$20 billion is a chunk of change even for BP (BP).
You can bet that a lot of oil company CEOs are trying to figure out if they can afford to keep drilling in the Gulf of Mexico (whenever that’s possible again.)
If the $20 billion fund that BP has agreed to put aside for the Deepwater Horizon disaster is the new size of an oil company’s potential minimum liability for a spill in the Gulf, you can bet that a lot of those CEOs are going to decide they can’t play.
And that becomes even more likely now that insurers are cutting back on their coverage for spills in Gulf waters. In written testimony John Lloyd, chief executive of Lloyd & Partners, told the U.S. Senate on May 11 that available insurance coverage could drop by as much as 30%. Premiums have already climbed by 50% for deep water rigs.
That’s likely to leave some oil companies faced with an alternative of coughing up extra cash for insurance (if they can get it), self-insuring (if they can afford it), or selling out of drilling leases and projects (if they can find a buyer).
But there will be winners from these decisions.
Oil companies with deep pockets—deep enough to pay higher premiums or to self-insure—and who have confidence (justified, we all hope) in their ability to drill without disaster will be looking at a buyers’ market in deepwater Gulf of Mexico leases over the next few years. Prices are likely to fall enough—after all there will be lots of sellers and relatively few potential buyers—that even after higher insurance and regulatory costs these leases will be selling at bargain prices.
Companies that fit my description include Chevron (CVX), ExxonMobil (XOM) Royal Dutch Shell (RDS), and possibly Apache (APA).
Chevron and Royal Dutch already have a major presence in the Gulf with Chevron’s Tahiti and Blind Faith and Shell’s Perdido and Mars projects. Apache has recently agreed to a deal to buy Mariner Energy (ME) and its deepwater projects.
Smaller companies—potential sellers–with deepwater rigs include Devon Energy (DVN), Marathon Oil (MRO), Newfield Exploration (NFX), Nexen (NXY), and Noble Energy (NBL).
The speed with which smaller producers decide to exit the Gulf will be influenced by the success of Anadarko Petroleum (APC), a 25% partner with BP in the Macondo well that is the sight of the Deepwater Horizon blowout, in passing all the cost to BP. Anadarko is on the hook for 25% of the costs (with another 10% allocated to Macondo partner Mitsui) unless BP is found guilty of gross negligence in running the drilling program. Anadarko hasn’t yet filed suit against BP, but the company has made no secret of its belief that BP was grossly negligent or of its intention to bring legal action.
A successful suit would make it much more attractive to smaller companies to sell a majority interest to bigger deep-pocket partners (while retaining a minority stake) rather than exiting completely.
Investors know that the Deepwater Horizon disaster will reshape the energy industry in the Gulf of Mexico. We just don’t know exactly how yet.
With this post I’m adding Chevron to my Jim’s Watch List.
Full disclosure: I don’t own shares of any company mentioned in this post.
I know what you mean. Ive lost more than a few myself. The word processing component of the software that allows comments to be posted leaves something to be desired. And the space is small (which I guess keeps the length of the rants down).
Energy policy is tough because you’re talking about taking dollars from the pockets of the powerful entrenched. But a good start would be to not allow the perfect to be the enemy of the good. There is no perfect solution until science creates the enzymes necessary to convert complex to simple sugars. Celulosic ethanol is the holy grail for transport fuel. We just have to dedicate enough billions to get there. It will be a fraction of the cost of the wars in Iraq and Afghanistan, and at the rate we’re going there, may not take much longer…
I’m rather frustrated; I wrote a long, insightful, respectful response; and I lost it. I think I need to write in word and paste it.
South, go back to the RS article: the 5000 BPD and “reasonable foreseeable” comments were specifically about a SHELL project, not the BP island. I’m sorry, but evidence you used against BP isn’t even accurate. Having said that, I agreed with some of what you wrote above (2nd half of 1st paragraph.)
