economics

May 27, 2010

BP Used Riskier Method to Seal Oil Well Before Blast

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WASHINGTON — Several days before the explosion on the Deepwater Horizon oil rig, BP officials chose, partly for financial reasons, to use a type of casing for the well that the company knew was the riskier of two options, according to a BP document.
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The Deepwater Horizon ablaze on April 21, the day after the oil rig exploded.
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Douglas Brown, the Deepwater Horizon’s chief mechanic, testifying. His lawyers, Steve Gordon, seated, and Jeff Seely, conferred.

The concern with the method BP chose, the document said, was that if the cement around the casing pipe did not seal properly, gases could leak all the way to the wellhead, where only a single seal would serve as a barrier.

Using a different type of casing would have provided two barriers, according to the document, which was provided to The New York Times by a Congressional investigator.

Workers from the rig and company officials have said that hours before the explosion, gases were leaking through the cement, which had been set in place by the oil services contractor, Halliburton. Investigators have said these leaks were the likely cause of the explosion.

The approach taken by the company was described as the “best economic case” in the BP document. However, it also carried risks beyond the potential gas leaks, including the possibility that more work would be needed or that there would be delays, the document said.

BP’s decision was “without a doubt a riskier way to go,” said Greg McCormack, director of the Petroleum Extension Service at the University of Texas at Austin. Several other engineers agreed with Mr. McCormack’s assessment of the BP document.

Andrew Gowers, a spokesman for BP, said that there was no industry standard for the casing to be used in deepwater wells and that the approach by the Deepwater Horizon had not been unusual. “BP engineers evaluate various factors for each well to determine the most appropriate casing strategy,” he said.

The role of financial and time pressures in the rig blast is one focus of a series of hearings by the Coast Guard and the Minerals Management Service that began Wednesday in Kenner, just outside New Orleans.

Douglas H. Brown, the chief mechanic for the Deepwater Horizon, testified Wednesday that he witnessed a “skirmish” on the rig between a BP well site leader and crew members employed by Transocean, the rig’s owner, the morning of the blast.

Mr. Brown said the disagreement followed BP’s decision to replace heavy drilling fluid with lighter saltwater before the well was sealed with a final cement plug.

“Well, this is how it’s going to be,” the BP official said, according to Mr. Brown.

Mr. Gowers declined to answer questions about workers’ accusations or about whether cost may have factored into the company’s decision to use the casing system it chose for the Deepwater Horizon.

BP executives will probably face tough questioning about cost-cutting measures on Thursday when they testify before the House Committee on Natural Resources. As more details come to light about the events that led to the explosion, investigators are trying to determine which decisions and incidents — or combination of them — may have led to the accident, which killed 11 workers.

For example, Representative Nick J. Rahall II, Democrat of West Virginia and the chairman of the committee, said BP executives would face questions about why they let workers from Schlumberger, a drilling-services contractor, leave the morning of the accident without conducting a special test on the quality of the cement work.

Engineers have described these tests, called cement bond logs, as an important tool for ensuring cement integrity.

The decision about the casings will also come up during the hearings.

Professor McCormack said that while the type of casing that BP chose to use was more expensive in the short term, it was ultimately the more cost-effective and versatile alternative because it would have allowed the company to more easily drill deeper in the same hole if they decide to do so later.

But, the BP records explain, the casing chosen by the company may also cause problems if drilling mud or cement is lost or pushed away from the well into porous rocks as it is pumped.

Federal and company records indicate that that is just what happened, on more than one occasion. The rig lost all of its drilling mud in an incident in March, and in the days immediately before the explosion, records show. The well experienced several other instances of minor losses of drilling fluid and gas kicks, according to interviews with workers from the rig.

The April 20 disagreement between the BP well site leader and Transocean officials is also a growing focus of the investigation.

At a briefing in Washington on Wednesday, investigators laid out a chain of events, beginning with an operational error, that appear to have led to the accident.

The findings are preliminary, and come from BP, which owns the lease on the well and has pointed fingers at other companies for the problems on the rig, including Transocean.

The BP officials said that rig workers apparently had not pumped in enough water to fully replace the buffer liquid between the water and the mud, which stayed in the blowout preventer, the stack of safety valves at the wellhead.

This thick liquid, which is about one-third solid material, may have clogged the pipe that was used for crucial “negative pressure” tests to determine whether the well was properly sealed. The result was a pressure reading of zero (because the pipe was plugged, not because there was no pressure in the well) and the workers apparently misinterpreted that result as indicating a successful test.

Rig workers declared they were “satisfied” with the tests and started to replace drilling mud in the pipe to the seabed with water. About two hours later, the blowout and explosion occurred.

Evidence began emerging Wednesday that BP officials may have had an incentive to proceed quickly.

A member of the federal panel investigating the cause of the blast said that before the explosion, the company had hoped to use the Deepwater Horizon to drill another well by early March, but was behind schedule.

BP applied to use the Deepwater rig to drill in another oil field by March 8, said Jason Mathews, a petroleum engineer for the Minerals Management Service.

Based on an estimate of $500,000 per day to drill on the site, the delay of 43 days had cost BP more than $21 million by the day of the explosion on April 20, Mr. Mathews estimated.

A Transocean official — Adrian Rose, the company’s health, safety and environmental manager — confirmed that BP leased the rig for $533,000 per day. He could not confirm where the Deepwater Horizon was planning to go next, but he said it was going to undertake another drill, probably for BP.

Reporting was contributed by Henry Fountain and Tom Zeller Jr. from New York, Robbie Brown from Kenner, La., and Matthew L. Wald from Washington.

May 14, 2010

Gulf Spill May Far Exceed Official Estimates

Filed under: Uncategorized — ktetaichinh @ 6:52 pm
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The amount of oil spilling into the Gulf of Mexico may be at least 10 times the size of official estimates, according to an exclusive analysis conducted for NPR.

At NPR’s request, experts examined video that BP released Wednesday. Their findings suggest the BP spill is already far larger than the 1989 Exxon Valdez accident in Alaska, which spilled at least 250,000 barrels of oil.
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BP has said repeatedly that there is no reliable way to measure the oil spill in the Gulf of Mexico by looking at the oil gushing out of the pipe. But scientists say there are actually many proven techniques for doing just that.

Steven Wereley, an associate professor of mechanical engineering at Purdue University, analyzed videotape of the seafloor gusher using a technique called particle image velocimetry.

A computer program simply tracks particles and calculates how fast they are moving. Wereley put the BP video of the gusher into his computer. He made a few simple calculations and came up with an astonishing value for the rate of the oil spill: 70,000 barrels a day — much higher than the official estimate of 5,000 barrels a day.

The method is accurate to a degree of plus or minus 20 percent.

Given that uncertainty, the amount of material spewing from the pipe could range from 56,000 barrels to 84,000 barrels a day. It is important to note that it’s not all oil. The short video BP released starts out with a shot of methane, but at the end it seems to be mostly oil.

“There’s potentially some fluctuation back and forth between methane and oil,” Wereley said.

But assuming that the lion’s share of the material coming out of the pipe is oil, Wereley’s calculations show that the official estimates are too low.

“We’re talking more than a factor-of-10 difference between what I calculate and the number that’s being thrown around,” he said.

At least two other calculations support him.

