June by scientists from the Woods Hole Oceanographic Institute. They describe it as being at least 22 miles long, 1.2 miles wide, and 650 ft. high. The total volume of the plume, assuming it filled that entire rectangular solid, would be about 3.6 trillion gallons. However, the critical data point that I didn't see reported in any of the newspaper accounts I read was the concentration of oil in that water. According to the report on the Woods Hole site, the concentration of specific oil-derived molecules ("BTEX") is "in excess of 50 micrograms per liter". Adjusting for the density of the chemicals in question, that means that they found oil-related concentrations of approximately 57 parts per billion by volume. So by my math, the total volume of these chemicals within the plume is on the order of 200,000 gallons, or under 5,000 bbl. Unless these chemicals are only the tip of the iceberg in terms of oil derivatives in the plume--and Woods Hole hints that there is more--then we're talking about less than 0.1% of the 4.9 million barrels estimated to have leaked into the Gulf. In other words, while a plume like this might be potentially serious for aquatic life, it's not clear how much doubt its existence casts on NOAA's analysis of where all the oil went.
I will be very interested in seeing further refinements of all these estimates in the weeks and months ahead. Perhaps the media will even include more of the details crucial for putting it into perspective.
Let's begin with the estimate of the total quantity of oil leaked into the Gulf, which lately seems to have become cast in stone at 4.9 million barrels (205.8 million gallons.) This is the crucial starting point for any analysis of how much of it remains in the Gulf. This figure appears to be based on the estimate by the Flow Rate Technical Group of an average rate of around 58,000 bbl/day for the 85 days that the well was leaking. NOAA indicates an uncertainty for this figure of +/- 10%, but with all due respect to the scientists who worked on it, that seems excessively precise for something that was never measured directly.
There are only two ways I know of to measure such a flow, as distinct from estimating it. The most accurate involves gathering all the oil flowing during a given interval--say, a day--and gauging the tanks into which it flowed at the beginning and end of the interval. From a quick review of the transcripts of BP's technical briefings, it appears that the largest quantity of oil that was actually collected in a 24-hour period equated to a flow rate of about 24,000 bbl/day, though this represented only a portion of the total flow, with the remainder continuing to leak into the sea due to containment limitations. So we know the rate must have been higher than that figure, but not how much higher. The other way to measure oil flow is with a flow meter. It's a pity that BP's "Lower Marine Riser Package", the second cap and valve assembly installed on the well, didn't include this capability. I don't even know if it would have been feasible, given the pressures and high flows of oil and natural gas involved.
In the absence of direct flow measurements, the Flow Rate Technical Group had to rely on sophisticated techniques for calculating the flow, based on the observed velocity of the fluid leaving the well and a complex set of assumptions--grounded in a limited amount of actual data--concerning the gas:oil ratio of the fluid, the rapid expansion of the gas coming out of solution within the space over which the velocity was determined, as well as the changing pressure and temperature within this regime. Tricky stuff, particularly considering how much of the observed flow was attributable to gas, rather than oil, as I noted in May. I'd also note that since the estimated 58,000 bbl/day flow rate is at the top of the range of flow rates observed from other oil wells in the history of the industry, it's quite possible that the range of uncertainty for the total amount leaked is not only wider than +/- 10%, but also non-symmetrical, with more downside than upside. I'm sure we will hear much more about this in the future, not least because the size of the fine BP would ultimately pay for the leak depends on it. That's not the concern of the moment, however.
The pie chart in NOAA's report indicating the breakdown of the different fates of the oil that leaked has gotten a lot of scrutiny. Some reports have interpreted it as indicating that only a quarter of the oil remains in the marine environment. I wouldn't read it that way. Instead, I'd see three distinct categories for the oil's current status. The first and least ambiguous concerns the oil physically collected directly from the well, skimmed from the surface, or burned off, constituting an estimated--and only partly measured--25% of the uncertain total discussed above. This oil is clearly no longer in the water. The next category is oil that is likely no longer in the water, and that is the portion of the "Evaporated or Dissolved" segment that evaporated. If the oil had all reached the surface, I wouldn't be at all surprised if most of that segment should be attributed to evaporation; this was, after all, light, sweet oil with a high proportion of volatile fractions. The problem is that we don't know how much of the oil that leaked a mile down made it to the surface. The portion that didn't, which in NOAA's parlance was dissolved, naturally dispersed or chemically dispersed--potentially up to 49% of their total estimate--could still be in the water column, along with the 26% "Residual"--less the unknown portion actually broken down by bacteria and other processes. And it's some of this remaining oil that makes up the plumes we've been hearing about.
