The World of Oil According to BP - 2010 In Review

BP has once again released this year's version of its Statistical Review of World Energy.  This publication is widely used by energy industry analysts and employees and is considered by many to be the energy industry standard.  Let's take a brief look at how 2010 looked for the world of energy according to "Beyond Petroleum".

BP notes that global energy consumption rose by 5.6 percent on a year-over-year basis, the largest annual growth since 1973.  This is an interesting statistic considering that average oil prices for the year were the second highest on record.  Coal prices were high in Europe but weak in both North America and Japan and natural gas prices were strong in the United Kingdom and weak in the United States where unconventional gas drilling (shale gas and other tight gas lithologies) flooded the market with natural gas.

Many recent projections of longer term global energy use propose that the so-called developed nations of the OECD will see their energy consumption drop over time as their economies become more energy efficient and that the bulk of the growth in future energy use will come from the non-OECD nations of Asia.  This was not entirely the case in 2010.  OECD consumption grew by 3.5 percent, the highest growth rate since 1984 and is now roughly at the same level as it was in 2000.  Non-OECD energy consumption grew by 7.5 percent year-over-year and is now up a rather astounding 63 percent since 2000.  China is now the world's largest energy consumer, using 20.3 percent of the world's total, up 11.2 percent year-over year.

Now let's take a look at the year that saw oil prices rise to levels that have only been seen once before, just prior to the Great Recession of 2008.  Let's look at the demand side of the equation first, followed by supply and then price.

On the demand side, globally, oil is the world's most used fuel, commanding 33.6 percent of the world's total energy consumption.  During the two previous reports for 2008 and 2009, BP noted that oil consumption declined on a year-over-year basis.  Not so in 2010.  Oil consumption reached a record 87.4 million barrels, up 2.7 million BOPD or 3.1 percent.  Interestingly enough, while this growth is rather robust, it is actually the weakest growth among all fossil fuels.  OECD oil consumption grew by 480,000 BOPD and non-OECD consumption grew by a record 2.2 million BOPD or 5.5 percent with China's consumption alone rising by 10.4 percent or 860,000 BOPD. Growth in net imports from China (growing at 14.6 percent) and Japan (growing at 7.1 percent) led the world.

On the supply side, global oil production rose by 1.8 million BOPD or 2.2 percent.  Looking back one paragraph, you'll note that production growth fell short of the growth in consumption.  In 2010, OPEC nations produced 41.8 percent of the world's oil.  Production by OPEC nations rose by 960,000 BOPD or 2.5 percent with production growth from Nigeria and Qatar leading the pack.  Production by non-OPEC nations rose by 860,000 BOPD or 1.8 percent, the largest increase since 2002.  Production growth was led by China, Russia and the United States.  Production decreases were most notable in Norway and the United Kingdom.

Now that we've looked at supply and demand, let's look at something that concerns all of us that consume oil (which is all of us) - the price of the commodity.  Brent crude (Europe's benchmark crude) averaged $79.50 per barrel over the year, still nearly $18 per barrel below the highs hit in 2008 but up 29 percent from its level in 2009.  In large part, production allocations by OPEC led to supply constraints and helped Brent reach a peak of $94 per barrel on the year.  For your information, Brent reached a high of just over $125 per barrel back in April 2011 and is trading in the $115 per barrel range now.  By comparison, West Texas Intermediate, North America's benchmark crude, was trading at just over $90 per barrel at the end of 2010 and reached a high of $114 per barrel in May 2011.

As a geoscientist, I am prone to flip to the reserves-to-production (R/P ratio) page because I find that it tells me the macro picture of the world's oil industry.  According to BP, the world's proven oil reserves reached 1383.2 thousand million barrels and were sufficient to meet the world's oil demand for 46.2 years.  This is down from the previous year, largely because the world's oil consumption rose rather dramatically (as noted above) and its proven reserves rose only slightly.  One note of interest is the change in Venezuela's official reserve estimates.  This revision drove the country's R/P ratio to 93.9 years from its previous 40 year life.  Venezuela now has the world's longest reserve-to-production life, surpassing that of the Middle East as shown in this graph:

Venezuela claims that they now have 15.3 percent of the world's proven oil reserves just behind Saudi Arabia at 19.1 percent and well ahead of third place finisher Iran with 9.9 percent.  To compare, the United States has only 2.2 percent of the world's oil reserves and Canada has 2.3 percent.  

Let's take a brief look at what the International Energy Agency (IEA) had to say in their monthly Oil Market Report released on June 16th, 2011.  The IEA predicts that global demand will reach 89.3 million BOPD by the end of 2011.  Global oil supply rose to 87.7 million BOPD in May after dippling to  87.4 million BOPD in April 2011 with OPEC supply rising by 210,000 BOPD to 29.18 million BOPD.  This is still 1.25 million BOPD below the level prior to the Libyan crisis.  China's oil consumption is expected to reach 9.9 million BOPD by the fourth quarter of 2011 and is expected to average 9.7 million BOPD over the entire year compared to 9.1 million BOPD in 2010 and 8.1 million BOPD in 2009.  That works out to a 19.75 percent increase in demand over a two year period.  Non-OECD nations will see their demand rise from 41.8 million BOPD in 2010 to 43.3 million BOPD in 2011.  Both demand numbers are up from 39.5 million BOPD in 2009.  With these statistics in mind, it is apparent that unless China's economy implodes, they will be the country that drives future oil demand and price.