Timothy Crone, an associate research scientist at the Lamont-Doherty Earth Observatory, used another well-accepted method to calculate fluid flows. Crone arrived at a similar figure, but he said he’d like better video from BP before drawing a firm conclusion.

Eugene Chiang, a professor of astrophysics at the University of California, Berkeley, also got a similar answer, using just pencil and paper.

Without even having a sense of scale from the BP video, he correctly deduced that the diameter of the pipe was about 20 inches. And though his calculation is less precise than Wereley’s, it is in the same ballpark.

“I would peg it at around 20,000 to 100,000 barrels per day,” he said.

Chiang called the current estimate of 5,000 barrels a day “almost certainly incorrect.”

Given this flow rate, it seems this is a spill of unprecedented proportions in U.S. waters.

“It would just take a few days, at most a week, for it to exceed the Exxon Valdez’s record,” Chiang said.

BP disputed these figures.

“We’ve said all along that there’s no way to estimate the flow coming out of the pipe accurately,” said Bill Salvin, a BP spokesman.

Instead, BP prefers to rely on measurements of oil on the sea surface made by the Coast Guard and the National Oceanic and Atmospheric Administration. Those are also contentious. Salvin also says these analyses should not assume that the oil is spewing from the 21-inch pipe, called a riser, shown in the video.

“The drill pipe, from which the oil is rising, is actually a 9-inch pipe that rests within the riser,” Slavin said.

But Wereley says that fact doesn’t skew his calculation. And though scientists say they hope BP will eventually release more video and information so they can refine their estimates, what they have now is good enough.

“It’s possible to get a pretty decent number by looking at the video,” Wereley said.

This new, much larger number suggests that capturing — and cleaning up — this oil may be a much bigger challenge than anyone has let on.

BP’s Hayward in ‘battle’ for hearts and minds By Sheila McNulty in Houston

Filed under: Uncategorized — ktetaichinh @ 1:43 am
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Published: May 13 2010 14:39 | Last updated: May 13 2010 14:39

It is 7pm at BP’s crisis centre in Houston, Texas, and two masseuses in royal blue scrubs are giving chair massages to those in need of a break on the night shift.

About 170 of the 500 people in the centre working to cap the oil well leak and contain the spill in the Gulf of Mexico are on duty. Several are filling Styrofoam plates at a buffet of barbecued chicken, rolls, salad and chocolate chip cookies.

One man sits in a room surrounded by eight empty bottles of water as if he has not moved in hours. On a table in another room, name cards from Halliburton, Oceaneering and others who have offered assistance are scattered across a table spread with papers.

The 12-hour shifts people have been assigned are turning into 14, given handing-over briefings at the start and end of their shifts. Nobody is taking holidays or weekends. Signs have been taped to the walls directing people to coffee. BP is making a point to highlight to staff the availability of a counsellor for anyone needing to talk.

“The stress gets pretty high,’’ says Kent Wells, BP’s senior vice-president for exploration and production. “This is an unprecedented technical challenge.’’

Yet, Tony Hayward, BP’s chief executive, appears to be taking it all in his stride. He began at 6am on Wednesday in discussions with the US secretaries of energy and the interior, Steven Chu and Ken Salazar, as well as top scientists and engineers on BP’s efforts to cap and contain the leak.

That ended close to noon, when he had a conference call with BP’s board – something he has been doing every week to 10 days to update them on progress. He spent the afternoon in Mississippi, meeting the governor and locals to ensure their claims for lost fishing or tourism were being processed. Then Mr Hayward returned to Houston for a night-time interview with journalists.

“We will only win this if we can win the hearts and minds of the local community,” he said. “It’s a big challenge.’’

Members of the US cabinet have his personal mobile number, he said, and they routinely call.

“Some nights I haven’t slept very well, but some nights I’ve been able to get five or six hours.’’ He is not up worrying, he said, but rather thinking how to “stay ahead’’ of the crisis that began on April 20 when a BP-contracted rig exploded in the Gulf.

Hate mail has come into BP, but so have 40,000 offers of help, including a call from James Cameron, the Avatar and Titanic writer and director, who offered manned submarines. BP has politely declined, given BP’s opportunity to use some from the defence department if need be. But it is appreciative of the support.

Mr Hayward called his counterparts at ExxonMobil, Chevron and other top deepwater producers for any assistance they could provide and they have responded.

“This is a global oil and gas industry problem being addressed by the oil and gas industry,’’ he said. Of the 500 people handling the crisis, he said, about 60 per cent were from BP, with the rest from the industry and government.

“We will be judged by the nature of our response,’’ he said before acknowledging he, in particular, also will be judged. Mr Hayward said he did not feel his job was on the line: ”I don’t, at the moment. That might change.”

Criticisms against BP have grown in recent days, culminating in allegations from a powerful US Congressional investigations panel on Wednesday that a litany of failures led to the catastrophic spill.

The allegations, pulled from 100,000 pages of documents from the companies involved, suggested many warning signs were overlooked. Mr Hayward declined to speak about the allegations, noting an investigation was under way.

Mr Hayward replaced Lord John Browne as chief executive, following a string of problems for BP in the US, including a fatal refinery explosion in Texas, corrosion and leaking pipes in Alaska and a propane scandal.

Lord Browne offered his support to Mr Hayward when his successors’ own crisis struck: “He sent me a text message of support,’’ Mr Hayward said.

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Mr Hayward said he has improved safety at the company in the years since he took over and, because of that, BP is in a position to deal with the current crisis and pull through.

“Apollo 13 did not stop the space programme. The Air France airplane that fell out of the sky off of Brazil did not stop the aviation industry,’’ he said.

“We have tried to be very aggressive on all fronts,’’ he said.

He came to the US just days after the explosion and went back to London for 36 hours to pack a bigger suitcase. He has travelled to Louisiana, Mississippi, Alabama – the states that might be affected by the spill – as well as Washington for meetings with the Obama administration.

“I’ve been to some places I probably didn’t expect to get to,’’ he said. And he has steered clear of reading newspapers and watching television. “I don’t want my judgment clouded by what is being said about me or BP.”

On Thursday, he is spending the day in Louisiana, but says he makes his plans day by day. ”I’m not sure where I am after that.”

“I’ve actually got some good friends through this,’’ he said, noting he had been dealing with people he would not ordinarily. ”We are fighting a battle.”

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May 12, 2010

Vietnamese, Cambodian fishermen among hardest hit by BP oil spill Many Vietnamese and Cambodia fishermen are without work now because of the BP oil spill, and some still feel the effects of Hurricane Katrina. BP is trying to help, but there’s a language barrier.

Filed under: Uncategorized — ktetaichinh @ 2:27 am
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BP apologized…again

At the community meeting in Buras, grandmothers held babies and fishermen stood impatiently in rubber work boots as David Kinnaird, community outreach spokesman for BP, made another apology for any confusion BP caused with the liability waivers.

“We recognize we’ve been having problems communicating with people in this parish and I’m here to make sure that everyone is heard and listened to,” said Kinnaird, his presentation translated into Vietnamese and Cambodian by two local residents.

Parish officials and United Way representative also provided locations in the parish where charities are distributing food, announced that a local Methodist church will soon be handing out $100 checks to out-of-work families, and announced the establishment of a United Way effort to help local fishermen.

