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Deepwater Horizon errors and lessons

See below 3 articles written by Paul Slater and published last week in Lloyds List

 
 
 
 
 
 
Shipping in Crisis - X
 
July 2010
 
 
 
 
 
 
“The Oil Catastrophe in the Gulf of Mexico
 
 
 
 
 
 
 
 
 
Paul Slater
 
Chairman & CEO,   First International Corp
The Oil Catastrophe in the Gulf of Mexico
 
So much has already been written, televised and spoken about the blow-out of the oil well that BP was drilling in the deep waters of the Gulf of Mexico, that one might ask, “what more can be said?” The well-head is still leaking more than 85 days after the initial explosion, although the latest cap seems to be working.
 
The clean-up appears to be gaining ground but a large amount of oil still remains on the surface. The finger-pointing and personal abuse from the Obama administration continues to flow as they try to deflect criticism of their own failures.
 
Above all the repercussions for drilling and transporting oil in US coastal waters pose serious problems for tanker and supply-ship operators as well as the owners of the oil.
 
What happened?
 
During the night of April 20th the oil rig Deepwater Horizon owned and operated by Transocean, one of the world’s leading rig owners and operators, exploded in a fireball as a lethal mixture of gas and oil roared up the drill pipe from the wellhead 1 mile below. The well itself was a steel and concrete encased hole that was a further 10,000 feet deep. BP had struck the oil and gas reservoir some weeks before and was in the process of securing the well before moving on to drill other wells in the area to establish the full scope of this discovery.
 
At the well-head on the ocean floor a huge blow-out preventer had been installed to deal with the very accident that occurred. The preventer failed to work properly, as did the back-up system and the well-head appears to have also collapsed under the force of the gas and oil that surged up from nearly 2 miles below the seabed at pressures estimated to exceed 25,000 lbs per sq.inch.
 
With nothing to stop it, a ball of gas continued to push up the pipe connected to the Deepwater Horizon erupting in a fireball, killing 11 workers and ultimately destroying the rig.
 
The shattered well head began leaking oil and gas uncontrollably into the deep waters of the Gulf of Mexico and a flotilla of fire-fighting and rescue vessels evacuated the survivors and tried unsuccessfully to put out the fire. The Deepwater Horizon sank into 5,000 feet of water on April 22nd.
 
Since then, in the full glare of media attention, the wellhead has continued to leak at the rate of some 2 million gallons per day as estimated from the continuous television feed that BP installed on the seabed. More than half of this is now being captured and pumped to tankers on the surface where it is either burned or stored.
 
Unlike most other oil spills from ships or shallow water rigs this leaking oil is widely dispersed by the time it reaches the surface creating huge problems of containment and clean-up.
 
 
 
The Response.
 
BP’s Crisis Management and Public Relations teams sprang into action to assure the American Public that they would do everything necessary to control the leak, clean up the mess and compensate those who were financially damaged by the accident.
 
 BP and other big oil companies drilling in the GoM had been required by federal regulators to base their response plans on assumptions provided by the US Interior Department’s Minerals Management Service (NYSE:MMS), which had last been updated 6 years ago. This focused on containing the spills and cleaning up the mess and not on repairing or stopping the leak.
 
Unfortunately the response plans had been drawn up before deep-water drilling in the GoM had begun and the models and assumptions used by the MMS had concluded that the probability of oil reaching the shores of the GoM was very low.
 
The MMS models were primarily based on experience of surface spills from ships and rigs and took no account of the possibility of the leak occurring 1 mile below the surface, which resulted in multiple oil slicks spreading over hundreds of square miles of the GoM.
 
The containment and clean-up equipment that the MMS required to be in place along the Gulf coast-line was woefully inadequate in much the way that it had been in Valdez 20 years before.
 
The US Coast Guard leapt into action with its substantial resources of manpower, ships, boats, helicopters and planes and set up joint operating centers with BP to begin to oversee and help manage the problems.
 
The Obama administration chose not to send the Federal Emergency Management Agency (FEMA) to assist in dealing with the growing catastrophe conscious of the criticism that the previous Bush administration had faced in hurricane Katrina.
 
Instead they embarked on a vicious finger-pointing campaign that encompassed personal attacks on the CEO of BP and the company itself, accusing it of negligence and collusion with the MMS in not having plans and equipment to deal with the spill.
 
This was further compounded when President Obama sent his Attorney General to the Gulf to look for evidence of criminal wrongdoing. This was further aggravated by Obama’s constant reference to BP as British Petroleum, implying the involvement of the British government and displaying Obama’s prejudice against the British for alleged atrocities to his family in Kenya under British colonial rule.
 