We need a real energy policy (not cap & trade) and ASAP. Scaremongering articles like the RS though aren’t going to help make the policy. Good night.
wrong on all counts (except that you deserved it). 😉
My criticism, had you read it closely, was that BP was going forward with drilling a well using a technology that had never been tried before and which BP can’t be certain will work, and can’t be certain what the potential consequences are if it doesn’t work, in an environment where the consequences of a failure could be disasterous beyond imagination. This is called externalizing costs- a favorite tactic in this country. Heads the entrenched win (Big oil, Bankers, bondholders, etc), tails we (the taxpayers) lose. The entrenched have been externalizing the costs of doing business, passing them off to the rest of us, and then pocketing all the profits, all the while bitching about having to pay taxes to provide funds for the government to pay the costs that have been externalized.
You don’t see that? Do you think it’s unreasonable to expect BP to beta test their methodology somewhere other than thousands of feet below the frozen surface of the Arctic ocean? You don’t think it’s reasonable to require them to have a plan in the event of a spill, as opposed to claiming such a spill is not “reasonably foreseeable”? What frigging planet are you living on?
The President Cheney comment was obviously not a mistake; it was tongue in cheek. But did not Bush brag about being the “CEO president” and leaving the details to his cabinet and Cheney. If Bush was the CEO, what did that make Cheney?
Did not Cheney invite the energy companies to write the administration’s energy policy and implementing regulations, and then claim executive privilege to keep secret the notes of the meetings and the drafts of the regulations?
Did not the Supreme Court rule in his favor, keeping such notes and drafts secret to this day?
Name dropping will get you nowhere- nobody gives a rat’s ass that you can convert the torque of mack trucks to the torque you could get with a breaker bar. It’s totally irrelevant to anything being discussed. It shows you’ve got a hammer, but it doesn’t show that you’re using it on a nail. But you’re improving, I’ll give you that. Keep trying.
In some ways I suppose I deserved that. On the other hand if we want to talk about being taken seriously:
RS is pretending when they write about energy and it shows. Among other things, they clearly don’t understand the relationship between Torque and Hp. 50 Mack engines is about 1.8MW of power, or the equivalent of 360 homes, not that much. And 105k ft-lbs of torque isn’t huge: I can get to about 1k with my breaker bar. So we’re supposed to take you seriously when you quote RS as your source; when you believe their writings? They’re a pop magazine for goodness sakes!
How serious can anyone take you with the President Cheney “mistake”? It’s lose/lose for you whether you did it on purpose or not.
So you gave me shit for criticising a drilling plan of which you know nothing, based on an article you hadn’t bothered to read.
And you expect to be taken seriously?
Alright, I found it. Not sure how the 50 Mack trucks in the article became 150 in your post; but that’s nitpicking. I see quotes from the NRDC and DofW but not one from any source saying something positive (though obviously that was not the intent of the article.) The quote “[drilling] beyond its proven limits” kind of annoyed me. Since when do we stop any kind of progress because ‘its not proven’. Somewhat of a ridiculous premise; don’t you think? Such an attitude would have stopped most of man’s great inventions in their tracks if we truly believed it. I’ll look elsewhere for information to make up my mind on the merits of the ‘island’ idea.
No I haven’t. But I’m not sure I can trust Rolling Stone to get the technical details right without, shall we say, a certain bias. I certainly can’t trust them to be impartial. Having said that I’ll look elsewhere for better info. but still see if I can find the RS article online. Are you trusting RS to be accurate since you’re against it? (Note that I’m not saying I trust BP; only that the idea sounds, at first glance, to have merit since we’ve solved the engineering issues to put up large buildings on man-made islands.) Obviously, I need to find the article.
Did you read the article?
Thanks
Actually, while not a D&E guy, the Alaska idea looks like a pretty good way to me. If we can build skyscrapers on man made islands it sure looks like a decent way to control risks of drilling by using one as a platform. Any particular reason you appear to be against it?