The room remained silent when they were asked if anyone present was worried about eating that night, but anger quickly flashed at Aronfeld, who started a question and answer period by admonishing local residents against hostility, shouting, or threats about lawsuits or claims.

“We are normal people! We are not animals! Talk to us like we are human beings!” one obviously upset fisherman shouted at Aronfeld, who profusely apologized.

Despite repeated promises by BP to quickly help fisherman in the region, many at the meeting complained of being caught in a Catch-22 of bureaucracy: BP is only accepting claims of economic loss from boat owners, not deckhands, and the company’s Vessel of Opportunity employing boatmen to fight the oil spill is only hiring fisherman who can prove their local residency.

Many Asian immigrants who have worked in Plaquemines for decades do not own their own boats. Many also moved to New Orleans after losing their homes to Hurricane Katrina, but still return to Plaquemines everyday to work.
Katrina’s lasting impact

“Since Katrina there is no school here for our kids, so we had to move to New Orleans,” said shrimper Houston Le, 40. “But I still come here every day, even now with the fishing closed I am coming, but BP says it is only hiring people they say live in Plaquemines.”

BP spokesperson Kinnaird said he would get answers, and referred residents to BP’s phone number for claims, pointing out that translators are available on the toll-free line. Thoai Tong, a fisherman who is acting as an interpreter for Aronfeld, estimated that out of the 3,000 immigrants from Southeast Asia living and working in Plaquemines, about ten percent are fluent in English.

Why We All Should Share the Cost of the Gulf Oil Spill Cleanup

Filed under: Uncategorized — ktetaichinh @ 12:15 am
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A story on CNN-Money today by Steve Hargreaves asks “What will BP (BP) really pay?” I think a more fundamental question to ask at this point is “What should BP pay? And should no one else?” As the story explains (emphasis added):

NEW YORK (CNNMoney.com) — The Gulf oil spill is going to cost billions to clean up, a tab BP has publicly pledged to pay in full.

But thanks to the unpredictable nature of the oil slick and the legal maze surrounding maritime law, what BP will pay and to whom is very much an open question…

Start with the costs. Estimates to clean the spill and compensate other parties for the economic damage run from $2 billion to $14 billion. One politician even said it could run into the hundreds of billions…

…which is a lot of money, too much for even BP to cover (whose profits were (coincidentally) around $14 billion last year).

BP’s public pledge notwithstanding, there are limits on what the government can make them pay, and the question is what can be done about it. Policymakers are starting to realize that if the costs are paid through anything more than a simple one-time fine on BP only–which BP would just have to “suck up” (pun intended)–that the burden of those costs will be spread (emphasis added):

BP’s liabilities may be capped by a federal rule that limits the payouts for economic damages stemming from an oil spill to $75 million. Once that threshold is reached, a federal fund kicks in, covering an additional $1 billion. The federal fund is paid for by a 8-cents-a-barrel tax on oil produced or imported into the United States…

To ward off any confusion, lawmakers in the House and Senate have introduced bills raising the liability cap from $75 million to $10 billion, an initiative they’ve dubbed the “Big Oil Bailout Prevention Act.” Lawmakers say there’s precedent for making the law retroactive: Witness the Superfund, which forced polluters to reimburse the government for toxic cleanup.

Given the public outrage over the spill, and the fact that it’s an election year, the bills stands a good chance of passing.

But not everyone thinks it’s a good idea. If the cap is increased, Nelson predicts that it will only raise the cost of buying insurance for all companies producing offshore oil.

“You’re going to pay for that at the gas pump,” he said.

There’s certainly an appeal to covering the costs of cleaning up (or trying to clean up) the oil spill entirely through a fine levied solely on BP, but that’s only on fairness and public perception grounds. Such a fine would be an example of what economists call a “lump-sum tax”–a tax which could not be avoided by changing behavior, in this case because it’s based on something that already happened. (Any tax on anything that happened in the past–any “retroactive” tax–is a lump-sum tax.) Economists generally like lump-sum taxes, because they don’t distort economic decisions. And when such a tax cannot be avoided by changing economic behavior, the burden of such a tax is also unable to be shifted to other participants in the taxed market. In the case of the BP oil spill (perhaps better called an “explosion”?), this probably seems good and “right” on fairness grounds, at least to most of the American public who aren’t directly employed by or invested in BP.

But it turns out that, on economic efficiency grounds, the fact that a tax or fine on BP alone would amount to a lump-sum tax that would not get passed along to any of the other participants in the BP marketplace or the oil market more generally is a bad thing. Because the BP oil spill reveals more than any lack of adequate quality and safety controls in BP’s production operations. It reveals more generally the risks associated with oil production, risks that translate into large social costs that go unpriced in the oil market. It is a classic case of a “negative externality,” where the social costs of producing and consuming a good exceed the private costs paid through market prices. In such a case, economic theory says that intentionally distorting market prices through public policy–in the case of a negative externality, through a tax representing the excess of social marginal costs over private marginal costs–would improve economic efficiency.

The BP oil spill provides us a new and very in-your-face lesson: the excess of social costs over private costs (the “external costs”) associated with fossil fuels go beyond the “biggie” of global warming via the consumption (burning) of fossil fuels–a very long-term phenomenon that is very difficult to predict the economic and social costs of (and hence is easy for us to ignore). The BP oil spill reveals that there are more immediate and clear (and very visual and quantifiable) social costs associated with fossil fuels in terms of the risks to the environment on the production/extraction side of the market. So now there are at least two major reasons why for economic and social efficiency, fossil fuels should be taxed: (i) because of the external costs associated with global warming resulting from the consumption of fossil fuels; and (ii) because of the external costs associated with the risky extraction strategies used in the production of fossil fuels. And both these reasons suggest that there is no way that the right policy response to the BP oil spill–from an economic efficiency, maximize social welfare standpoint–is just to “fine the hell out of BP” (alone) and run BP (alone) out of business. (Even from a fairness perspective, it’s not at all clear that this kind of accident couldn’t have happened with any other company’s well.)

The right policy needs to indeed spread the burden of the costs of cleaning up the oil spill to all participants in the oil marketplace, including those of us who innocently just fill up our tanks with gasoline. Only when the extra social costs of the environmental risks associated with both fossil fuel production (e.g., risk of offshore drilling mishaps) and fossil fuel consumption (e.g., global warming, pollution) are incorporated into the prices all of us face in the fossil fuel markets we participate in, will we be led to make the correct, or at least better, decisions from a social welfare standpoint, not just from our own selfish standpoints. These better decisions include the oil companies using safer production methods (which likely means producing less offshore), and consumers buying less gasoline.

Unfortunately, politicians won’t see it that way. Even pro-environment types in Congress were cold to President Obama’s climate change proposal last year that would have raised gasoline and other fossil fuels prices. (Psst: That’s how climate change policy is supposed to work, by the way, and the President’s proposal was a good one.) See, the U.S. isn’t in the practice of taxing environmentally-harmful activities (besides our very/too low-by-international-standards gasoline tax); in fact, we’re in the habit of subsidizing the oil and gas industry via tax preferences. We get that wrong in two ways: we increase the deficit, and we worsen the economic inefficiencies (and just plain environmental damage) associated with fossil fuels.

Now with the BP disaster to more clearly and immediately remind us that we’ve been getting this all wrong, we should be trying to change those two wrongs into two rights. This should motivate policymakers to implement smart climate change policy–i.e., a policy that would actually raise fossil fuel prices (that all of us pay) and raise revenue for deficit reduction (or to avoid deficit increases)–as soon as possible.