As I have stated in other postings, I feel that the reserve-to-production (R/P) number or reserve life index is the key to the future of oil production and consumption.  As shown in the graph above, this number has remained static since the late 1980s despite ultra deepwater drilling, drilling in increasingly hostile environments, the growing exploitation of oil sourced from tar sands and the massive upgrade to the volume of recoverable oil in Venezuela.

In my estimation, the reserve life index number is telling us that peak oil is on our doorstep….or behind us.  Only time will tell.

In a future posting, I’ll examine the world’s natural gas situation, particularly in light of the massive shale and tight lithology exploration and exploitation that has taken place in many of the world’s sedimentary basins.  It is most interesting to think that natural gas may be the fossil fuel that bails the world out of a very sticky energy situation.

BP Plays the Blame Game

A few minutes ago, BP released the results of its internal investigation into the Macondo well disaster. The report full report complete with a 29 minute video can be found here and the summary press release can be found here.

In a nutshell, the four month long investigation found that, and I quote:

• The cement and shoe track barriers – and in particular the cement slurry that was used – at the bottom of the Macondo well failed to contain hydrocarbons within the reservoir, as they were designed to do, and allowed gas and liquids to flow up the production casing;
• The results of the negative pressure test were incorrectly accepted by BP and Transocean, although well integrity had not been established;
• Over a 40-minute period, the Transocean rig crew failed to recognise and act on the influx of hydrocarbons into the well until the hydrocarbons were in the riser and rapidly flowing to the surface;
• After the well-flow reached the rig it was routed to a mud-gas separator, causing gas to be vented directly on to the rig rather than being diverted overboard;
• The flow of gas into the engine rooms through the ventilation system created a potential for ignition which the rig’s fire and gas system did not prevent;
• Even after explosion and fire had disabled its crew-operated controls, the rig’s blow-out preventer on the sea-bed should have activated automatically to seal the well. But it failed to operate, probably because critical components were not working.

Basically, there was a bad cement job between the production casing and the wellbore; this allowed hydrocarbons to leak into the production casing and ultimately flow to the surface. The blowout preventer failed and the rig's fire and gas systems did not prevent ignition of the natural gas/oil mixture once it reached the surface.

Basically, BP is scattering blame among Halliburton, Transocean and, I gather, themselves to some degree. Nice to see that everyone gets a share.

Greenland - apparently not the new frontier for BP

In Thursday's Guardian, BP confirmed that they will no longer participate in the next bid round for offshore exploration licences in Greenland. Apparently, both the Greenland government and BP agreed that it would not be prudent for BP to be involved in the bidding process for offshore oil and gas licenses in light of the Gulf of Mexico debacle although the Greenland Bureau of Minerals and Petroleum would not confirm the agreement. BP is currently active in other Arctic areas, primarily in Prudhoe Bay in Alaska where they have experienced a series of environmental issues related to oil spills and pipeline corrosion including a March 2006 spill of 201,000 gallons of oil. Trouble does seem to follow BP.

This development is of interest especially in light of August 24th's update from Cairn Energy where the company announced that they had discovered natural gas in thin sands at their T8-1 well located in the Baffin Bay Basin, the first hydrocarbons discovered in the basin. Cairn is currently operating two offshore rigs in the previously undrilled Baffin Bay Basin, located between the west coast of Greenland and the east coast of Baffin Island. Cairn is also active in other areas of Greenland; they have planned the acquisition of 2500 kilometres of 2D seismic in one exploration area and acquisition of 7500 kilometres of 2D seismic in southern Greenland is already underway. The two wells being drilled by Cairn are part of a four exploration well program approved by the Greenland Government for the Sigguk block in water depths of 300 to 500 metres with targeted drilling depths of up to 4200 metres.

Here's a map from the Cairn website showing their eight hydrocarbon licences in Greenland's offshore:

Greenpeace is already active in the Cairn exploration area where they have been attempting to sail their Esperanza protest boat to the offshore rigs being used to drill the two wells. A Danish Thetis-class warship was sent to confront the Greenpeace vessel outside the 500 metre exclusion zone around the Stena Don rig.

The United States Geoplgical Survey has completed several reports on Greenland's hydrocarbon potential. In its report "Assessment of Undiscovered Oil and Gas Resources of the East Greenland Rift Basins Province", the USGS concludes that the basins on the east side of Greenland contain approximately 31.4 billion barrels of oil equivalent (MMBOE) comprised of oil, natural gas and natural gas liquids. In a similar study entitled "Assessment of Undiscovered Oil and Gas Resources of the West Greenland - East Canada Province, 2008", the USGS has estimated that those portions of the Province on Greenland's west coast that are north of the Arctic Circle contain an estimated 7.275 billion barrels of oil, 51.816 TCF of natural gas and 1.152 billion barrels of natural gas liquids. This Province includes the Baffin Bay Basin where Cairn is currently drilling its two wells. From the Greenland Bureau of Minerals and Petroleum, here's a map showing the current licences that have been granted for mineral exploration for both onshore and offshore areas. To put the size of these reserves into perspective, according to the Energy Information Administration, at the beginning of 2009, the United States had proved oil reserves of 21.317 billion barrels and proved natural gas reserves of 237.7 TCF according to the Oil and Gas Journal.