Better
South: Never meant to be a one and done. Apparently, I am a technical lightweight as I managed to put that post in before I was done and then completely lost the follow-up before posting it. By then, it was late and I had to go to work to support not only my young children, but the 47% of us who don’t pay any taxes, and for all the new give-aways (whether Wall Street’s or Dave Obey’s.) In the tongue in cheek words of Jim, I’m a sucker because I actually play by the rules. So; I’m back, and I’m anything but a lightweight when it comes to energy.
Yes, we’ve had 8 administrations who, along with Congress, have failed us with regard to energy leadership (Watch Jon Stewarts take on this.) But ticktock is right on: everything is blocked before it has a chance and you’re buying right into it with the Alaska comments.
First wind: its intermittant nature is only the beginning. The real problem is variation as the wind blows. The force of wind varies as the cube of the speed; and thus the energy produced. If you can figure out why this is big deal for our grid, I’m impressed; if you can’t and want to know why let me know. Suffice to say wind has limitations that greens seem unwilling to recognize.
Solar has this problem (other than night) called humidity (think light scatter) that will limit its effectiveness as the holy grail solution.
How about biomass? Oh yeah; it will take 4.5 billion acres (2x the entire US land area) to replace just the 46% of our electricity made by coal in a sustainable fashion. And don’t forget while it’s easy to make a simple sugar into ethanol, it’s hard as hell to make cellulose (a complex sugar) into a simple sugar: so all those fantastic announcements saying they will make trees and corn stover into ethanol for $2.50/gal are blowing smoke (Eg. Range fuels)
Smart Grid? Good idea; but to make it work we all have to give control of our thermostats (and future car charges) over to the ‘Utility’. The progressive community of Boulder, CO tried that: they couldn’t get them ripped out of their house fast enough.
The fact is there is no replacement for oil. If the green’s really believe that CO2 is the problem they should be supporting every alternative, especially nuclear. Unless someone can come up with a huge breakthrough in electrical storage, nuclear is the only energy source that will allow us a prayer to lower our oil consumption (via a new transportation model.) But as Yclept says, we will still need it for materials, and just as importantly, for our diesel engines (you can’t pull a plow or run a combine with a battery.) So unless we want to back up the bus 200+ years, the greens need to wake up.
RossLEdgar; you need to look at South’s other posts to see why I was so hard on him, normally I just ignore it, but the ‘ignorance’ on this particular one hit too close to home. And don’t get the idea I’m a free for all kind of guy: I’ve nothing but disdain for Wall Street fools.
What I want to know is what is the best way to help provide for my children by making sure I’m profiting on the more expensive oil which is coming (and not just paying for it?
Any thoughts on Ensco, premium Jack ups and a new deepwater fleet. The drillers sure look cheap with dividends to boot.
what is the chances of a well run company having a blowout like the Macondo Exploration well? About 1 out of 40,000. You will literally have to try to have a blowout after the new regulations are put in place. Think about it. With all the different operators drilling approx 40,000 wells in the GOM, and only 2 manage to have a blowout. It will be hard to end up with a blownout well as BP is dealing with if you simply follow the procedures that are in place and used by many different operators in the GOM.
We cannot do without the oil here in the U.S. since it represents 33% of our countries crude production. You cannot get the flow rates onshore as they have in the GOM, thus the big and safe operators will be buying up the rights to leases that they have already worked and know about.
Again, look at BP’s safety record; 760 violations to Obama’s most hated Exxon’s single (1) violation. Having worked in the E&P business, there were about 15 different events that lead up to the BP blowout, any of which could have changed the outcome of the blowout. If the blowouts were so easy to happen, there would not have been 40,000 wells drilled in the GOM without any major blowouts. Only BP and Pemex have had a major well failure, and both were due to not following basic procedures.