May 11, 2010

BP, subcontractors: Spill is the other guy’s fault

Filed under: Uncategorized — ktetaichinh @ 10:41 pm
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NEW YORK (CNNMoney.com) — The three oil companies primarily involved in the Gulf of Mexico oil spill blamed each other Tuesday for the accident last month that left 11 workers dead and oil still spewing into the Gulf.

At a hearing before the Senate Energy and Natural Resources Committee, BP (BP), the well’s owner and lead operator of the project, sought to turn attention to Transocean, which had a contract to drill the well for BP using its Deepwater Horizon drill rig.

“Transocean, as owner and operator of the Deepwater Horizon drilling rig, had responsibility for the safety of drilling operations,” said Lamar McKay, chairman and president of BP America.

In particular, McKay drew attention to the valve that was supposed to shut off the well in case of an accident. The valve, known as a blowout preventer (BOP), is owned by Transocean.

“Clearly, the BOP remains a critical piece of equipment throughout all operations to ensure well control,” said McKay.

In written testimony before the hearing, Transocean (RIG) said the blowout preventer performed fine in tests just a week before the accident.

While it’s still unclear why the blowout preventer did not work, Transocean chief executive Steven Newman said the preventer is not the ultimate cause of the accident. He says that there must have been a failure of the well’s cementing or the casing that holds the wells in place.

Either way, Transocean said it’s the responsibility of the well’s owner to set all specifications for the drilling process.
0:00 /:41BP oil spill worries investors

“All offshore oil and gas production projects begin and end with the operator … in this case, BP,” Newman said.

Newman took a slightly more conciliatory tone during his testimony, but still sought to shift the focus away from the blowout preventer and to the well itself.

“Here was a sudden, catastrophic failure of the cement, the casing, or both,” he said. “Without a failure of one of those elements, the explosion could not have occurred.”

The well’s cementing was done by Halliburton (HAL, Fortune 500). But Halliburton’s chief safety and environmental officer, Tim Probert, said responsibility lay with either Transocean or BP.

“The casing shoe was cemented some 20 hours prior to the tragic incident,” said Probert. “Had the BOP functioned as expected, this catastrophe may well not have occurred.”

During the cementing of the well, Halliburton simply followed BP’s instructions, he said.

“Halliburton, as a service provider to the well owner, is contractually bound to comply with the well owner’s instructions on all matters relating to the performance of all work-related activities,” he said.
Emergency shut off

Senators were not impressed with the blame game.

“Shifting the blame does not get us very far,” said Sen. John Barrasso, R-Wyo. “And it does not change America’s need for energy.”

Several senators focused on the blowout preventer, and why it didn’t work.

“Should we go forward with deep-water drilling when we know these blow out preventers may not function?” asked Sen. Mary Landrieu, D-La., whose state has been severely affected by the spill.

Elmer Danenberger, former head of the Minerals Management Service, the federal agency that regulates offshore drilling, said the blowout preventers usually work. But in some cases, such as thick sections where two joints come together, the preventers won’t cut through the pipe, which is necessary to pinch it shut and stop leaks.

Senators wanted to know why there weren’t two shears on the blowout preventer in case the first shear hit a thick spot on the pipe. They also asked why other backup systems were not in place.

“That was going to be in place, but apparently it never happened,” Danenberger answered.

It has been speculated that additional shears might make the devices too heavy for older drill rigs to carry.
Who pays?

Under federal law, BP, as the lead project operator, is responsible for all clean-up costs associated with the spill. On Monday, BP said it has spent $350 million so far.

But damages caused by closure of fishing grounds, shipping lanes and tourist spots could exceed the cleanup costs, and it’s unclear which party will pay those or how much they’ll add up to. Under current law, BP may only be liable for the first $75 million of claims that are expected to run into the billions.

BP has said it will pay all “legitimate claims” when it comes to compensating people for economic loss. At Tuesday’s hearing, BP’s McKay said the company expects to spend more than $75 million on compensating people for the spill.
Oil spill costs: What will BP really pay?

But under questioning from Sen. Maria Cantwell, D-Wash., the extent of the commitment wasn’t clear.

“So you’ll pay for lost fishing opportunities?,” asked Cantwell.

“All legitimate claims,” responded McKay.

“And lost tourism revenue?,” asked the senator.

“All legitimate claims,” McKay answered again.

“And how about lost tax revenues to towns and parishes?,” asked Cantwell.

“Question mark,” said McKay.

“And damages sustained to Louisiana’s brand?”

“I really don’t know,” said McKay.

While the subcontractors are thought to have some legal indemnification from BP and the federal government, lawyers say they could still be open to lawsuits from fisherman and others affected by the spill.

Ultimately, experts have said total costs could range from $2 billion to $14 billion or higher, depending on when the leaking well is closed and where the oil washes ashore.

Efforts are still underway to close the well, which is leaking some 200,000 gallons of oil into the Gulf each day.

May 8, 2010

The oil spill in the Gulf of Mexico Deep trouble America’s distorted energy markets, not just its coastline, need cleaning up

Filed under: Uncategorized — ktetaichinh @ 7:54 am
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Slick salesmen

Because that is where the oil is, oilmen retort. The Gulf of Mexico accounts for almost a third of America’s oil production and the lion’s share of new discoveries. Most dry land has been picked over, and better technology allows exploration in ever deeper waters. Elsewhere too, Western oil firms are being forced offshore as nationalist governments curtail their involvement in big, easily tapped fields on land. The Gulf of Mexico and the waters off Africa and Brazil are among the most enticing prospects to which they still have access. If Americans do not want to hand even more money and clout to the likes of Iran, Russia and Venezuela, the argument runs, they should not curb offshore drilling. Even if they do, rising oil powers such as Angola and Brazil are not going to follow suit.

Moreover, in America at least, oil firms have been reasonable stewards of the seas. Before Deepwater Horizon foundered there had not been a big leak from an offshore oil well for 40 years. Average annual spills from underwater pipelines declined from 2.5m gallons in 1980-84 to just 12,000 gallons in 2000-04, according to the Congressional Research Service. America’s National Research Council reckons that offshore drilling accounts for 1% of the oil floating in the country’s waters, and tankers and pipelines only a further 4%, compared with 33% from other shipping and 62% from natural seepage (though the industry’s spills are more concentrated, and so more harmful). As the fleet of 200 ships battling the slick shows, oil firms have elaborate plans to mop up leaks.

In this instance the oil spilled is quite volatile, so much of it should disperse or evaporate before reaching the coast, where it will do the most damage. The warmth of the air and water in the Gulf should also help. Since the well is 40 miles offshore and the weather has been relatively clement, there has been time to test dispersal techniques and prepare coastal defences.

May 1, 2010

Choppy Seas Hinder Effort To Contain Oil Spill

Filed under: Uncategorized — ktetaichinh @ 2:14 am
Tags: , ,

by NPR Staff and Wires

Enlarge NASA/APThis satellite image taken Thursday shows the oil slick in the Gulf of Mexico as it nears the shoreline, threatening wildlife along Louisiana’s fragile islands and barrier marshes.