Here's a map showing geography and assessment units used by the USGS to estimate the petroleum and natural gas potential of the West Greenland - East Canada Province where Cairn is active. The Baffin Bay (AU-4) unit has a mean oil reserve estimate of 1.555 billion barrels of oil and 12.272 TCF of natural gas.

In other BP-related news, in late July, ExxonMobil, BP and Imperial Oil (Canadian subsidiary of ExxonMobil) announced that they have formed a joint venture to explore for oil and gas in Canada's Beaufort Sea located off the north shore of Canada. The drilling leases are located between 120 and 150 kilometres offshore and are located in water between 200 and 4000 feet deep. Both companies will be pooling their leases and have already completed 3D seismic surveys. ExxonMobil and Imperial Oil will each hold a 25% interest and BP will hold a 50% interest. Fortunately, Canada's National Energy Board is reviewing offshore drilling operations as a result of BP's Macondo spill in the Gulf and the new joint venture partners will need approval from the NEB prior to drilling and no drilling is likely before 2014. A major problem with drilling in Arctic climates is the time taken to drill relief wells; it is estimated that it could take up to three years to drill a relief well since ice conditions preclude drilling for more than 50 to 85 days in any given year. As well, while scientists estimate that approximately 25 percent of the oil spilled from BP's Macondo well in the Gulf of Mexico has evaporated, the cold climate in the Arctic precludes that method of spill cleanup.

We'll be watching the National Energy Board in the coming weeks and months as they seek public input as they review drilling requirements and look at what safety and environmental rules are necessary before oil companies are once again drilling offshore wells in Canada's environmentally fragile Arctic.

References:

Greenpeace Standoff with Cairn in Greenland

Drilling in the Canadian Arctic - ExxonMobil and BP

More problems for BP at Texas City - Part 2

In August 2010, the Texas Commission on Environmental Quality (TCEQ) found that between April 6th 2010 and May 22nd, 2010, BP's Texas City refinery allegedly released a mixture of toxic and cancer-causing chemicals over a 46 day period. This is one of the largest chemical releases in recent Texas history according to environmental experts. As a result, BP is facing a $10 billion class action lawsuit seeking damages for 2212 plaintiffs who breathed in the toxic chemicals. Attorney Tony Buzbee who filed the lawsuit says that he has uncovered evidence that BP has experienced 400 releases annually, 200 leaks and one fire per week at their Texas City refinery. In this most recent incident, approximately 538,000 pounds of various chemicals including 17,000 pounds of benzene along with 189,000 pounds of carbon monoxide, 37,519 pounds of nitrogen oxide, 61,000 pounds of propane and 34,645 pounds of isobutane were released over the 46 day period. It appears that BP was aware of the fact that a seal on one of its ultracracker hydrogen compressors was compromised after a fire, however, they elected to keep the refinery online and continued to operate the unit at 55% capacity, continuing to produce gasoline despite the fact that the operation was releasing toxic chemicals. Normally, the chemicals involved would be reused for fuel in the plant, however, BP chose to flare and burn the gases, a process which they knew would incompletely break down the chemicals. Studies show that anywhere between 2 and 20 percent of products that are sent up a flare stack are not burned and pass into the atmosphere. Details about the release of the toxins were not made until BP submitted a final incident report to the Texas Commission on Environmental Quality on June 4th, nearly 2 months after the fact. 

Here's a quote from the class action lawsuit:

"1. Profits over the safety of people. In order to avoid losing the profit from shutting down an operating unit, and in an attempt to avoid the publicity such a shutdown would have garnered in the financial press, the Defendant instead spewed thousands of pounds of one of the most deadly and nastiest carcinogens into the atmosphere, exposing unsuspecting onsite workers and nearby residents.

2. This is a class action, brought pursuant to Rule 23 of the Federal Rules of Civil Procedure, that deals with a large-volume release of 538,000 pounds1 of chemicals and compounds, including an estimated 17,000 pounds of Benzene2, that occurred from April 6, 2010 to May 16, 2010 at the BP Texas City Refinery (hereafter the “Refinery” or the “Facility”); although, such event must be viewed in light of BP’s long and tortured history of failure in the area of Process Safety Management. In this case, tens of thousands individuals were injured and had his or her long-term health put in jeopardy after being exposed to extremely high levels of Benzene and other toxic chemicals while working at the BP Texas City Refinery or by simply living or working in Texas City. Plaintiffs and all members of the Class, the Worker Sub-class and the Texas City Sub-class seek remedy for this exposure, and also attempt to do, through this case, what none of the authorities thus far has been able to do—put an end to BP’s continuous pollution of the air, ground, and water, and the continued exposure to harmful substances of workers at the BP Texas City Refinery. In this effort, Plaintiffs seek punitive damages against BP in excess of $10 billion."

Back in June 2009, the Texas Attorney General also filed a civil lawsuit against BP for poor operating procedures at the Texas City refinery that led to "a pattern of unnecessary and unlawful Emissions Events", events that the lawsuit claims were and continue to be avoidable.