Meanwhile BP’s principal focus was on stopping the leak, but no oil company had any experience of doing this in deep water where only robotic devices (URVs) could work. All of the wellhead equipment including the failed blowout preventer had been installed using URVs but controlling the leak presented a new set of problems.
 
 
The Consequences.
 
The Oil Pollution Act of 1990 provides that BP and its partners, who own the leases of the area being drilled, would be held responsible for costs associated with the response, clean-up and compensation of third parties who prove financial damage. The size of this liability is limited by OPA 90 to $75m but there are no limitations on claims brought by the affected States or private lawsuits.
 
In any event BP has ignored this limitation and to date has spent more than $3 billion on efforts to stop the leak, clean-up the mess and compensate local people and businesses affected by the spill. Apart from the mandated activities of the US Coast Guard no funding has come from Washington and no assistance to handle the claims of third parties. Offers of assistance and specialized equipment from numerous overseas governments and private companies have been rejected by the Obama administration which invoked the archaic Jones Act instead of temporarily suspending it even though it need not have applied to most of the offshore activities. 
 
The desperate need for skimmers, boom layers and dredgers to place sandbars in front of the unprotected marshlands of Louisiana was totally frustrated by the Obama administration who failed to comprehend the magnitude of the problem. BP has voluntarily set up and funded the organization to pay claims to people in Louisiana and neighboring States for financial losses created by the leak. To date they are still running this process paying out over $40 million a month without any assistance from FEMA.
 
As part of the response plans filed with the MMS and the USCG, BP retained private Oil Spill Response organizations (OSROs) to manage the clean-up while it continued to work closely with the USCG to plug the well and stop the leak.
 
The OSROs were totally overwhelmed by the size of the spill both in terms of the area it covered and the fact that the well continued to leak. These organizations had the equipment and were expert in dealing with conventional spills from ships and even surface wells but the additional equipment that had been promised by the US Govt to be in place on the Gulf Coast to cope with a deep water spill did not exist. To date the booms alone exceed 100 miles in length and some 5,000 small fishing and pleasure boats are assisting in the clean-up despite having no specialized equipment or training.
 
Meanwhile President Obama and his Democrat led Congress chose to hold worthless hearings which allowed members of Congress to display their ignorance and abuse BP management in front of the TV cameras while failing to provide any assistance or financial support to help the recovery process.
 
The President has made four fleeting visits to the region for photo ops and yet had no conversations with any of the senior management of BP for the first six weeks before he dragged the Chairman and CEO into the White House for lengthy meetings with his staff, (he only stayed 20 minutes), during which BP were forced to agree to set up a $20billion fund to pay claims for damages caused by the spill.
The White House also sent its own bill of $40 million to BP and demanded immediate payment. It is not clear that this was ever responded to and Obama’s press secretary no longer refers to it.
The President’s staff and leaders of Congress have continued to hurl abuse and false accusations at BP and suspended all drilling activities in the GoM until further notice without any indication of when or on what conditions this moratorium will be lifted. Fortunately the Federal Court in Louisiana has thrown out the moratorium but the incompetent Secretary of the Interior, Ken Salazar, has vowed to continue to fight this and has cancelled all the new offshore leases that were to be opened up along the US East Coast.
 
Mean while drilling has completely stopped in the GoM and more than a dozen rigs have so far left for other areas of the world. Oil exploration and production has been the economic lifeblood for southern Louisiana and Texas for decades, while fishing represents a much smaller portion of the local economies. Fishing will recover quickly along with tourism but failure to restart the offshore drilling will create massive unemployment among the service industries that support it.
 
The Media and the Facts.
The news media, print, radio and television have descended on this situation like vultures on a dead carcass. With pictures of oiled pelicans and pools of oil washing ashore in the Louisiana marshlands they have had plenty of material to broadcast.
 
With no accurate figures of the amount of oil that has reached the surface, the media has grossly exaggerated the scale of the problem, and followed the President’s example by demonizing BP and belittling its CEO for causing the leak and failing to stop it.
 
Alarm spread throughout the Gulf States as the media quoted so-called experts who predicted the oil could come ashore all down the Florida West Coast and up the US East Coast, as well as across the Atlantic. A resident of my home town, Naples in SW Florida, has filed a $5million lawsuit against BP claiming the smell of the oil is making her sick. The fact that the leak is 400 miles north of here and the prevailing winds are from the southwest speaks to the nonsense that has already developed.
 
The Gulf of Mexico is not a stagnant lake but is fed by a number of rivers, the largest of which is the mighty Mississippi which sends a billion gallons of fresh water into the Gulf every 10 minutes.   The highest estimate of the amount of oil leaked from the well over the first 2 months equates to 30 seconds of Mississippi inflow. The leak estimates have been grossly misleading with the media mixing barrels and gallons and failing to understand the simple facts of oil drilling.
 