ASA/APThis satellite image taken Thursday shows the oil slick in the Gulf of Mexico as it nears the shoreline, threatening wildlife along Louisiana’s fragile islands and barrier marshes.

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April 30, 2010

High winds and choppy seas frustrated efforts to hold back the oil spill seeping into Louisiana’s rich fishing grounds and nesting areas Friday, and the government desperately cast about for new ideas for dealing with the nation’s biggest environmental crisis in decades.

The seas were too rough and the winds too strong Friday to burn off the oil, suck it up effectively with skimmer vessels, or hold it in check with the miles of orange and yellow inflatable booms strung along the coast. The floating barriers broke loose in the choppy water, and waves sent oily water lapping over them.

Oil Slick’s Projected Path

NOAA estimates that the oil slick will reach parts of the Louisiana coast Friday.

“It just can’t take the wave action,” said Billy Nungesser, president of Louisiana’s Plaquemines Parish.

Louisiana’s National Guard mobilized to fight the spill, but the first waves of crude neared the state’s wetlands.

Sheen from the vast oil slick was beginning to penetrate the ecologically rich coastal marshes and barriers island, according to several reports, though the heavy oil was still offshore. The state of Louisiana diverted thousands of gallons of fresh water from the Mississippi River to try to flush out the wetlands, though that effort was being hampered by wind.

High seas were in the forecast through Sunday and could push oil deep into the inlets, ponds, creeks and lakes that line the boot of southeastern Louisiana. With the wind blowing from the south, the mess could reach the Mississippi, Alabama and Florida coasts by Monday.

The Guard prepared to send communication equipment, boats, all-terrain vehicles and other equipment to help. Animal rescue workers say they’ve begun to clean oil off sea birds coated from the oil spill that’s begun to wash ashore along the Gulf Coast, according to Eileen Fleming of member station WWNO in New Orleans.

Weather May Drive Spill Deeper Inland

The National Weather Service predicted winds, high tides and waves through Sunday that could push oil deep into the inlets, ponds and lakes that line the boot of southeast Louisiana. Seas of 6 to 7 feet were pushing tides several feet above normal toward the coast, compounded by thunderstorms expected in the area Friday.

Crews are unable to skim oil from the surface or burn it off for the next couple of days because of the weather, Coast Guard Rear Adm. Sally Brice-O’Hara said.

Waves may also wash over booms strung out just off shorelines to stop the oil, said Tom McKenzie, a spokesman for U.S. Fish and Wildlife Service, which is hoping booms will keep oil off the Chandeleur Islands, part of a national wildlife refuge. “The challenge is, are they going to hold up in any kind of serious weather,” McKenzie said. “And if there’s oil, will the oil overcome the barriers even though they’re … executed well?”

President Obama sought to reassure Gulf Coast communities Friday and counter any perception that his administration has been slow to respond. At a Rose Garden news conference, he said the federal government is “fully prepared” to meet its responsibilities to them as the spill becomes a worsening environmental disaster.

The president said no new offshore leases would be issued to oil companies unless they were subject to stricter safety measures, NPR’s Giles Snyder reported. But Obama, who recently lifted a drilling moratorium for many offshore areas, including the Atlantic and Gulf areas, underscored that offshore drilling remains an important part of U.S. energy policy.

The Coast Guard also defended the federal response to the spill.

Brice-O’Hara, appearing on multiple TV news shows, said the Coast Guard-led federal response to the spill has been rapid and sustained, and that it has adapted as the threat has grown since a drill rig exploded and sank last week. The Coast Guard, she said, has been closely monitoring efforts directed by oil company BP PLC to contain and stop the leak and has filled in gaps where needed.

Military Planes Awaiting Orders

The Gulf spill was up to five times larger than first estimated and could surpass the Exxon Valdez disaster in scope.

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“It is of grave concern,” David Kennedy of the National Oceanic and Atmospheric Administration told The Associated Press. “I am frightened. This is a very, very big thing. And the efforts that are going to be required to do anything about it, especially if it continues on, are just mind-boggling.”

Florida’s governor declared a state of emergency as the slick spread across the Gulf. The declaration from Gov. Charlie Crist, which covers six counties in the state’s panhandle, frees up state money and activates Florida’s National Guard to respond to the crisis.

But Judith Smelser of member station WMFE in Orlando said some experts think ocean currents could carry the oil all the way around the Florida Peninsula.

Two Air Force planes have been sent to Mississippi and were awaiting orders to start dumping chemicals on the oil spill threatening the coast, as the government worked Friday to determine how large a role the military should play in the cleanup.

The C-130 Hercules cargo planes, specially designed for aerial spraying, were sent Thursday from the Youngstown Air Reserve Station in Ohio, said a spokesman there, Master Sgt. Bob Barko Jr.

The planes and crews were standing ready in case they’re needed, said Maj. David Faggard, an Air Force spokesman at the Pentagon.

“If this mission comes to pass, it would be first time we have done this in a real world scenario,” Barko said, adding that the 910th Airlift Wing at Youngstown has trained for such a mission and has done other spraying such as mosquito-abatement flights after Hurricane Katrina in 2005.

NPR’s Wade Goodwyn, reporting from New Orleans, said that as the slick moved closer to shore, a strong smell of crude oil had penetrated the city and other parts of southern Louisiana, extending as far as Baton Rouge. Authorities urged people with respiratory illness to take precautions or remain indoors.

Hundreds Of Gulf Coast Species Imperiled

The oil slick could become the nation’s worst environmental disaster in decades, threatening hundreds of species of fish, birds and other wildlife along the Gulf Coast, one of the world’s richest seafood grounds, teeming with shrimp, oysters and other marine life.

Louisiana Gov. Bobby Jindal declared a state of emergency Thursday, which allows the state to free up resources to prepare for the oil’s impact.

The Coast Guard has worked with British oil giant BP, which operated the rig that exploded April 20 and then sank, to deploy floating booms, skimmers and chemical dispersants, and to set controlled fires to burn the oil off the water’s surface.

Obama has pledged that his administration will use “every single resource at our disposal.” Homeland Security Secretary Janet Napolitano, Interior Secretary Ken Salazar and environmental protection administrator Lisa Jackson will travel to the Gulf of Mexico on Friday to oversee efforts to contain the spill.

Salazar said he pressed the chief executive of BP to “work harder and faster and smarter to get the job done.” He said the government will not rest until BP seals the well and “they clean up every drop of oil.”

As for the cause of the accident, he said: “I am confident we will get to the bottom of what happened here. Those responsible will be held accountable.”

BP confirmed Thursday that up to 5,000 barrels, or 200,000 gallons, of oil a day are spilling from the site of the deadly oil rig explosion in which 11 workers are still missing and presumed dead.

Many of the more than two dozen lawsuits filed in the wake of the explosion claim it was caused when workers for oil services contractor Halliburton Inc. improperly capped the well. Halliburton denied it.

At that rate, the spill could easily eclipse the worst oil spill in U.S. history — the 11 million gallons that leaked from the grounded tanker Exxon Valdez in Alaska’s Prince William Sound in 1989 — in the three months it could take to drill a relief well and plug the gushing well 5,000 feet underwater on the seafloor. Ultimately, the spill could grow much larger than the Valdez because Gulf of Mexico wells typically hold many times more oil than a single tanker.

At least 1.6 million gallons of oil have spilled, according to Coast Guard estimates.