The undersea oil plume currently in the news was found in June by scientists from the Woods Hole Oceanographic Institute. They describe it as being at least 22 miles long, 1.2 miles wide, and 650 ft. high. The total volume of the plume, assuming it filled that entire rectangular solid, would be about 3.6 trillion gallons. However, the critical data point that I didn't see reported in any of the newspaper accounts I read was the concentration of oil in that water. According to the report on the Woods Hole site, the concentration of specific oil-derived molecules ("BTEX") is "in excess of 50 micrograms per liter". Adjusting for the density of the chemicals in question, that means that they found oil-related concentrations of approximately 57 parts per billion by volume. So by my math, the total volume of these chemicals within the plume is on the order of 200,000 gallons, or under 5,000 bbl. Unless these chemicals are only the tip of the iceberg in terms of oil derivatives in the plume--and Woods Hole hints that there is more--then we're talking about less than 0.1% of the 4.9 million barrels estimated to have leaked into the Gulf. In other words, while a plume like this might be potentially serious for aquatic life, it's not clear how much doubt its existence casts on NOAA's analysis of where all the oil went.
I will be very interested in seeing further refinements of all these estimates in the weeks and months ahead. Perhaps the media will even include more of the details crucial for putting it into perspective.
Tuesday, July 27, 2010
BP Shrinks by $16 Billion
I've been going though BP's second-quarter earnings press release and results to get a better sense of the impact of the Gulf Coast oil spill on the company's finances. It's a measure of the scale of a "Supermajor" like BP and the robustness of its underlying cash flows that it could continue to invest more than $6 billion (B) in capital projects and acquisitions in the quarter and even pay down a bit of debt, while recording a charge of $32.2 B against earnings related to the Deepwater Horizon disaster and ensuing oil leak. To put that figure in perspective, it's more than the market capitalization of Exelon Corporation, the largest owner and operator of nuclear power plants in the US. Yet among all of the remarkable and morbidly-fascinating numbers presented here, the one that stood out for me was the net decrease of shareholder equity by $16 B since the end of 2009. Anyone seeking to explain the decision of BP's board to change CEOs should start there.
The media have tended to focus on the impact on BP's market capitalization, which is a more immediate, though also much more volatile measure of shareholder value. As of today, it's down by about $70 B compared to its pre-disaster level. If it remained there and the market believed that the $32 B that BP has just recognized was likely to be the full extent of the impact on the company, a flurry of takeover bids would follow shortly. However, when you read BP's description of how they arrived at that amount, it's clear that there's relatively little upside--mainly from its partners in the Macondo field, if they eventually pay the $1.4 B of costs that BP believes they owe--and a great deal of downside. While including the entire $20 B escrow account set up to cover claims, BP has apparently not reserved extra amounts for the outcome of future lawsuits beyond litigation costs, or for the additional fines and penalties that would follow if it were found to have been grossly negligent.
All of these costs must be balanced somehow. BP's other businesses have continued to generate roughly $7 B per quarter, but the key to finding the money to pay all the claims and damages from the Deepwater Horizon disaster rests with the company's decision to sell up to $30 B of assets, with the first $7 B already sold to Apache, and in its coerced but convenient decision to suspend dividend payments for the balance of 2010. The latter was never really necessary to secure the $20 B escrow account, which BP indicates "will be assured by the setting aside of US assets with a value of $20 billion." No matter what, BP will be smaller in the future as a result of this event, but its management has effectively trimmed the shrinkage by investing some of the shareholders' money--their expected dividends--in projects and activities that might otherwise have been curtailed or sold.