I’ve been convinced for weeks that offshore drilling (particularly deep-water) is dead. Regardless of ability to pay, what company in its right mind would ever again take on the amount of risk to bring in a well when measured against the amount of profit potential it represents. Maybe if gasoline hits $50/gallon, but I don’t see it as a viable business model short of that type of return. By the time the price rises to a level high enough to make this calculation feasible, it (the price) will have become untenable for the consumer who perforce will have moved to some alternative transportation model. Oil consumption will be more and more directed to raw material for plastics, pesticides, and such and less and less to fuel (with the possible exception of aviation, where it may prove irreplaceable). It will be too expensive for ground transportation fuel. For the time being, new onshore wells and existing production will keep the price from rising to the point where the deep water drilling business model would make sense again.
There’s nowhere in the world that governments aren’t going to emulate the vindictive example that is arising around the current spill, so the gamble has to be considered the same regardless of where they drill the hole.
RossLE
You ain’t seen nothing yet! This is just the morning war-mup…
The REAL action will be the posts to Jim’s latest re: financial reform; yep, that will bring them all out of the woodwork.
We calls it the Friday Fray-Cuss, or sometimes the Friday Free-For-All. No admission fee, no holds barred, no prerequisites for literacy or logic or rationality or objectivity. And it is all anonymous- they suspend the Full Disclosure rule.
I love reading this blog. You folks are some of the most interesting people I’ve never met. I’m really mostly a “lurker”, but the conversation above is so provocative I can’t help myself even though it’s really off-topic:
southof8:
Your analysis pretty much hits the mark, except that part about Cheney … he was Vice President … wasn’t he?
meboatbuilder:
You wrote that southof8’s posts were mostly “a total willingness to blame conservatives with all that’s wrong with the world.” That’s not true at all. southof8’s post blamed both liberals and conservatives for a lack of an energy policy. He didn’t exactly say it, but he seemed to blame conservatives for the apparently way too friendly way the regulators treated the companies drilling for oil in the Gulf. And that’s not too far off the mark … the previous Administration didn’t represent the oil industry; they WERE the oil industry.
As for the belief that private enterprise always handles everything in the best way it can be handled, just look at the swell job they’ve done in the Gulf and on Wall Street. Millions of jobs lost and along with them, the tax revenue for schools, infrastructure, all the things we need to be competitive with developing countries. Private enterprise created a perfect smashup … too bad the Government can’t just send them the bill.
drmdrd
Not sure if we can move this to investing from politics [oh, sure- they are one and the same…]
I’ve been looking at DO as an alternative to Jim’s Pick RIG- and I like what I see- to a point: a strong company with strong management [+31% ROIC- right Jim?], and best of all they have been making huge special dividend payments to their stockholders for years: giving it back to the owners.
What I worry about most are those large special dividends- can be eliminated at any time. I also worry that most of DO’s and all the other deep drillers’ business is going to be cut off by a moratorium on Gulf drilling [the company says it is working world-wide; true enough, with about 95% of its business in the GoM, and a rig or two in Brazil and Malaysia and N. Sea. If the Gulf is closed down, DO is closed down.
[Sure I read the news- judge overrules…well, judges can be overruled too- and the people are enraged; so, the pols are “enraged”. Here in AZ we already have a 2-year moratorium on drilling for uranium in effect, soon to be extend to 20 years- thanks to the pols. Can happen here over manufactured political trivialities, can happen in the GoM, and everywhere else. Wait till that oil turns the corner past the tip of FL and starts moving up the Atlantic seaboard…]
I think RIG will be hit for some of the damages out of the Gulf disaster; I would otherwise love to put some money into DO…but I think I will continue to wait and see what falls out, or floats up, or goes Belly uP.
There are other oil drilling companies, not out in the oceans, and other good oil plays- e.g. one of Jim’s favorites, SLB. It has been hit hard too, lately- collateral damage. Probably a steal where it is today- probably will go lower.
A small point that may have a big consequence.