’We’ll Take Help From Anyone’

Jackie Savitz, a toxicology scientist with the environmental group Oceani, says that at the current flow rate, the spill will reach the 11 million gallon mark of the Exxon Valdez spill in 50 days. The Gulf holds several endangered and threatened species, including four species of endangered sea turtle, in addition to dolphins, porpoises and whales.

“This is one of only two spawning areas for bluefin tuna in the world,” Savitz said. “If larvae are exposed, there’s a good chance they won’t survive or their survival will be reduced because of the oil spill.”

Doug Suttles, the oil company’s chief operating officer, told NBC’s Today show that oil is bubbling up from the ocean bottom at a rate of 1,000 to 5,000 barrels a day. He said the company would welcome help from the U.S. Defense Department and other agencies in containing the slick.

“We’ll take help from anyone,” Suttles said.

As the slick has grown, so have potential cleanup costs. Napolitano called BP the responsible party for costs “as the president and the law have made clear.”

Industry officials say replacing the Deepwater Horizon, owned by Transocean Ltd. and operated by BP, would cost up to $700 million. BP has said its costs for containing the spill are running at $6 million a day. The company said it will spend $100 million to drill the relief well. The Coast Guard has not yet reported its expenses.

The massive Gulf spill could result in billions of dollars losses for BP and curb plans to expand offshore drilling, according to NPR’s Chris Arnold.

The chairman of PFC Energy, Robin West, says BP could spend several hundred million dollars on cleanup efforts but that bigger costs could come from legal liability for spill-related damages.

“If it gets into all the bayous and estuaries and things like that, the potential liability is immense,” West said. “The Mississippi River delta is one of the great spawning grounds on earth.”

NEW ORLEANS — Officials in the Obama administration began for the first time Friday to publicly chastise BP America for its handling of the spreading oil gusher in the Gulf of Mexico, calling the oil company’s current resources inadequate to stop what is unfolding into a environmental catastrophe.

Multimedia
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The Takeaway on the Spill With Clifford Krauss

//

What the Spill Means for Offshore Drilling

How should the environmental effects of deep sea oil exploration be weighed against its benefits?

Readers’ Comments

As oil edged toward the Louisiana coast, fears continued to grow that the seabed oil well could grow much larger and spiral out of control. A document prepared by the National Oceanic and Atmospheric Administration said the oil flow could grow from the current estimate of 5,000 barrels a day to an amount 10 times that much, which could be 2.1 million gallons a day.

The increased level of concern was reflected in the sharp new criticism by federal officials of BP for not stopping the leak and cleaning up the spill before it reached land, something the company’s officials had said was possible earlier in the week.

“It is clear that after several unsuccessful attempts to secure the source of the leak, it is time for BP to supplement their current mobilization as the slick of oil moves toward shore,” Homeland Security Secretary Janet Napolitano said pointedly, as the government announced steps to supplement its response with people and equipment from the Defense Department.

Geoffrey S. Morrell, deputy assistant secretary of defense, said in a statement that the government would hold BP accountable for the cost of the department’s deployment, which as of Friday night included the Louisiana National Guard to help clean up coastal areas once the oil comes ashore.

BP officials said they did everything possible, but a review of the response suggests that it may be too simplistic to place all the blame on the oil company. The federal government also had opportunities to move more quickly, but did not do so while it waited for a resolution to the spreading spill from BP, which was leasing the drilling rig that exploded in flames on April 20 and sank two days later. Eleven workers were left missing and are presumed dead..

The Department of Homeland Security waited until Thursday to declare that the incident was “a spill of national significance,” and then set up a second command center in Mobile. The actions came only after the estimate of the size of the spill was increased fivefold to 5,000 barrels a day.

The delay meant that the Homeland Security Department waited until late this week to formally request a more robust response from the Department of Defense, with Ms. Napolitano acknowledging even as late as Thursday afternoon that she did not know if the Defense Department even had equipment that might be helpful.

Officials initially seemed to underestimate the threat of a leak. Rear Adm. Mary E. Landry, the chief Coast Guard official in charge of the response, said on April 22, after the rig sank, that the oil that was on the surface appeared to be merely residual oil from the fire, though she acknowledged that it was unclear what was going on under the water. The day after, officials said that it appeared the well’s blowout preventer had kicked in and that there did not appear to be any oil emanating from the well, though they cautioned that it was not a guarantee.

BP officials, even after the oil leak was confirmed by using remote-controlled robots, expressed confidence that the leak was slow enough, and steps taken out in the Gulf of Mexico aggressive enough, that the oil would never reach the coast.

(The NOAA document regarding a far larger leak, first obtained by The Press-Register in Mobile, Ala., was described by agency officials as raising a possibility, though not a prediction.)

Some oil industry critics questioned whether the federal government is too reliant on oil companies to manage the response to major spills, leaving the government unable to evaluate if the response is robust enough.

“Here you have the company that is responsible for the accident leading the response to the crisis,” said Tyson Slocum, director of Public Citizen’s Energy Program. “There is a problem here, and the consequence is clear.”

But it is still the government, in this case the Coast Guard, that has the ultimate say.

A law passed a year after the 1989 Exxon Valdez disaster makes the owner of a rig or vessel responsible for cleaning up a spill. But oversight of the cleanup is designated to the Coast Guard, with advice from other federal agencies.

Rear Adm. Robert C. North, retired, who was commander of the Coast Guard’s Eighth District from 1994 to 1996, said that decisions in these situations are made collectively, but that the buck essentially stops with the federal coordinator — in this case, Admiral Landry. “The federal on-scene coordinator is kind of the one individual to say, ‘I think we need to do more or that’s adequate,’ ” he said.

NEW ORLEANS — Officials in the Obama administration began for the first time Friday to publicly chastise BP America for its handling of the spreading oil gusher in the Gulf of Mexico, calling the oil company’s current resources inadequate to stop what is unfolding into a environmental catastrophe.

As oil edged toward the Louisiana coast, fears continued to grow that the seabed oil well could grow much larger and spiral out of control. A document prepared by the National Oceanic and Atmospheric Administration said the oil flow could grow from the current estimate of 5,000 barrels a day to an amount 10 times that much, which could be 2.1 million gallons a day.

The increased level of concern was reflected in the sharp new criticism by federal officials of BP for not stopping the leak and cleaning up the spill before it reached land, something the company’s officials had said was possible earlier in the week.

“It is clear that after several unsuccessful attempts to secure the source of the leak, it is time for BP to supplement their current mobilization as the slick of oil moves toward shore,” Homeland Security Secretary Janet Napolitano said pointedly, as the government announced steps to supplement its response with people and equipment from the Defense Department.

Geoffrey S. Morrell, deputy assistant secretary of defense, said in a statement that the government would hold BP accountable for the cost of the department’s deployment, which as of Friday night included the Louisiana National Guard to help clean up coastal areas once the oil comes ashore.

BP officials said they did everything possible, but a review of the response suggests that it may be too simplistic to place all the blame on the oil company. The federal government also had opportunities to move more quickly, but did not do so while it waited for a resolution to the spreading spill from BP, which was leasing the drilling rig that exploded in flames on April 20 and sank two days later. Eleven workers were left missing and are presumed dead..

