Best of the Week
Most Popular
1.BrExit House Prices Crash, Flat or Rally? UK Housing Market Affordability Crisis - Nadeem_Walayat
2.Stocks Bull Market Climbs Wall of Worry, Bubble? When Will it End? - Nadeem_Walayat
3.Gold Price Is Now On Its Way To All-Time Highs - Hubert_Moolman
4.Deutche Bank Stock Price Crash - The EU Has Problems Far Beyond the Brexit - Harry_Dent
5.UK interest Rate PANIC CUT! As Banks Prepare to Steal Customer Deposits - Nadeem_Walayat
6.Gold and Silver Bull Phase 1 : Final Impulse Dead Ahead - Plunger
7.Central Bankers Fighting An Unprecedented Global Economic Slowdown - Gordon_T_Long
8.Putin Hacking Hillary for Trump, Russia's Manchurian Candidate? - Nadeem_Walayat
9.Stock Market Insiders Are Secretly Selling, Cycle Top Next Month - Chris_Vermeulen
10.Gold Sector - Is it time to Back up the Truck? – Mortgage the Farm? - Peter_Degraaf
Free Silver
Last 7 days
Post Yellen = Market Confusion - 28th Aug 16
Theresa May Instructs Police, NHS Gp's, Public Sector To Stop Racial Discrimination in Service Delivery - 28th Aug 16
Ignore Yellen and Buy the Dip in Precious Metals - 27th Aug 16
SPX Downtrend Should be Underway - 27th Aug 16
Unraveling the Secular Economic Stagnation Story - 27th Aug 16
The Precious Metals Sector and the Fed. . . - 27th Aug 16
Stock Market - All Is Calm, All Is Not Right - 27th Aug 16
Gold Junior Stocks Q2 2016 Fundamentals - 26th Aug 16
Buy Gold’s August Dip? Gold’s Monthly Sweet Spot In September - 26th Aug 16
The IMF’s Internal Audit Reveals Its Incompetence and Massive Rule Breaking - 26th Aug 16
Commodities Are the Best Bargain Now—Here’s What to Buy - 26th Aug 16
Why I Left Canada and Became A Citizen of the Dominican Republic - 26th Aug 16
The GLD vs GOLD - 26th Aug 16
Can Stocks Survive Without Stimulus? - 25th Aug 16
Why Putin Might Be on His Way Out - 25th Aug 16
Bond Guru Gary Shilling - The Bond Market Rally of a Lifetime - 25th Aug 16
A Zombie Financial System, Black Swans and a Gold Share Correction - 25th Aug 16
OPEC’s Output Freeze: What Has Changed Since Doha? - 25th Aug 16
Merkel Prepares For a Deliberate Crisis While White House Plans For a Disastrous Succession - 24th Aug 16
Suspicious Reversal in Gold Price - 23rd Aug 16
If Trump Can’t Pull Off a Victory, Expect a Civil War - 23rd Aug 16
Ceding ICANN and Internet Control to Globalists - 23rd Aug 16
How to Spot an Oversold Stock Market - 23rd Aug 16
Gerald Celente Sees Worst Market Crash, New Military Conflict, Gold Spike to $2,000/oz - 23rd Aug 16
EU Olympics Medals Table Propaganda Includes BrExit Britain - 22nd Aug 16
BrExit Win's Britain Olympics Success Freedom Dividend, Economy Next - 22nd Aug 16
Stock Market Top Forming, but Slowly - 22nd Aug 16
(Really) Alternative Banking Systems - 22nd Aug 16
Vauxhall Zafira Fires - Second Recall Issued - Inspection Before Bursting into Flames? - 21st Aug 16
Will the Stock Market Bubble Pop Regardless if the FED Never Raises Rates? - 21st Aug 16
US Government Spending - 3 Big Stories Not Being Covered – Part III - 21st Aug 16
Silver Analysis - 20th Aug 16
SPX New Highs, Correction Next? - 20th Aug 16
Housing Bubble - The Marginal Buyer Holds The Pin That Pops Every Asset Bubble - 20th Aug 16
Gold Miners Q2 2016 Fundamentals - 19th Aug 16
Which Price Ratio Matters Most in a Fiat Ponzi? - 19th Aug 16
Big Policies, Bigger Failures - 19th Aug 16
Higher Crude Oil’s Prices and USD/CAD - 19th Aug 16
Here’s Why You Should Look for Dividend Stocks and How - 19th Aug 16
Deglobalization Already Underway — 4 Technologies That Will Speed It Up - 19th Aug 16
These 6 Charts Show Why the Average American Is Fed Up - 18th Aug 16
SPX Easing Lower - 18th Aug 16
Low / Negative Interst Rate’s Legacy - 18th Aug 16
The 45th Anniversary of The Most Destructive Event In Modern Monetary History - 18th Aug 16
USDU - An Important Perspective on the US Dollar - 17th Aug 16
SPX Completes Wave 1 Decline - 17th Aug 16
How to Quickly Spot Common Fibonacci Ratios on a Chart - 17th Aug 16
When Does a Forecast Become a Trade? - 17th Aug 16
Kondratiev Wave - The Financial Winter Is Nearing! - 17th Aug 16
Learn "The 4 Best Elliott Waves to Trade -- and How to Trade Them" - 16th Aug 16
Stock Market Bears Turning Bullish At New All Time Highs - Time to Get Worried? - 15th Aug 16
Job Seekers Sacrificed to the Inflation Gods - 15th Aug 16
A Look At Commodities and Financial Markets Trading Week Ahead - 15th Aug 16
Stock Market New Top Forming? - 15th Aug 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

US Economy - 3 Secret Charts

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

© 2005-2016 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

Catching a Falling Financial Knife