As the first oil from the massive oil spill in the Gulf of Mexico starts reaching the Louisiana coast, here are a few thoughts on the spill and what it will mean over the coming months:
1. This a “reputational disaster” for the entire US offshore business. That’s the assessment of David Pursell, a managing director at Tudor Pickering Holt and Company, a Houston-based energy investment banking firm. The results of that will likely be:
- Drastically higher insurance rates for all operators working in the Gulf of Mexico. Rates had gone up dramatically after Hurricanes Rita and Katrina. Now they’ll go yet higher which will mean higher costs for the whole industry.
- The spill also means less offshore drilling in US waters. The chances of the Obama administration approving more offshore leases in the wake of this disaster are slim and none. And as my father used to say, “Slim left town.”
- Those factors will mean increased oil imports in the future. Any decline in US offshore oil production (30% of US oil production comes from the Gulf of Mexico) will necessarily mean more imports.
2. The best experts in the industry still don’t know what happened. It may have been a bad cement job. No one knows why the blowout preventers didn’t work or why they still can’t be activated.
3. The environmental damages caused by the spill will almost certainly eclipse those of the Exxon Valdez disaster. The volume of oil spilled in the Gulf will almost certainly be far less than the 11 million gallons spilled by the infamous tanker, but the cleanup from the Alaska spill was largely contained within Prince William Sound which had rocky beaches that could be steam cleaned. The oil that is heading into the Louisiana marshes cannot be corralled or managed in anything like the manner used in Alaska. And the Valdez spill happened on the surface. This oil is emerging from leaks 5,000 feet below the surface, which means the oil can bubble to the surface long distances from the well. Once on the surface, it can now drift
4. What the hell is wrong with BP? Just a few years ago, BP launched a hugely expensive ad campaign touting itself as “beyond petroleum.” The reality is that BP’s safety record is beyond pathetic.
In March 2005, BP’s Texas City refinery was hit by explosion that killed 15 and injured dozens. That accident resulted in a record $87 million fine against the company by the Occupational Safety and Health Administration. A few months later, the company’sThunder Horse platform, a $1 billion investment in the Gulf of Mexico, almost sank. Then came the problems with leaking pipelines in Alaska. Now comes the Deepwater Horizon disaster. Expect litigation, and lots of it, aimed at BP. I’m no fan of lawsuits, but BP will richly deserve all of the lawsuits and all of the bad publicity that it gets. The Texas City disaster should have been a wake up call. It wasn’t. And now the entire oil and gas industry is being – pardon the pun – tarred with the same brush as BP.