Here's a direct quote from that lawsuit:

"These administrative orders (from TCEQ) show that BP's poor operating and maintenance practices have resulted in an egregious amount of Emissions Events in the past few years. These events continue unabated to the present."

On August 9th, 2010 Texas Attorney General Greg Abbott filed a petition charging BP for the second time in as many years because of this year's emissions as noted above. Here is a quote from the Attorney General's press release:

"Today’s legal action is the second against BP since June 2009, when the Attorney General filed a legal action alleging that the facility’s poor operational practices led to harmful releases following a 2005 explosion that killed 15 workers and injured 170.

Of the 72 violations cited in the State’s ongoing 2009 case, seven involve the same operating compressor unit that was responsible for the emissions in today’s enforcement action. When the unit malfunctioned and caught fire on April 6, BP workers shut it down and routed escaping gases to flares. Rather than shut down associated units while compressor repairs were made, BP chose to keep operating those other units, which led to unlawful release of contaminants to the air for almost 40 days. BP self-reported the incident to the TCEQ.

The State’s investigation shows that BP’s failure to properly maintain its equipment caused the malfunction and could have been prevented. BP’s own self-reporting data indicate that seal filters protecting the compressor failed because of an iron sulfide buildup, likely because BP failed to properly maintain these devices.

The Attorney General is seeking civil penalties of no less than $50 nor greater than $25,000 per day of each violation of state air quality laws, as well as attorneys’ fees and investigative costs."

As late as Friday of last week, BP reported yet another accident at their refinery that took place on Thursday August 12th; an ultracracker upset resulted in emissions from the unit for about a 9 hour period.

Oh brother, apparently it never ends for BP and those unfortunate enough to live near the Texas City refinery.


Update: January 23, 2011


The lawsuit, originally filed in U.S. Federal court, has now been filed in Texas State Court.  There are now 30,000 plaintiffs.

References:

http://www.propublica.org/article/bp-texas-refinery-had-huge-toxic-release-just-before-gulf-blowout

BP - down but not quite out....yet?

On Friday of last week, Alabama Attorney General Troy King announced that the state of Alabama has filed two lawsuits (on Thursday); one against BP and the other against Transocean, Haliburton, Anadarko and other companies. Interestingly enough, it appears that the suits were filed despite the wishes of Alabama Governor Bob Riley who says that the state should pursue out of court settlements first. The suits, filed by Alabama law firm Balch Bingham, accuses BP of "negligent or wanton failure to adhere to recognized industry standards of care.". King stated that the state was increasingly concerned that BP's history of broken promises and saying one thing and doing another would cause further anguish to the residents of Alabama. The state has concerns that BP will shirk its fiscal responsibility to Alabama residents. The amount of the damages being sought in the suit have not been specified. As an aside, here's an interesting document showing how much BP has paid out so far in settlement of claims made by Alabama residents from the Alabama Attorney General's oil spill website. As of Friday, BP has paid out just over $83 million in claims and has had 29534 claims for property damage and 547 claims for bodily injury in Alabama alone with no claims being refused to date. It's interesting to see that claims have been made for bodily injury ranging from eye irritation, headaches, nausea, sprains and strains and even hot flashes!

Another class action lawsuit was filed on July 27th by the firm of Beasley, Allen, Crow, Methvin, Portis and Miles P.C. seeking damages for 2 class representatives who claim personal injuries and property damage related to BP's oil spill remediation. In this case, both BP and Nalco are the targets; Nalco is the company that supplied million of gallons of the dispersant Corexit 9500 used to break up the oil spill. According to the suit, Corexit is considered four times as toxic as crude oil and it is claimed that the representatives have had respiratory and gastrointestinal problems related to the widespread use of the toxic chemicals found in Corexit. Here's a posting that I did on Corexit back in early May if you wish to get some information on the product being used to "clean" the Gulf. Just in case you wondered, Beasley Allen has a track record in large civil litigation settlements with over $20 billion in verdicts to date. Their environmental attorneys negotiated the largest environmental settlement in United States history against Solutia, Monsanto and Pharmacia for PCB contamination in Alabama. The settlement amount was for $700 million. As well, they recorded an $11.8 billion settlement against ExxonMobil Corp. for breach of contract and fraud in relation to royalties payable on natural gas production to the state of Alabama.

As it stands now, more than 300 suits have been filed in federal court against BP since the April 20th Deepwater Horizon explosion. Within the next two weeks, Beasley Allen alone is expected to file an additional 800 cases in addition to those previously filed.

When you put the whole story together, it's interesting to see how many vultures are circling and the body isn't even dead yet! One thing is reassuring though; at least a select group of Americans with law degrees will be weathering the economic downturn without too much of a personal slowdown. Perhaps we should just look at it as a transfer of wealth from one wealthy group to another.

To date, BP claims that they have paid out over $347 million after receiving 148,000 claims; it has yet to deny a claim however, some 40,000 claims are still outstanding. As well, BP has now established a trust account and made a $3 billion initial deposit into the proposed $20 billion escrow account announced in June. This deposit was made ahead of schedule; the next $2 billion depost will be made in the fourth quarter of 2010. BP has estimated that they have spent approximately $6.1 billion to remediate the cost of the spill to date.