The Department of Homeland Security waited until Thursday to declare that the incident was “a spill of national significance,” and then set up a second command center in Mobile. The actions came only after the estimate of the size of the spill was increased fivefold to 5,000 barrels a day.

The delay meant that the Homeland Security Department waited until late this week to formally request a more robust response from the Department of Defense, with Ms. Napolitano acknowledging even as late as Thursday afternoon that she did not know if the Defense Department even had equipment that might be helpful.

Officials initially seemed to underestimate the threat of a leak. Rear Adm. Mary E. Landry, the chief Coast Guard official in charge of the response, said on April 22, after the rig sank, that the oil that was on the surface appeared to be merely residual oil from the fire, though she acknowledged that it was unclear what was going on under the water. The day after, officials said that it appeared the well’s blowout preventer had kicked in and that there did not appear to be any oil emanating from the well, though they cautioned that it was not a guarantee.

BP officials, even after the oil leak was confirmed by using remote-controlled robots, expressed confidence that the leak was slow enough, and steps taken out in the Gulf of Mexico aggressive enough, that the oil would never reach the coast.

(The NOAA document regarding a far larger leak, first obtained by The Press-Register in Mobile, Ala., was described by agency officials as raising a possibility, though not a prediction.)

Some oil industry critics questioned whether the federal government is too reliant on oil companies to manage the response to major spills, leaving the government unable to evaluate if the response is robust enough.

“Here you have the company that is responsible for the accident leading the response to the crisis,” said Tyson Slocum, director of Public Citizen’s Energy Program. “There is a problem here, and the consequence is clear.”

But it is still the government, in this case the Coast Guard, that has the ultimate say.

A law passed a year after the 1989 Exxon Valdez disaster makes the owner of a rig or vessel responsible for cleaning up a spill. But oversight of the cleanup is designated to the Coast Guard, with advice from other federal agencies.

Rear Adm. Robert C. North, retired, who was commander of the Coast Guard’s Eighth District from 1994 to 1996, said that decisions in these situations are made collectively, but that the buck essentially stops with the federal coordinator — in this case, Admiral Landry. “The federal on-scene coordinator is kind of the one individual to say, ‘I think we need to do more or that’s adequate,’ ” he said.

If the government determines that the responsible party is not up to the job, it can federalize the spill, running the cleanup operations without the private company but billing it for the cost. This is a last resort, however.

In this case, Admiral North said, the oil companies have more technology and expertise than the government.

“It doesn’t appear that federalizing it would bring in any more resources,” he said.

Officials from BP and the federal government have repeatedly said they had prepared for a worst-case scenario.

“There are not much additional available resources in the world to fight this thing offshore,” said Doug Suttles, BP’s chief operating officer for exploration and production, in an interview. “We’ve basically thrown everything we have at it.”

Mr. Suttles said that BP’s efforts did not change after it was disclosed, on Wednesday night, that the leak was estimated at 5,000 barrels a day, five times larger than initial estimates suggested. He said BP, which is spending roughly $6 million a day and will likely spend far more when oil reaches land, had already been mobilizing for a far larger spill.

However, he did not deny that BP initially thought the slick could be stopped before it reached the coastline.

“In the early days the belief was that we probably could have contained it offshore,” Mr. Suttles said. “Unfortunately, since the event began we haven’t had that much good weather.” The first weekend after the sinking of the rig, choppy seas brought the cleanup to a near halt, and made more complicated tactics such as controlled burns impossible.

But even after the weather cleared — and just a couple of days before officials began acknowledging the likelihood of landfall — the chief executive of BP expressed confidence that the spill could be contained.

Adm. Thad W. Allen, the commandant of the Coast Guard, said Friday that he agreed the situation is catastrophic and could continue to unfold for up to three months, but he said he remained satisfied with the response of his team, saying that even if they knew that the leak was 5,000 barrels a day, they would have responded the same.

“While it may not have been visible to the public, from the very start, we have been working this very hard,” he said.

Within a matter of hours of the report of the explosion, the Coast Guard had dispatched three cutters, four helicopters and a plane to the scene, helping ultimately to save 90 workers, including three critically injured workers who were sent by helicopter for emergency care.

“We have never tried so many different methods for a large spill on the surface as we have during this, and I have been doing oil spill response for 30 years,” Admiral Allen said.

But he acknowledged that the oil leaks are growing, and in fact said officials still do not understand why more oil is not already leaking from the drill site, as it is still a relatively limited flow compare to the enormous surge that could spew out of the well if there were no restraints on it.

The Gulf coast oil spill

Horror from the deep

Watching and waiting after the Deepwater Horizon spill

Apr 29th 2010 | HOUSTON | From The Economist print edition

THE spill has been unfolding for more than a week, pouring at least 1,000 barrels (159,000 litres) of oil a day into the Gulf of Mexico, and probably a lot more than that. It began on April 20th with a fire and an explosion on an exploratory rig 40 miles (65km) from the Louisiana coast. Eleven workers were lost, and several days later it became apparent that the well underneath had begun to leak. By April 26th the slick was 80 miles across, with the western part 36 miles from reaching the coast. By April 28th, as The Economist went to press, it was 100 miles wide and only 16 miles from Louisiana’s shores. It was feared that it might reach land by as early as April 29th.

An array of state and federal agencies are on the scene, skimming up oily water, installing thousands of feet of boom in an attempt to contain the oil, and burning off some of the slick. BP, which was leasing the rig, will spend at least $100m on the clean-up. Much depends on the wind, which could push the oil out towards the open sea—or in the other direction. If the oil does reach Louisiana, the costs will be grave. The coastal marshes are home to abundant and various animal life, as well as sizeable fishing and tourism industries.

It is terrible timing for Barack Obama. In March he proposed opening new stretches of America’s coasts to offshore drilling. Some observers guessed that he was trying to smooth the way for a climate-change bill by offering Republicans a present. So far, though, there has been no response.

Now environmentalists will point to the spill as a reminder of the dangers of offshore drilling. They have a point. Nancy Kinner, co-director of the Coastal Research Response Centre at the University of New Hampshire, explains that oil rigs rarely have accidents: “The risk might be one in 1,000, or one in 2,000.” Of course, she adds, there are hundreds of rigs out there. This spill might be shocking; but it was hardly unforeseeable.

RPezzie wrote:
Apr 29th 2010 3:32 GMT
I think that Obama’s plan to allow more off-shore drilling is like one step backwards before one step forwards. We have barely begun to secure real alternative energy momentum, and to allow more off-shore drilling throws the message in the wrong direction. We do not have time to to continue on the path of off-shore drilling, we need to be throwing all our energy into developing alternative energy strategies if we are going to have air clean enough to breathe and water clean enough to drink in 50 years
http://www.cnn.com/video/data/2.0/video/us/2010/04/30/ac.oil.slick.intv.cnn.html

April 30, 2010

OPEC’s Speculative Position

Filed under: Uncategorized — ktetaichinh @ 4:48 am
Tags: , ,

By LIAM DENNING

Like comedy, correlation analysis rests on timing.

In its latest monthly report, the Organization of the Petroleum Exporting Countries put a chart front and center showing the price of oil tracking closely the level of open interest in Nymex oil contracts. The message was that speculators are driving oil prices higher.

The timing is interesting in several respects. The Commodity Futures Trading Commission wants to limit the size of positions taken by speculators in the oil futures market. The deadline for public comment on the draft regulations passed Monday.

