Shutting Down the Gulf

Jim Brown
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Worries about future restrictions on drilling in the gulf and concerns about closing existing platforms in danger from the spill sent futures higher on Monday.

The growing oil spill actually shrank on Monday from 3,100 square miles to 2,200 square miles but that only means the oil has started to sink. There is still new oil pouring in at the rate of 5,000 bpd so once the wind dies down the slick will begin to increase again.

What won't die down is the worry over politicians talking up their own election chances by proposing new restrictions on drilling in the gulf. Currently there are 57 rigs active in the gulf and there are more than 30,000 active wells. It is a wonder that we have not seen more problems in the past.

I reported in these pages last week that there have been 39 blowouts in the gulf in the last 14 years but I bet you can't name any of these.

The last major spill was a gulf well called IXOT-1 in 1979. It was in 150 feet of water not 5,000. It leaked 30,000 barrels of oil per day for nine months. It took that long to drill two relief wells and stop the leak. That was in 150 feet of water where the spill was easier to control. Can you imagine if the current leak was 30,000 bpd?

The shares of all the gulf players as well as those involved in the spill rose around midday after BP said the first concrete box was nearly ready to be dropped over the biggest leak. BP said it now appears one set of rams in the blowout preventer had closed BUT the sealers around those rams did not seal. Earlier in the day a news report said the flow of oil had been significantly reduced but BP COO Doug Suttles called that statement "inaccurate."

BP increased containment efforts for the oil nearing the shoreline after the inclement weekend weather improved. Unfortunately pictures of oil covered birds, fish and turtles washed up on the beaches are starting to make their way into the press.

BP has begun the first relief well but they claim the process can take months. The second relief well should be started over the next two weeks.

As long as the oil is still flowing there will be greater risk of some kind of government intervention against future drilling. This will continue to pressure energy stocks involved in the gulf and probably keep support under crude prices. The contango increased sharply today with prices for contract farther out in the future rising sharply while current month contracts moved lower. This is investors and speculators pricing in the potential for lower production from the gulf in the months ahead.

Contango Table

Anadarko reported great earnings after the bell today but along with those earnings was news that their insurance coverage was only expected to pay up to $177 million towards their 25% ownership of the well. The APC conference call will be at 10:AM ET on Tuesday and you can bet those will be the first questions analysts ask.

It was also revealed that the Horizon did NOT have a remote controlled shutoff switch on the BOP as required by some other nations. You can bet that this will be a requirement for any future drilling. The U.S. Minerals Management Service (MMS) responded that it does not require a remote control switch as long as there is another procedure for closing the BOP. That procedure in this case was the use of a robot sub to manually close it on the sea floor. This is a routine event but for some reason it failed. I suspect it was due to the stress on the riser as the rig sank. The stress from 5,000 feet of steel pipe collapsing in a pile on the ocean floor was probably more than the BOP could handle and that stress kept the valves from closing.

The White House stressed again on Monday that BP would be held liable for the cost of the cleanup and economic compensation for losses on the gulf coast. That is an open door for claims and you can bet BP management are not having a good week.

Old laws to the rescue. Democratic senators pointed out that the Oil Polution Act of 1990, passed in the wake of the Exxon Valdez, caps economic damage at $75 million. Senator Bill Nelson of Florida, Robert Menendez and Frank Lautenberg of New Jersey quickly introduced new legislation to raise that cap to $10 billion. The new law is dubbed the Big Oil Bailout Prevention Act would eliminate a cap of $1 billion per incident on claims against the Oil Spill Liability Trust Fund. That fund currently has $1.6 billion in assets from contributions from oil companies. The bill will allow payments of more than the fund assets to be made up from future contributions by oil companies. President Obama said he supports the move to raise the caps.

With the red tape flowing and laws changing it is only a matter of time before somebody proposes something that is going to restrict new drilling in the gulf. The countdown clock is ticking.

Jim Brown

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