Oh yes, and to top a great week off for BP, they will be paying a record $50.6 million fine/penalty for failing to fix safety problems at their Texas City oil refinery after a 2005 explosion killed 15 employees. This is the largest penalty assessed in the history of the United States Occupational Safety and Health Administration (OSHA). The OSHA is also going after another $30 million for an additional 439 new violations that were discovered during their 2009 investigation that resulted in the $50.6 million fine for failing to correct deficiencies. Reassuringly, BP has this to say about this particular transgression:

"As part of this agreement, BP will further accelerate its ongoing multi-year program of investment in activities that are designed to implement industry leading process safety practices and address potential hazards which are identified through comprehensive engineering reviews."

Just in case you're thinking that you want to get in on the action while BP is wobbling at the knees, here are a couple of law firm websites that may be of use:

http://www.bplawsuit.com/

http://www.bplawsuit.net/

Ixtoc 1 - No longer the biggest blowout in the Gulf

Here is the story behind one of the world's largest maritime oil spills; the Ixtoc 1 oil spill in the Gulf of Mexico.

In 1979, Petroleos Mexicanos (Pemex), the Mexican national oil company, was drilling an exploratory well they named Ixtoc 1. The well was being drilled in the Bay of Campeche in the Gulf of Mexico in 50.5 metres of water using a semi-submersible rig. On June 3rd, 1979, the rig lost control of the well and it blew out a mixture of oil and gas which very quickly caught fire.

The drilling crew lost control of the well when they hit a highly porous and permeable (a measure of the interconnectedness of the rock's pores) layer of rock at at depth of 3627 metres. When a well is being drilled, drilling mud is used to serve several functions. First, it lubricates the drilling bit as it cuts through the rock and transports the rock cuttings to the surface where they are removed from the mud as it is pumped back down the hole. The drilling mud also aids in the formation of filter cake along the outside rim of the hole; this protective coating prevents damage to porous and permeable formations by the fluids in the drilling mud. Most importantly, the hydrostatic weight of the column of mud is used to keep the fluids, be they oil, gas or water, in the subsurface. Since the formations encountered at depth have higher pressures than the atmospheric pressure that we experience at the earth's surface because of the weight of the overlying rock (and water), the fluids in the wells have a tendency to push their way to the surface, sometimes quite violently. This is what creates a blowout as we are now seeing in the Gulf of Mexico. The drilling fluids provide a delicate balance between the pressures at depth and atmospheric pressure.

In the case of the Ixtoc 1 well, when a very permeable layer of rock was encountered at a depth of 3627 metres (11,900 feet), the drilling mud flowed quickly into the formation meaning that there was very little balance to keep the oil and gas downhole. The operator decided to trip all of the drill string out of the hole so that efforts could be made to plug off the lost circulation zone, unfortunately, when they did so, they created reduced pressure that resulted in swabbing the porous zone which resulted in immediate and uncontrollable flow oil and gas. Normally, the blowout preventers (BOPs) should have activated and the shear rams should have cut through the drill pipe and sealed off the well. Unfortunately, because the drill string was being tripped out of the hole and the far heavier gauge drill collars were at the level of the shear rams, they were unable to cut through the collars and seal off the well.

When the oil and gas reached the surface it sprayed 30 metres above the platform floor and motors on the deck of the rig ignited the stream resulting in the rig catching fire and collapsing to the floor of the Gulf. Fortunately, the rig was abandoned as soon as gas and oil spray erupted from the well and there were no casualties among the 71 on board. When the rig collapsed, the end result was a tangled mass of 3000 metres of drill pipe and the remains of the rig tangled around the wellhead, which tilted the BOP off its vertical orientation. Fortunately, because the well was not as deep as the BP Macondo well, the use of remotely operated equipment was not necessary. In the case of the Ixtoc well, divers were able to access the BOP stack and attempts were made to shut in the well manually. Unfortunately, it appeared that valves in the BOP could be damaged by the pressure of the flowing fluids and it was decided that it would be better to allow the well to flow oil and gas unhindered into the waters of the Gulf of Mexico. Attempts were made to plug the well including a "junk shot" which forced pieces of metal and balls into the hole to stem the flow of hydrocarbons. Unlike BP, the Pemex junk shot attempt was partially successful; the flow was reduced to 10,000 barrels of oil per day. Pemex also attempted to place a containment dome nicknamed "Operation Sombrero" over the top of the BOP however they could not properly anchor it in place. Both of these techniques are similar to what BP used in far deeper waters at their Macondo well.

Here is a photograph of the blowout after the rig collapsed:

During the 9 months and 22 days that the Ixtoc 1 well blew out, it flowed between 10,000 and 30,000 barrels of oil per day, much of which caught fire and burned when it reached the surface. In total, it is estimated that 3.3 million barrels (139 million U.S. gallons) of crude were released in the spill, making it one of the worst in history. Nearly 500 aerial missions were flown to spread the dispersant Corexit over the spill to assist in breaking it up. Again, in this case as in the BP Macondo spill, it's interesting to note that the use of dispersants is controversial. Dispersants cause the oil to be redistributed throughout the water column; this is very hard on aquatic life such as shrimp and fish, however, it saves water fowl. As many experts have noted, this makes us feel better because we can't see dead fish but the media can expose us to heart-breaking photographs of oil-fouled birds. Unfortunately, dispersants do not work on weathered crude so by the time the crude reached the beaches of Texas in August 1979, dispersants were of no use. About 160 miles of Texas coastline were damaged by the crude. Pemex has stated that about half of the oil was burned immediately when it reached the surface of the water and that about one third evaporated.

