Monday, May 3, 2010

Trying to Size the BP Disaster

Here is a bit from a posting by Geoffrey Styles at the Energy Outlook blog. Styles is a retired industry insider, so his comments are well worth listening to:
In trying to imagine the range of outcomes, we must consider the rate at which the oil is flowing, how long it will flow, and the relative success of efforts to recover or break down the oil that has leaked before it reaches the shoreline, fisheries and other sensitive environments. A high-end projection of the volume of oil spilled might involve a leak that is actually well above the current 5,000 barrel-per-day (bpd) estimate, and that continues as long as it took to cap last year's Timor Sea leak: 10 weeks. Even at 5,000 bpd, that would eclipse the total spilled from the Exxon Valdez before it ended. And if oil were leaking much faster, as some estimates suggest, the result could rival the largest oil tanker spills, such as the Amoco Cadiz in 1978, while still falling short of the 1979 blowout of Pemex's Ixtoc-1 well farther south in the Gulf. We may never know the true extent of the spill, because there's no accurate way to measure the quantity of oil currently flowing from 5,000 ft. down in the Missississipi Canyon.

If that's the far extreme, what might a less dramatic scenario look like? As described in this morning's New York Times, BP is pursuing several approaches that could either shut off the well quickly, or at least contain the leakage until the well can be sealed by means a relief well drilled into the same formation to block the flow to the current well. The critical event following the explosion on the drilling rig was the apparent failure of the blowout preventer, which BP has been attempting to activate by remotely-operated vehicles (ROVs.) The BOP was supposed to cut off the errant flow--literally. The quickest solution would be to set a new BOP in place and activate it to crimp the riser and drillpipe and shear them off. From my limited understanding of the techniques involved, doing this at depths like these, using only ROVs, and with a well that might be blowing gas and oil at much higher rates once the bent riser and drillpipe were removed would be extremely challenging. BP's plan to use "domes"--essentially underwater cofferdams--to contain and siphon off the oil as it comes out of the well could be nearly as tricky to pull off, though with less downside if it failed. If any of these techniques worked, the total volume of the spill might be limited to something under 150,000 bbls, assuming that the well has already leaked 50-60,000 bbls. That would still qualify as a very large oil spill--much larger than early estimates projected--though far short of a true worst-case.
Read the full posting to get additional information and links to relevant material.

Styles makes clear that he thinks drilling should continue. I agree. The question here isn't to "stop" exploration. It is "how to make sure this doesn't happen again". Technology advances only when you learn from your mistakes. The executives at BP may want to cover up the mistake and ignore it, but the job of government regulation is to make sure that a thorough investigation takes place and the appropriate lessons are learned. The financial penalty to BP should get its executives to take this seriously. But even if it doesn't, the role of government is to make sure that all corporations "learn the lesson" and do what is necessary. That is the point of regulation.

Bush and the right wing Republicans like to pretend that all actors in the business world are rational and "do the right thing" because the market incentives will lead them to do that. That is hooey. There are more than enough executives who run a business like a professional crook, i.e. "get in, grab the loot, and get out fast". That is optimizing from the individual's perspective, but it is disaster from a society's viewpoint. That's the purpose of regulation. To make sure the the values of society really count.

I find it funny how Republicans talk about "family values" and then get caught in scandals. They also talk about the virtues of the marketplace, but cases like BP point out that "corporate values" cut corners just like politicians (and most people). You can't rely on moral truisms or "market incentives" to get people and corporations to do the right thing. You need regulations with teeth.

There are few silver linings in the BP disaster in the Gulf of Mexico, but this is it: this disaster is going to force government to get much tougher on regulating offshore oil exploration.

4 comments:

thomas said...

One thing that comes to mind is that they should have acted like an insurance company and assessed the risks and costs of a disaster like what is unfolding right now. I think everyone involved should have looked at it from a perspective of "what if the most unlikely thing happens" and planned on the financial burdens and of course the disaster plans would have been nice. That is why companies have insurance; for the things that might happen... Going forward, I am sure that these companies that do this will have this event in mind and will plan for paying for the liabilities. This disaster, if it goes the worst of possibilities will be a burden for all of us for many years to come. But, it also brings to light the real and potential costs of getting our oil from deep sea drilling.

RYviewpoint said...

Thomas: You are right. Management should have treated their exploration cautiously and backed it up with insurance. But rather than simply buy a policy, they needed to invest in the best possible drilling and safety practices. Deep sea drilling is not a well-established practice so there are unknowns. BP has now discovered this. But management should have realized the risks. I guess that over the next year or two insider tales will leak out and we will get an idea of their thinking.

I'm expecting heads to roll in the company. This was a big expensive mistake. A lot of shareholders are not going to be happy to see that 17% of their investment just "went up in smoke" because of a bad, bad management decision to cut corners.

Maybe management can fend off the shareholders by explaining that they did the best technically feasible. But if that is so, that will mean governments will stop deep sea drilling. The costs are too high for the benefits expected.

Ordinary citizens don't get a direct say in how BP behaves. Shareholders supposedly control it, but it is indirect via annual voting where the board decides who to put up as candidates. This makes typical political elections look like real democracy.

But over time, this impact will find its way into the boardroom. Shareholders will vote their unhappiness. Even more important, governments will vote their unhappiness by layering on more regulation and restriction and costs.

thomas said...

RY;

I read this morning that a backup shutoff system is required in other countries and would have cost only $500,000. Here is a link to that story.. Good ole Dick Cheney had his hand in this disaster, too.

RYviewpoint said...

Thomas: Thanks for the link to the video.

It is good to see the "drill, baby, drill" chant replaced by the more realistic "spill, baby, spill". That is a needed toning down from the Cheney et al, enthusiasts.

But I do worry that Obama's message at 1:05 into the video is lost: "I continue to believe that domestic oil production is an important part of our overall strategy for domestic security".

That is key. The fanatics on one side go "drill, baby, drill" and on the other side they want to "shut it down". The oil is needed.

Domestic oil production is needed to prevent dollars flowing to the Middle East and into terrorist hands.

So people need to be realistic and accept the need to drill, but drill responsibly. The good news is this video "officially" takes this responsible view, but it caters to the crazies who want to "shut it down".

It is useful to point out that there was an automatic shutoff that wasn't used and Cheney was the facilitator of this "budget saving" strategy through the idiotic deregulation pushed by the Bush administration on Wall Street, in oil fields, in food safety, etc.

But I can assure you that after this $30 billion accident, no oil company will ever try ocean drilling without an automatic blowout preventer. Nobody running a major oil corporation will ever take this "shortcut" again.