Another figure in BP's results that is attracting some attention is the $10 B tax credit it is recording in conjunction with that $32 B charge. It's simple accounting--the spill-related charges are being incurred pre-tax and will reduce the income upon which BP pays taxes--but this may not sit well with Gulf Coast residents and US taxpayers who have been assured by BP that they will be kept whole. This is as meaningful a source of cash as an asset sale, though it could deliver yet another blow to BP's reputation.
Mr. Dudley has assumed the reins of a company that is still undergoing a near-death experience. Time will tell whether BP's accountants have included a sufficient "haircut" in the second-quarter results to allow him to begin rebuilding the firm's fortunes and restoring the lost shareholder value that was patiently accumulated over many years but destroyed in the course of just a few weeks. I've already seen a fair amount of speculation concerning whether his Gulf Coast roots and American accent will help mollify angry stakeholders, government officials, and Members of Congress, and it's hard to see how he could fare worse in this regard than his predecessor. However, it's going to take a lot more than that to enable BP to retain its access to valuable government contracts and exploration leases, including the extremely thorny decision about whether, when and how to bring up the subject of returning to unlucky Macondo to drill some proper wells and produce a field that some experts seem to think could hold up to a billion barrels of oil, less the several million that flowed into the Gulf.
The media have tended to focus on the impact on BP's market capitalization, which is a more immediate, though also much more volatile measure of shareholder value. As of today, it's down by about $70 B compared to its pre-disaster level. If it remained there and the market believed that the $32 B that BP has just recognized was likely to be the full extent of the impact on the company, a flurry of takeover bids would follow shortly. However, when you read BP's description of how they arrived at that amount, it's clear that there's relatively little upside--mainly from its partners in the Macondo field, if they eventually pay the $1.4 B of costs that BP believes they owe--and a great deal of downside. While including the entire $20 B escrow account set up to cover claims, BP has apparently not reserved extra amounts for the outcome of future lawsuits beyond litigation costs, or for the additional fines and penalties that would follow if it were found to have been grossly negligent.
All of these costs must be balanced somehow. BP's other businesses have continued to generate roughly $7 B per quarter, but the key to finding the money to pay all the claims and damages from the Deepwater Horizon disaster rests with the company's decision to sell up to $30 B of assets, with the first $7 B already sold to Apache, and in its coerced but convenient decision to suspend dividend payments for the balance of 2010. The latter was never really necessary to secure the $20 B escrow account, which BP indicates "will be assured by the setting aside of US assets with a value of $20 billion." No matter what, BP will be smaller in the future as a result of this event, but its management has effectively trimmed the shrinkage by investing some of the shareholders' money--their expected dividends--in projects and activities that might otherwise have been curtailed or sold.
Another figure in BP's results that is attracting some attention is the $10 B tax credit it is recording in conjunction with that $32 B charge. It's simple accounting--the spill-related charges are being incurred pre-tax and will reduce the income upon which BP pays taxes--but this may not sit well with Gulf Coast residents and US taxpayers who have been assured by BP that they will be kept whole. This is as meaningful a source of cash as an asset sale, though it could deliver yet another blow to BP's reputation.
Mr. Dudley has assumed the reins of a company that is still undergoing a near-death experience. Time will tell whether BP's accountants have included a sufficient "haircut" in the second-quarter results to allow him to begin rebuilding the firm's fortunes and restoring the lost shareholder value that was patiently accumulated over many years but destroyed in the course of just a few weeks. I've already seen a fair amount of speculation concerning whether his Gulf Coast roots and American accent will help mollify angry stakeholders, government officials, and Members of Congress, and it's hard to see how he could fare worse in this regard than his predecessor. However, it's going to take a lot more than that to enable BP to retain its access to valuable government contracts and exploration leases, including the extremely thorny decision about whether, when and how to bring up the subject of returning to unlucky Macondo to drill some proper wells and produce a field that some experts seem to think could hold up to a billion barrels of oil, less the several million that flowed into the Gulf.
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