Two relief wells were drilled and on March 23rd, 1980, they successfully sealed off the Ixtoc 1 well with cement after 290 days of "production" had reduced the flowing pressure of the oil and gas.

It is estimated that Pemex spent over $100 million to cleanup the spill but they invoked sovereign immunity (i.e. the state cannot be found guilty of a crime) when it came to paying for most compensation claims. In fact, United States businesses sued Pemex for $300 million but their request was refused under sovereign immunity.

Environmental damage was extensive, especially to the beaches of Mexico; bird, fish, squid and octopus populations were particularly heavily hit. In some areas, it was reported that catches in the fishery dropped by 50 to 70% from the previous year. Within a few years, scientists noted that fish catches had returned to normal levels and that there was very little evidence of damage. Fortunately, fewer wetlands were inundated by oil in the portions of the shoreline affected by the Ixtoc spill unlike the fragile Mississippi delta marshes that are being affected by the BP Macondo spill. Scientists that returned to the beaches of Mexico years after the spill and noted that most of the oil had weathered to tar and it no longer appeared to have a marked effect on the beach ecosystem. Fortunately, it appears that the warm temperatures in the waters of the Gulf of Mexico aided in the rapid breakdown and evaporation of the Ixtoc crude.

At this point, American residents of the Gulf can only hope that they get away with as little damage as the residents of the Mexican portion of the Gulf experienced after the Ixtoc 1 blowout. Only time will tell.

In searching the internet, I came across a blog that had some photos of the damage done by the BP blowout that I had not seen in the mainstream media. Here are some photos of the BP Macondo spill that are well worth viewing (if not more than a bit disturbing). These photos made me realize just how sanitized the coverage of this spill has been.

The Largest Blowout in American History

The recent blowout of the BP well in the Gulf of Mexico will be one of the great blotches on the face of the oil industry for decades to come.

Surprisingly enough, there was a blowout of even greater proportions onshore in California that flowed up to 100,000 barrels of oil per day for 18 months before it was brought under control. During that time, it is estimated that the well produced more than 9 million barrels of oil. In comparison, if the BP Deepwater Horizon well has flowed 60,000 barrels of oil over the past 85 days, it will have produced 5.1 million barrels of oil.

The Lakeview Oil Gusher blew out on March 14th, 1910. The well had been spudded by a small private oil company called Lakeview Oil Company that ran into financial problems. The well was taken over by the Union Oil Company, now part of Unocal Corporation. The Lakeview well was located between the towns of Taft and Maricopa in south central California, about 170 kilometres north of Los Angeles. Interestingly enough, geology and geophysical input was not used when the location for the well was selected, rather, there was a theory that grass grew red over an accumulation of oil. As well, at that point in time, oil well drilling was rather primitive; wooden derricks were used and there were no blowout preventers to prevent, well, blowouts. When the 2200 foot deep well blew out, it started flowing oil at an uncontrolled rate of 18,000 BOPD and soon reached a production rate of 100,000 BOPD; the plume of oil reached nearly 200 feet into the air. The derrick was completely destroyed and a crater was left behind that made it completely impossible to control the flow of oil. Most of the oil produced either evaporated or soaked into the soil at the site; only about 40% of the oil was recovered and sold. So much oil blew out of the hole that crews had to build 20 foot high dykes around the site to contain the oil and prevent it from flowing into Buena Vista Lake. The massive flow of oil created a lake of about 60 acres in size. Accompanying the oil lake was an plume of oily mist that was noted as much as 30 miles from the well site.

What is rather interesting about the story was that the well was very nearly abandoned, in fact, the drilling crew had been told to stop drilling because it appeared that the hole was dry, however, against orders they kept drilling ahead until they hit an over-pressured formation that obviously contained a lot of oil.

Strangely enough, some people felt that the blowout was a sign from God that oil was meant to stay in the ground to "kindle the hells of fire". You know, maybe they weren't so wrong way back in 1910!

Attempts were made to control the well but the sheer volume of oil made it difficult. What the crew finally did was to place a steel "semi-cap" weighing several tons over the plume of oil and anchor the cap to the ground with steel guy wires. Basically, all this did was control the spray of oil and sediment and confine it to the oil lake rather than letting it spread over a wider area. This sounds like technology that BP should have considered...or perhaps already has.

The well died as quickly as it started when the hole caved in on itself on September 10th, 1911. By that time, it was only producing about 40 barrels of oil per day. Today all that remains are the original well cavity, a few sandbags and some dried oil that has turned to layers of asphalt. Oh yes, and a plaque that commemorates what will hopefully still be the United States greatest oil well blowout.

References:

If you wish to see more photos of this fascinating part of American history, click here.