“Anadarko hasn’t yet filed suit against BP…”
The contract between Anadarko, BP and Mitsui includes a clause that any disputes will be handled by binding arbitration. Probably no law suits. Thus it will be with no real public record, probably decisded faster, and like you say, gross negligence would need to be proven.
I recently listened to a person with a background in this go over a timeline of the things that happened leading to the explosion, and I came away with the notion that although it was not always “Best Practices” they were “Common Practices” that when combined had an unforseen consequence. Negligence depends on “foreseable”
dont forget the past eight presidents have all talked about energy reform and ending our need for foriegn oil. 32 years years of talk and no action. why? money. there is no democrate/republican. results never change. just gives us something to talk about and illusion of choice.
What about DO and NE?
Gee boat, that’s the best you got? Pretty weak man. Bring that on the playground and you’re one and done.
southof8
Let’s see, negative diatribes; a complete lack of alternative suggestions; a total willingness to blame conservatives with all that’s wrong with the world: pretty much sums up your posts.
Let me repeat the most important part of ticktock’s post “ta lack of any concrete alternative energy policy beyond simple rhetoric. There is nothing really happening in wind, solar or nuclear that isn’t immediately blocked by lawsuits by the same people and groups that portray themselves as “green”.
In retropspect, Blind Faith is a scary name for Deep Water well/project in the Gulf.
Nothing different would happen. Oil would pollute the water, wash up on the shore, close down fisheries and tourism, result in untold environmental damage and economic devestation, there’d be no way to stop it, the government and BP would point fingers at each other, and the out-of-power political parties and their supporters would do everything possible to pin the blame on the party or politician in power for political gain. Probably the only differences would be (a) the third world country wouldn’t have the ability to enforce a demand for a $20 billion slush fund to pay out claims resulting from the damage, and (b) BP’s chairman and CEO would go nowhere near the country for fear of being jailed or worse.
But regarding energy policy, or the lack thereof, yesterday’s Rolling Stone (of Stan McChrystal fame) had a great article on the plans to drill a well roughly eight miles off shore Alaska, in the Arctic sea, which is covered with ice six months of the year. The best part was (if you’re BP), it’s not subject to the (formerly) six month moratorium on off shore drilling, because BP created an “island” two miles off shore on which to mount the driller, and then drill out horizontally six miles to where the oil field is. Everyone freely concedes the technology has never been tried before and they have no idea if it will work. Oh, and the torque to turn the drill will be the equivalent of 150 Mack Trucks. So there is some risk…
But that didn’t stop the MMS from approving the plans without so much as requiring BP to have a plan for how to handle a large spill (over 5000 bpd as I recall), because such a spill was not a “reasonably forseeable event” i.e., it’s never gonna happen so quit being a worry wort Sierra Club.
Sounds distressingly familiar. President Cheney must be laughing his ass off while collecting his Halliburton retirement package.
There was an interesting short video clip (in Portuguese) last week on BBC Portuguese regarding Brazil’s chance to take advantage of this mess in the Gulf by moving PetroBras’s deepwater drilling in the Atlantic even faster. The commentator was standing before a drilling rig platform that was about to be shipped up the coast from Rio to a point north where it would then be taken far out to sea. He was quite gleeful about how Brazil was now joining the major economic powers. Couple that with President Lula’s comment about how Brazil doesn’t need any Gringos telling it what to do in the Amazon since it is Brazil’s.
Not mentioned much in all the screaming, justified or not, regarding the BP disaster is what would be taking place if this had occurred off some 3rd world country? Or even more telling, suppose the parties responsible were not one of the multinational firms that many in this country believe still control the world’s oil supply instead of less than 10%?
In the long, and growing, list of the failures of this administration is their lack of any concrete alternative energy policy beyond simple rhetoric. There is nothing really happening in wind, solar or nuclear that isn’t immediately blocked by lawsuits by the same people and groups that portray themselves as “green”.
So is this going to raise oil prices in the near future?