Best of the Week
Most Popular
1.London House Prices Bubble, Debt Slavery, Crimea 2.0 - Russia Ukraine Annexation - Nadeem_Walayat
2. Gold And Silver – 2014 Coud Be A Yawner; Be Prepared For A Surprise - Michael_Noonan
3.Sheffield, Rotherham Roma Benefits Plague, Ch5 Documentary Gypsies on Benefits & Proud - Nadeem_Walayat
4.Glaring Q.E. Failure Spotted - Money Velocity Is Falling Rapidly - Jim_Willie_CB
5.Don't Miss the Boat on Big Biotech Catalysts: Keith Markey - Keith Markey
6.Gold Prices 2014: Do What Goldman Does, Not What It Says - David Zeiler
7.Bitcoin Price Strong Appreciation to Be Followed by Declines? - Mike_McAra
8.Gold Preparing to Launch as U.S. Dollar Drops to Key Support - Jason_Hamlin
9.Doctor Doom on the Fiat Money Empire Coming Financial Crisis - Andrew_McKillop
10.The Real Purpose Of QE - It’s Not Employment - Darryl_R_Schoon
Last 72 Hrs
What Will December 31, 2014 Financial Headlines Look Like? - 23rd Apr 14
Why Gasoline Prices are Surging Again - 22nd Apr 14
Cold War 2.0 - 22nd Apr 14
The JIS – Junk Ideology Syndrome - 22nd Apr 14
How to Avoid Losing All Your Money - 22nd Apr 14
Silver Up, Stocks S&P Down - 22nd Apr 14
U.S. Mainstream Media Propaganda Setting the Stage for War With Pakistan - 22nd Apr 14
U.S. Interest Rates are NOT Rising! - 22nd Apr 14
A Crisis vs. the REAL Crisis: Keep Your Eye on the Debt Ball - 22nd Apr 14
Bitcoin Implications of Lack of Price Action - 22nd Apr 14
Japan - The Twilight Of The Rising Sun - 22nd Apr 14
Is This What a Credit Bubble Looks Like? - 22nd Apr 14
The Dark Side Of The Silver Mining Industry - 21st Apr 14
Strong U.S. Dollar Rally Could Pull Rug From Under Gold and Silver - 21st Apr 14
Silver Feeble Rally Fails to Hold Breakout, Falling Back Towards Support - 21st Apr 14
Stock Market Smart Money – All Out or More to Go? - 21st Apr 14
Fast Rising Pump Prices Counterattack - 21st Apr 14
Extreme Climate Change And Life On This Planet - 21st Apr 14
Gold and Silver Stocks Sitting Tight - 21st Apr 14
Stock Market Minor Correction Imminent - 21st Apr 14
Gold and Silver - Counting Blessings and Tender Mercies - 20th Apr 14 - Jesse
The CIA Through The Looking-Glass - 20th Apr 14 - Stephen_Merrill
Gold And Silver - Gann, Cardinal Grand Cross, A Mousetrap, And Wrong Expectations - 20th Apr 14 - Michael Noonan
Nikkei Stock Market - Sell Japan - 20th Apr 14 - WavePatternTraders

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

BP Gulf Relief Oil Wells Nightmare Scenario

Companies / Oil Companies Jul 14, 2010 - 08:08 AM GMT

By: Money_Morning

Companies

Best Financial Markets Analysis ArticleKent Moors, Ph.D. writes: Although the global energy sector is entering its most-promising stretch in decades - with more new technologies and more investment opportunities than ever before - I just can't seem to get away from BP PLC (NYSE ADR: BP) and its problems.


Take last Thursday, for instance. I began the day at FOX Business News, 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 served as a consultant to a Wall Street investment crew - via conference call - once again on the status of the BP relief wells.

The BP relief wells are right now the dominant topic on everyone's mind. But there are two potential scenarios - of "nightmare proportions" - that investors need to know about.

Let me explain...

Problem No. 1: The Armageddon Scenario
Although news on BP's early success with a new oil-well cap really helped fuel investor optimism yesterday (Tuesday), the reality is that two other potential problems are unfolding.

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

In the days and weeks to come, the question that will dominate headlines is a simple one: Will the BP relief wells succeed?

I'm still giving the company no better than a 50-50 chance.

Surprised? Don't be. Take a step back and really think about what BP needs 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 additional supply online 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.

[Editor's Note: Dr. Kent Moors, a regular contributor to Money Morning , is the editor of "The Oil & Energy Investor," a newsletter for individual investors. In a career that spans 31 years, Dr. Moors has been consulting the energy industry's biggest players, including six of the world's Top 10 oil companies and the leading natural gas producers throughout Russia, the Caspian Basin, the Persian Gulf and North Africa. His experiences - as well as his unrivaled industry access, contacts and insights - will serve as the foundation for the Energy Advantage, an advisory service that debuts this week. For more information on that service, please click here.]

Source : http://moneymorning.com/2010/07/14/bp-relief-wells/

Money Morning/The Money Map Report

©2010 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

justmeint
17 Jul 10, 01:40
Judas Money now?

And if the caps holds and the cleanup can really get underway ... what then?

It is reported that scientists are being offered $250.00 per hour by BP, if they will simply sign on the dotted line, and keep silent about their work and findings for at least the next three years. Traitor? such a strong word "Judas" .... you choose....

http://just-me-in-t.blogspot.com/2010/07/judas-money-sign-on-dotted-line.html


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014