BP Under Attack

Jim Brown
 
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The remaining five defendants in the Deepwater Horizon trial have aligned themselves against BP in the second phase of the liability trial.

The second phase of the trial is to determine exactly how much oil flowed out of the Macondo before it was capped. BP initially claimed the flow rate was only 5,000 bpd. A witness against BP said the company could have capped the well two months earlier if it had used the method that eventually worked.

BP was told by several engineers that capping the blowout preventer (BOP) with another set of valves and then turning them off was the best way to solve the problem. BP claims they were worried the additional weight added to the 90 ton blowout preventer could have created a dangerous condition and fractured the sea floor and allowed oil to escape the well. Cracks would have been even harder to seal than the BOP.

BP complained that cutting off the bent tubing at the top of the BOP was another challenge to the early capping process. BP eventually cut it off using a Remotely Operated Vehicle or ROV.

Edward Ziegler, a safety consultant appearing as an expert witness, told the court the process of attaching a new BOP to the top of the old one was an established technique years before the Deepwater Horizon disaster. If BP had the equipment on hand they could have sealed the well two weeks after the initial explosion on April 20th. Even if the equipment had not been readily available and they had to adapt a preventer not designed for that purpose it could still have been ready by mid May.

A Transocean employee testified they had a "capping stack" ready for use in mid June but BP refused to use it.

The aligned parties include Transocean, Halliburton and the states of Louisiana, Mississippi and Alabama are trying to pin the majority of the blame on BP for intentionally misrepresenting the volume of the spill and then delaying proven remedies like the capping stack in favor of things like the "top kill" where they injected golf balls and shredded tires into the BOP in an effort to stop it up. BP also tried to set a cover over the well and pipe the oil and natural gas to the surface. Witnesses testified that neither attempt could have possibly succeeded given the actual flow rate many times what BP was disclosing to the public. Had they disclosed the accurate flow rate the attempted solutions would have been immediately written off as impractical.

BP claimed 5,000 bpd while Halliburton's estimate at the time was 30,000 bpd. The eventual estimates were closer to 50,000 bpd.

Transocean and Halliburton are trying to get the judge to cut off their liabilities as of May 1st when BP refused to use the capping stack to halt the flow of oil. They claim the deliberate misrepresentation of the flow rate hampered their efforts at finding an alternate solution and therefore they should not be held liable.

The judge has heard repeated testimony from numerous parties in the case claiming BP intentionally misled them on the flow rate. BP employees have been censured for deliberately deleting emails and correspondence regarding the actual flow rate. The aligned parties believe BP rejected proven efforts to stop the flow because the efforts would have exposed the cover up and create greater liability for BP. In reality by covering up the flow rate and trying a series of "low flow" techniques first BP actually incurred more liability and could be found grossly negligent and be forced to pay a much higher fine for the oil spilled.

The best case is the truthful case and it would have saved BP tens of billions in damages, cleanup and compensation payments. This trial only has one conclusion. BP will be found liable with RIG as a minor participant and HAL shouldering more of the liability because of the flawed cement seal.

If the judge finds that BP was not negligent it would cut $7.5 billion from the maximum $18 billion fine facing BP today. If the judge decides Transocean and Halliburton were powerless to force changes to BP's tactics and were misled by the false flow rate claims we could see their penalties cut by 70% or more.

Tropical Storm Karen

Karen is fading from her former glory and has declined to sustained winds of only 30-35 mph. The storm has stalled off the coast of Louisiana and is eventually expected to move almost directly east to make landfall in Florida. Alabama and Mississippi are now expected to see only rain and some wind gusts. The southernmost tip of Louisiana is expected to see the heaviest winds and waves.

The problem with Gulf storms this year is a terrible case of wind shear. High winds in different directions at different altitudes are tearing the storms apart before they can grow large enough to be a complete weather system.