[C1.SKYBOX2] TKkOil facility in Jubail, Saudia Arabia

Position limits are aimed at curbing speculative excesses, which some blame for the spike in oil prices in 2008 and the 65% increase in prices over the past 12 months. A particular target is the passive investors putting money into buy-and-hold oil futures funds.

These funds do create demand for futures. But the effect on oil spot prices is more subtle. Passive investors raise the price of futures relative to the spot price of oil. That’s a big reason why the oil futures curve has sloped upward for most of the past five years, corresponding with when investment in commodity funds really took off.

As energy economist Phil Verleger observes, that premium for oil delivered further out in the future can create an incentive for sellers of futures to buy physical oil, store it and sell it forward. The result is bigger inventories of oil, acting as a buffer against shortages arising from unexpected swings in oil supply or demand. Mr Verleger points to this winter’s cold snap, which should have caused heating-oil prices to spike but did not due to the security provided by high inventories.

[OPECHERD]

It’s worth remembering that after oil prices crashed in 1998, OPEC specifically targeted cutting global oil inventories to raise prices. As the past decade has demonstrated, it certainly helped in that regard.

This is why OPEC would love to see passive money forced out of the futures market. This would reduce the premium to spot prices and, hence, the incentive to store oil. Initially, the unwinding of these trades might cause oil prices to drop significantly as barrels flooded onto the market. Longer term, however, lower inventories would hand market power back to those producers controlling the world’s swing spare production capacity: Step forward OPEC.

In another interesting twist of timing, OPEC’s chart only begins in September 2009. As Deutsche Bank points out, extending the analysis back just to early 2008 would show a period during which net long positions on Nymex were falling yet crude was racing toward its all-time peak. It puts correlation between changes in net positions on Nymex and oil price moves at 17%—positive but hardly in lock step.

Even if OPEC’s timing is off, the sight of a cartel bemoaning market distortions really should raise a smile.

Uganda Seeks to Reconcile Oil, Nature Government Plans for Drilling in National Park Spark Worries That ‘Money Will Win Over Animals’

Filed under: Uncategorized — ktetaichinh @ 4:18 am
Tags: , ,

BULIISA, Uganda—One of Africa’s biggest nature parks has turned into a battleground over oil, pitting foreign energy companies and the government of Uganda against environmentalists eager to shed light on their venture.

Oil companies led by London-listed Tullow Oil PLC have found oil reserves estimated to hold up to two billion barrels in the Albertine Rift Valley, which contains Murchison Falls National Park. The park is one of Uganda’s biggest tourism draws and home to elephants, giraffes, lions and rare birds.

Tullow’s project, which contains one of Africa’s biggest onshore oil finds in decades, is seen as crucial to the Central African nation’s economy as the government attempts to diversify away from tourism and rely less on foreign aid. The government has given a Tullow consortium the green light to explore and drill in the park.

“As much as we need to protect the environment, oil is an important resource for the country if properly managed,” said Aryamanya Mugisha, the executive director of Uganda’s state-run National Environmental Management Authority, or NEMA.

That stance has irked environmentalists and villagers who benefit from park tourism. Protected areas support over 80% of Uganda’s tourism industry and bring in about $600 million a year in revenue, according to official estimates.

Big oil and environmentalists have never had an easy relationship, but tensions in Uganda run especially high. Civil society groups say that many of the government’s decisions surrounding oil have been shrouded in secrecy and that details of Tullow project, including any clear plan to minimize its environmental impact, haven’t been disclosed.

Environmentalists have put pressure on the government to disclose its production-sharing agreement by filing several lawsuits in Uganda’s capital, Kampala. Production-sharing contracts aren’t normally made public.

“The [Ugandan] government is totally uninterested in preserving the wildlife,” says Jacqueline Weaver, a University of Houston law professor specializing in oil industry law and contracts, who has visited Uganda and consulted with the government, oil companies and civil-society groups on oil contracts there. “Money will win over animals every time.”

Tullow is one of the world’s largest independent oil companies, with a $16.5 billion market capitalization and a string of recent Africa successes, including a big Ghana offshore discovery. In Uganda, it has begun drilling appraisal wells and expects commercial production to start next year.

To shoulder the project’s financial burden, Tullow has enlisted France’s Total SA and China’s CNOOC Ltd., each of which will take a third in a joint venture, say Ugandan officials.

Tullow Vice President Tim O’Hanlon told executives at an industry conference last week that the company expects the Ugandan government to approve the new partnership, valued at an estimated $5 billion investment over five years, “within weeks.”

Production in three Uganda oil blocks 100%-owned by Tullow—including one that covers some park land—is expected to reach around 150,000 barrels a day by 2015, Tullow has said. African oil giants Nigeria and Angola produce about two million barrels a day.

[UGANDA]

Mr. Mugisha, the environmental regulator, said Tullow doesn’t submit plans for proposed activities on time but has pressed NEMA to approve projects quickly following the discovery of oil reserves. He says the government’s rush led to regulatory lapses, such as not ensuring proper disposal of wastewater or drill cuttings, which can lead to pollution of nearby bodies of water which are frequented by locals, livestock and wild animals. The regulatory agency said Tullow hasn’t yet put in place an oil-spill contingency plan ahead of extended well testing.

NEMA is a semi-autonomous body under the Ministry of Water and Environment, and can withhold approval of drilling projects if impact assessment reports are deemed insufficient.

Tullow says it has established an environmental-management department and submitted a comprehensive environmental-impact assessment report to address shortfalls cited by the regulator. It aims to manage and dispose of wastewater and drill cuttings as well as restore grasslands at drilling sites.

“Tullow is aware of the sensitivity involved in working in wildlife reserve areas,” said Paul Coward, a company environmental manager. “We want to build the oil and gas sector in Uganda and that means building the people as well.”

The Ugandan government says it hasn’t disclosed details about oil contracts because it’s bound by confidentiality clauses. Tullow says it would be willing to reveal more details of its drilling program and contracts, but the Ugandan government has refused to do so.

Tullow’s presence is hard to miss around Buliisa, a dusty town bordering Lake Albert, where road signs bear distances between towns alongside Tullow’s logo.

The oil venture rankles some. “I think some [local government officials] are very excited about oil and don’t have the foresight to consider what future effects oil might have on the community,” said Blasio Mugase, 70, a local chief of the Bunyoro ethnic group, who was wearing a Tullow hat. “The income we’re getting from [Murchison] is great. The government can’t expect oil money to come and replace game parks.”

Akelo Oliver, a fisherwoman on the shores of Lake Albert on the outskirts of Buliisa, stacked the day’s haul of tilapia in piles to dry under the sun. Behind her an oil rig rose into the sky. Ms. Oliver said the sound of the rig is a combination of a dog’s howl and a generator’s whirr.

“We don’t sleep,” she said. “No one has talked to me or told me about what they’re doing.”

Oversight of oil projects in nature reserves will most likely end up in the hands of the Uganda Wildlife Authority, local officials say. The UWA, a semi-autonomous body set up by an act of parliament in 1996, says it has already run into difficulties.

“We’ve been castigated for licensing in protected areas,” says UWA spokeswoman Lillian Nsubuga. “Meanwhile oil companies are saying we’re trying to sabotage their efforts. We’re in the middle and everyone feels we’re doing the wrong thing.”

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