BP - Keeping an Eye on 2010 Executive Bonuses

Updated to July 26th, 2010

Under pressure from United States lawmakers and the White House, British Petroleum agreed to set up a $20 billion escrow fund over the next three and a half years to cover claims for compensation resulting from their blowout in the Gulf of Mexico that is now releasing up to 60000 BOPD into the environment. Personally, I liked it better when it was only flowing 5000 BOPD but apparently, that number was drawn out of thin air.

BP will make payments of $3 billion in the third quarter and $2 billion in the fourth quarter of 2010. These initial payments will be followed by payments of $1.25 billion for each of the following quarters until the total of $2o billion has been reached. While the fund is building, BP will pledge some of their United States assets as a guarantee. In addition to setting up the fund, BP has agreed to pay $100 million to oil rig workers who are now out of work because of the moratorium on drilling in deep water. Lest these numbers sound astronomic, it's important to keep in mind that BP's net income for the first quarter of 2010 was $6.079 billion and their net income for all of 2009 was $16.578 billion, down from $21.157 billion in 2008.

To finance the fund, BP agreed to suspend its planned dividend payment from the first quarter of 2010 due on June 21st. As well, dividends for the second and third quarters of 2010 will also be suspended; in 2011, the Board will reconsider reinstating dividend payments based on the situation in the Gulf. It is estimated that the suspension of dividends will save BP an estimated $10 billion on an annual basis; during 2009, they paid out $10.899 billion in dividends. What seems a bit off about their decision to cut the dividend is that none of the ecological debacle in the Gulf was in any way the fault of their now much beleaguered shareholders. It appears that the media and the White House have already laid the fault for the spill at the feet of BP's corporate culture but I guess everyone shares in the misery.

In addition, the company has over $10 billion in credit available from banks. BP will also reduce capital spending and increase their asset divestment program over the next twelve months to raise approximately $10 billion to help pump money into the escrow fund.

One thing that the American government, the White House and BP itself have not discussed taking action on is BP's bonus program for its executives and directors. From their 2009 Director's Remuneration Report, I have taken the following screen cap showing details of BP's remuneration program for Executive Directors:

You can see that their bonus program and performance shares program can be a pretty sweet deal. The Group Chief Executive, one Tony Hayward, can collect up to 5.5 times his annual salary in perfomance shares and one third of his actual on-target bonus of up to 150% of his salary in additional shares matched one for one if they reach a safety and environmental performance standard. I think we can write off the one for one matching based on safety and environment standards this year, don't you?

As I have before, let's take a quick look at Dr. Hayward's BP share holdings from their 2009 Annual Report.

Here is his salary (and that of the other Executive Directors in case you care):

Here are his performance share holdings:

Last but not least, here are his share options:

Here's the chart today showing the BP's performance on the London Stock Exchange (priced in pence):

It's readily apparent that with today's price of 408.50 pence that all existing options and performance shares for all of the Executive Directors are WAY out of the money. It does give some idea of how lucrative the performance share package can be if the issue price is low enough. Dr. Hayward holds a total of 2.36 million performance shares; if the stock were to rise to 700 pence as was targeted, he'd be sitting on a nice pile of notes.

What is also apparent is that BP is now trading at a multi-year low. Should the remuneration committee at BP decide that now (or soon, or at least while their stock price was depressed) was a good time to issue some options to their Directors, Executive or senior management, it could be a very lucrative move for all involved. The lower the issue price the more volume the director gets upon issuance. As well, it's a buy low sell high philosophy. For example, if Dr. Hayward were issued performance shares equivalent to even four times his annual salary of 1.045 million British pounds, he would receive 4.18 million British pounds worth of shares. At today's price of 359 pence, he'd get 1.16 million shares. If the price of BP stock were to rise to its normal pre-blowout trading price of 550 pence, he would stand to rake in a cool 2.22 million British pounds (about $3.38 million Canadian). If he got the full 5.5 times his annual salary, the take would be 3.06 million British pounds or $4.6 million Canadian holding all else equal. That's why it's so advantageous for executives to issue options when stock prices are depressed.

It will be interesting to see if the White House puts pressure on BP to avoid this exact situation as the anger builds, the days roll by and the oil coats the beaches.

...and just in case we forget, Petroleo Brasileiro SA, Brazil's state-controlled oil company, is currently drilling a well in the Gulf of Mexico in 8850 feet of water, nearly 4000 feet deeper than the BP well. Shell and ChevronTexaco have drilled wells in water over 10000 feet deep. It was just a matter of time until there was a catastrophic accident.

Drilling in Deep Canadian Waters

In recent days, there have been three noteworthy developments regarding oil industry drilling in the waters of Eastern Canada.

In the first development, Corridor Resources, a publicly traded junior oil company with market capitalization of about $410 million, is applying for approval from the National Energy Board (NEB) to drill a well in the Gulf of St. Lawrence. Corridor is headquartered in Halifax and has existing natural gas production in the McCully Field near Sussex, New Brunswick. As well, Corridor is exploring for petroleum and natural gas onshore in New Brunswick, Prince Edward Island and Quebec. Corridor holds exploration licences covering nearly 252,000 acres over the "Old Harry" prospect in the Gulf of St. Lawrence; the prospect is located in water depths of 460 metres. Approximately two-thirds of the prospect lies in the Quebec portion of the Gulf with the remaining one-third lying in Newfoundland and Labrador waters. The Old Harry prospect covers more than 20,000 hectares and Corridor's seismic interpretation shows that the closure is one of the largest undrilled prospects in Eastern Canada with potential reserves of 1.5 to 2 billion barrels of oil or 4 to 5 Tcf of natural gas.

