BP’s Gulf of Mexico Disaster: Expect the Unexpected

Everyone has by now heard of BP’s (BP) undersea oil geyser — actually three geysers at this point. Initially we were told that the spillage was equivalent to just 1000 barrels of oil per day. Next, the figure rose to 5000 and then at least 50,000 barrels per day. Soon after, we learned that a leaked BP memo envisioned 165,000 barrels as the worst-case scenario. Even at 50,000 barrels, that comes out to an Exxon Valdez every four days.

They say that it could take three months to fix this thing. But it took nine months to fix a smaller leak under just 150 feet of Gulf water back in 1979. This time, the problem is almost one mile under the surface. Once again, the powers that be are following the Soviet playbook at Chernobyl, feeding us the rosiest imaginable scenario for as long as they can.

Interestingly, and quite suspiciously, what they are failing to tell us is the estimated size of the punctured deposit. Surely BP has an estimate, and surely the Feds know BP’s estimate from its licensing application, but no one is talking. A few news sources vaguely referred to it as being in the “tens of millions of barrels.” That is hard to believe. Would a giant like BP even get out of bed for that kind of oil?

Keep in mind that renting and staffing a large platform costs almost two million dollars a week. And the pressure in this deposit is so high that it blew out all the stops and sank a rig half the size of a large baseball stadium. I am no geologist, but generally, higher pressure equals a larger deposit. Could this monster gush indefinitely?

If the pipes and cement casing on the borehole collapse, other gushers continue poking through the seabed, and BP’s worst-case-scenario is realized, we are looking at a quarter-billion gallons of oil released every month until this thing is brought under control. And that does not even include the natural gas that comes along with the oil. This could be the American Chernobyl — in fact, it could be much worse.

Already, at this early stage, New Orleans residents are said to be experiencing a foul odor. Well, how about the city becoming uninhabitable (again)? How about all ocean traffic being directed away from this port indefinitely? How about another $50 billion or more added to the 2010 Federal budget deficit, just like after Katrina? How about BP being rendered insolvent via Federal penalties and literally hundreds of lawsuits? How about the entire Gulf of Mexico being poisoned? And what about the nearby Caribbean and Atlantic?

If this continues, it could very well be the end of BP, or at least its American operation, as well as of the platform operator, Transocean (RIG) — which, although headquartered in landlocked Switzerland (go figure), is essentially an American company. It could also be the end of life as we know it on the US Gulf Coast. If that is not relevant to the equity and bond markets and broader social and economic sentiment, I am not sure what is.

Disclosure: No positions