The constantly broadcast TV pictures of the leaking wellhead were analyzed by many experts who concluded that the flow was anywhere between 5,000 and 75,000 barrels a day, an extraordinary range of disparity.
 
 The flow however did not consist solely of oil, but a mixture of oil, methane gas and water.
A group of scientists at the University of Houston have recently concluded that more than 50% of the leak is methane gas and they are worried about the effects it may have on the waters of the GoM, recognizing however that it will disperse in a relatively short period of time.
Of the remaining leak some 10% is water and more than 50% of the balance is solidifying in the cold waters and dropping back to the seabed, where it will biodegrade naturally.
 
BP has bombarded the leak with millions of gallons of chemical dispersants, both on the surface and at the wellhead, to emulsify the oil, making it easier to see and collect and sending most to the seabed.
Additionally temporary pipes have been connected to the wellhead and are bringing more than 5,000 barrels a day to surface ships for burning or storing.
 
This massive effort is being solely funded and managed by BP, under the oversight of the USCG, without any assistance from the Obama administration which publicly claims to be in charge.
 
There have been numerous attempts to stop the leak which have failed and been ridiculed by the administration and the media as if BP was simply changing the tire on a car. The fact that the most recent cap that has been installed weighs 75 tons contains numerous valves and meters for measuring and controlling the flow, is testament to the technology involved.
 
Meanwhile two other relief wells have been drilled 2 miles below the seabed and are only now a few feet from the original well which they hope to intercept and seal off in the near future. The challenges have been enormous and there is no doubt a lot of lessons will have been learned which will make deep-water drilling safer in the future.
 
The Financial Consequences
 
Undoubtedly BP and its partners, together with rig owner Transocean and the various engineering companies such as Halliburton who were involved with the Deepwater Horizon will all face massive claims for damages arising from the accident and which will take years to settle through the courts.
 
One sensible decision by the administration, in response to BP’s request, was Obama’s appointment of an independent administrator of the $20billion fund, Kenneth Feinberg, to oversee the claims process and minimize the lawyer’s involvement with no class action suits.
 
BP can obviously afford to meet all reasonable claims for damages and clean-up costs but the repercussions for the oil industry and the shipping industry could be immense.
 
On the one hand BP has made a major discovery of oil and gas in the unchartered waters of the GoM which, if we look back at old films, would normally be celebrated by riggers standing under the gushing oil and investors rubbing their hands at the success. This well if brought under control could produce $1.25 billion of annual revenue and with numerous other wells being drilled in the area could make 10 times that within 10 years.
 
This coupled with the exploration by Exxon Mobil and others further to southwest could confirm that beneath the GoM is enough oil and gas to replace the imports from the Middle East by 2025. China is also exploring onshore and offshore Cuba and the Brazilians have an immense program off their own Atlantic coast.
The moratorium on deepwater drilling and the cancellation of new leases by the Obama administration without any consultation with the oil industry or the service providers on the
Gulf Coast, speaks to the arrogance of the Obama administration and its desire to have all such activities brought under government control.
 
Worse still the Democrat controlled Congress is proposing to remove the limit on liability contained in OPA 90 and its subsequent amendments. This directly affects not only the oil companies but all shipping companies carrying oil, its products and bunker fuel into the US.
 
With no limits on liability shipowners will be unable to obtain third party risk insurance or provide the Certificates of Financial Responsibility required by the USGC for all voyages to the US. Furthermore the supplemental oil pollution funds would be completely extinguished in the event of a large tanker spill and insurers and bankers would restrict owners from trading to the US.
The Aftermath
 
This saga is far from over and it is a very unfortunate accident that might have been avoided.      The causes will be investigated and the responsibilities argued for years to come but it is important that lessons are learned from this by all parties, both industrial and governmental.
 
We are not going to replace fossil fuels as for transportation for at least another generation and although natural gas offers a clean source of energy, finding it poses the similar risks to oil as it is after all a fossil fuel.
 
The technology that has been applied so far in deepwater drilling is enormous and will benefit from this accident, but governments need to apply sensible regulations and efficient oversight, while allowing private enterprise to take the risks and operate the equipment. Apart from the strategic benefits of becoming less dependent on imported oil, the tax and royalty revenues earned by the various States and the Central Government will go a long way to help balance the public budgets.
 
The primary focus, having introduced new systems and regulations designed to prevent another accident in the deep waters, must be on containment and clean-up with the appropriate equipment and training be strategically placed along the shorelines.
 
Given the area covered by this underwater oil spill there needs to be a whole new approach to equipment and people readiness which can protect the coastlines in the US and elsewhere in the world in the event of another accident.
 
 
Paul Slater
Chairman First International Corp