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Putting BP's Macondo Disaster in Perspective

|Includes:BP p.l.c. (BP), HAL, WEL

Over the last six weeks unsuccessful efforts to staunch the unrestricted flow of oil from an exploratory well on BP's (NYSE:BP) Macondo prospect in the Gulf of Mexico have dominated the headlines and provided a target rich environment for demagogues of all stripes to complain, criticize and condemn without truly understanding what they're talking about. While there is more than enough blame to go around and the damage is in fact horrific, it's important to remember that comparable disasters have occurred in the past and are almost certain to occur in the future.

If we set the way-back machine to the summer of '79, I was new law school graduate and Pemex had an incredible mess on its hands because the Ixtoc well in the Bay of Campeche blew out and began spewing 1.3 million gallons of oil a day into the Gulf of Mexico. It took almost ten months to drill relief wells and bring the Ixtoc well under control. The total spill was estimated at 3 million barrels, or roughly 120 million gallons of oil. Ultimately the Gulf recovered and so did the oil industry. It was a tremendously expensive semester in the school of hard knocks, but the lessons learned were beyond price and have served the oil industry well for the last 30 years.

Flash forward to 1991 and nearly 700 wells in Kuwait were torched by withdrawing Iraqi troops resulting in the loss of roughly 6 million barrels, or about 240 million gallons, per day. While news reports at the time claimed it would take years or even decades to put out the fires and restore production, and the demagogues of the day were predicting the equivalent of a small-scale nuclear winter, a group of specialty well control contractors jumped into action, ignored the dangers and resolved the problems in a timeframe that nobody believed possible.

After Kuwait I had the pleasure of serving as securities counsel for the firefighting crew of the Red Adair Company when they quit their jobs at Global Marine and organized International Well Control. I was actively involved in their acquisition of Boots & Coots and their emergence as an Amex listed company (WEL). While I still question the sanity of these men who control the uncontrollable for a living and voluntarily walk into the jaws of hell with a half-ton of dynamite, my experience working with the best well control hands in the world taught me more about their business than I ever wanted to know.

The biggest reason that well control operations in Kuwait went as smoothly as they did was Halliburton's (NYSE:HAL) introduction of a diamond cable cutting technology that allowed the firefighters to make a clean cut on a damaged well and install a new well control assembly over the freshly cut pipe. In other words the cutting and capping operation that BP will attempt later this week has already been done hundreds of times on dry land with remarkable success. The only difference between what was done in Kuwait and what will be attempted in the Gulf is about a mile of water.

I keep reading stories about how incredibly risky the latest plan is and how it might increase flow rates once the damaged well components are cut away. The reality is that BP will be using a proven technique and the only technical difference is that the work will be done by submersible robots in a mile of water instead of by human hands on dry land. There is a chance that the effort will fail, but even the worst case scenario will have the relief wells in Macondo completed five months quicker than the relief wells in the Bay of Campeche were.

I may be overly optimistic about the chances for success. But my optimism comes from knowing what my former clients did in Kuwait and being pretty confident that they're in the Gulf today doing what they do best.

On balance, I think the market's reaction is overblown and BP is being unjustifiably savaged by the press. The fact is that bad things happen from time to time in the oil industry, but the lessons learned in the school of hard knocks are always worth the pain over the long term. So for just a few minutes I think it's time to stop our complaining and thank God for the Hellfighters.

In April of this year, Boots & Coots International Well Control entered into a merger agreement with a subsidiary of Halliburton that is expected to close this summer.

Disclosure: No positions.

Stocks: BP, HAL, WEL