According to this article in the Charlottetown Guardian from June 2nd, 2010, the Prince Edward Island government is concerned about possible environmental impact from drilling of the prospect and rightly so. Although the prospective area lies outside Prince Edward Island jurisdiction, an oil spill or blowout would have a marked impact on the North Shore of the Island, home to the majority of the Island's fishing and aquaculture economic activity. P.E.I. Environment Minister Richard Brown has sent notice to the federal government requesting input on approval of any offshore drilling that Corridor may undertake.

On the second front, Chevron Canada (with partners Exxon Mobil, Shell Canada and Imperial Oil Ventures Limited) has commenced exploratory drilling in the remote Orphan Basin off the coast of Newfoundland and Labrador this month. The Lona O-55 well is drilling in water depths of 2600 metres, far deeper than existing production at White Rose (water depth averages 120 metres), Terra Nova (95 metres of water) and Hibernia (80 metres of water) and is setting a record for drilling in the deepest water in Canada. By comparison, the BP well currently blowing out in the Gulf of Mexico is in 1500 metres of water.

The map following this paragraph can be found on the Chevron Canada website; it shows just how remote the Orphan Basin is. The basin is located approximately 370 kilometres northeast of St. John's. The map also shows the locations of the current producing fields of White Rose, Terra Nova and Hibernia.

An environmental assessment of the Lona o-55 well completed by Chevron in 2005 stated that there was a very small chance (.0086%) of a spill of 150,000 barrels or greater however, the report admitted that if a large spill were to take place, the company would find it very difficult to clean it up even with state-of-the-art equipment. Rough water conditions would make containment and recovery of spilled oil far more difficult; Chevron estimates that only 2 to 12 percent of an offshore spill could be retrieved under "typical wind and wave conditions".

In response to the recent debacle in the Gulf of Mexico, on May 20th, 2010, the Canada-Newfoundland and Labrador Offshore Petroleum Board (C-NLOPB) announced special oversight measures for the Orphan Basin drilling program currently underway. Here's a quote from the Report:

"... in light of the situation unfolding in the Gulf of Mexico...Chevron is required to provide the C-NLOPB’s Well Operations Engineer with copies of the field reports prepared in respect of the following: testing of the blowout preventer (BOP) stack; function test of the acoustic control system; function test of the Remotely Operated Vehicle (ROV) intervention capability and function test of the automode function (AMF) system, together with an assessment of the readiness of the ROV system in terms of equipment, procedures and spare parts.

Prior to penetrating any of the targets, Chevron must hold an operations time-out to review and verify, to the satisfaction of the Chief Safety Officer and the Chief Conservation Officer, that all appropriate equipment, systems and procedures are in place to allow operations to proceed safely and without polluting the environment." (my bold)

As well, audits and inspections of the drill ship will take place every three to four weeks rather than every three to four months as had been the case. Most importantly, since the casing cement job may have failed on the BP well, Chevron must allow a representative of the C-NLOPB to be onboard the drill ship to observe the cementing operations of the casing, witness BOP testing and pressure testing of the cement job.

I'm rather impressed by their thoroughness, especially considering that their experience is limited to the drilling of only 355 wells offshore Newfoundland and Labrador compared to nearly 4000 (3858) producing platforms alone offshore in the Gulf of Mexico. What is frightening though is that any accident that could take place would be nearly impossible to clean up. Since 1997, it is estimated that 2700 barrels of oil have been spilled into the ocean off Newfoundland's coast in 340 incidences. These are all very small spills in comparison to the current spill in the Gulf of Mexico; the largest spill of 1040 barrels of oil took place in November 2004 in the Terra Nova field.

Thirdly, on June 8th, 2010, the Premier of Newfoundland and Labrador, Danny Williams, commented that drilling a same season relief well (drilled simultaneously with an exploratory well) would dramatically increase the costs of the well that Chevron is currently drilling in the Orphan Basin. He said that the requirement of an additional well could terminate further exploration in the deep waters of the Orphan Basin with the potential result that billions of dollars that could flow into provincial coffers to fund social programs would be lost. I noticed right away that he neglected to mention anything about the cost to Newfoundland and Labrador should a blowout occur.

Because it has not yet been determined what caused the blowout in the Gulf of Mexico, there is a great deal of uncertainty regarding the safety of drilling in and recovery of huge volumes of spilled oil from medium and ultra deep offshore wells. Until it is known exactly what caused the BP well to blowout, prudence is in order from all Canadian regulatory agencies. Well approvals in both offshore Newfoundland and Labrador and the Gulf of St. Lawrence must include safety measures that go beyond what would normally be expected of operators at least until the factors that created the Gulf of Mexico debacle are known and a solution to future deep water blowouts is provided by industry.