APC, CVX, XOM, BP, BHP, RDS.A, MRO and WMB all reported they were resuming normal operations in the Gulf. At one point early Satrday almost 62% of Gulf oil production or 866,000 bpd and 48% of natural gas output or 1.8 Bcf, had been shut in because of the storm risk. It will take a couple days for all of that production to be restarted.


Bakken light sweet crude prices fell to the lowest level in more than 15 months after Canadian light production increased and refineries began shutting down for fall repairs. Canadian light crude production rose +39% to 291,000 bpd after a lengthy maintenance outage. Bakken oil for delivery in Clearbrook Minnesota dropped -$2 to a discount of $12.50 to WTI prices late Friday.

Many refiners upgraded their plants to process heavy sour crude over the last several years in order to handle the expectations for more imports from Saudi Arabia and Venezuela. When the shale revolution began to produce significant amounts of crude at a lower price they offset the need for heavy crude imports.

As shale production continues to grow it will eventually eliminate the need for light crude from Africa. We get a large portion of our light crude from Nigeria. Pushing that crude back into the market should lower global prices.

Meanwhile here in the U.S. the abundance of light crude from shale is eventually going to overload our refining capacity for that type of crude. Producers will end up competing with themselves as refiners find themselves in the sweet spot with multiple sources bidding for their business.

Normal unplanned outages are also a major challenge for shale crude sellers currently shipping their crude by rail to refiners. The Northern Tier Energy St Paul Park refinery in Minnesota closed one of two crude units after a fire. The unit will be down 4-5 weeks.

It is ironic that WTI prices are rising because of a new pipeline from Cushing to the Gulf to make it easier to sell shale oil to coastal refiners. At the same time Bakken crude prices are falling because of the rapidly increasing production of shale oil.

Buyers for Bakken crude at the point of origin have to pay to ship it to a refinery several states away. That influences the pricing for the crude in North Dakota. Bakken crude was trading at a $19.58 per barrel discount to Brent at the close on Friday. They need to get that pipeline to the Gulf open as soon as possible to open up new refiners as customers.

Market

The Dow continued to decline last week but the Nasdaq and Russell 2000 posted gains. Traders seem to believe everything will work out in Washington and a big rally will follow. While I do believe everything will work out since the alternative of a U.S. default is not an option I am not convinced there will be a "lasting" rally afterwards.

The yelling and screaming in Washington is likely to heat up even further over the next week. The president and Treasury Secretary Jack Lew are actively trying to talk down the market in hopes a falling market will force lawmakers to give up their battle. The president said on multiple occasions that Wall Street had better take note because "this time is different." He was able to push the markets lower on Thursday but they came right back on Friday. Lew was on five Sunday TV shows warning in strong language about the dire threat to the U.S. if the debt limit was not raised. That is another effort to talk down the market and force lawmakers to concede defeat.

The republicans are getting blamed for the shutdown but it is the president who has said many times "I will not negotiate on the debt limit." The republicans have offered numerous compromises and the democratic senate has refused to even sit down at the conference table and talk about them. Whose fault is it really? The party submitting compromises on a daily basis or the party that refuses to even talk about the issues except in derogatory terms with the press.

Eventually both parties will have to compromise. As the clock ticks toward the Oct 17th deadline the headlines will continue to become more hostile and the threats about a debt default will become increasingly dire.

I still believe the escalating headlines this week will force the market lower. However, we only saw that on the Dow last week. It is possible the "everything will work out" mentality will ignore the headlines and take us higher.

There are a significant percentage of investors that believe the eventual compromise will be followed by a blowout rally. That may be true but it may not be a yellow brick road to 1,800 on the S&P. The seasonal trend in October is a sharp decline between Oct 19th and 28th as fund managers restructure their portfolios ahead of their fiscal year end on Oct 31st. Seasonality is calculated over a long period and individual months can buck the trend. I think we should accept any post shutdown rally but keep our eyes on the exits in case of a month end restructure events.

Jim Brown

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