The BP Oil Spill

Last week the Deepwater Horizon, a Transocean Ltd. (NYSE: RIG) oil rig leased to British Petroleum (NYSE: BP), exploded and sank in the Gulf of Mexico, costing at least eleven lives, hundreds of millions of dollars in damages and great harm to the environment as its well leaks oil at a rapid rate. As I write this entry, the well is leaking 5,000 barrels (155,000 pounds) of oil per day into the Gulf. Even more frightening is the fact that if the well cannot be closed, the total leakage could amount to over 100,000 barrels (4.2 million pounds) of oil.

Many Americans are wondering why more safety precautions were not taken in anticipation of such an event, given the potentially catastrophic damage we are seeing now. Every oil well has a shut off valve, known as a blowout preventer, which cuts the flow of oil from a well when closed. Crew members of the rig were either unable to close the valve, or they tried and the shut-off process simply did not work. Still, the shut-off process should have happened automatically through the “dead man” switch, whose purpose is to sense catastrophe and close the valve. The Deepwater Horizon did have a dead man switch, but for unknown reasons it failed to close the valve. The last line of defense in this situation would be an acoustic trigger, a device that sends acoustic impulses through the water that can trigger a valve to shut down the well; however the Deepwater Horizon did not have one. Interestingly enough, BP was the main opponent of regulations proposed by the US that would have required acoustic triggers on deep sea rigs, citing unproven effectiveness and cost issues as their reasons for opposition. If it fails it fails, but it looks like it would have been worth the $500,000 (the cost of an acoustic trigger) to try – this incident alone is costing BP $6 million a day, not to mention the $560 million cost of replacing the rig.

The issue now is trying to stop the leak at its source, and then deciding how to move forward if that effort fails, which is very possible. Remote-controlled robots were dispatched to activate the blowout preventer, but so far those efforts have not proven effective. On Wednesday, BP conducted a “test burn” to measure the effectiveness of setting fire to the oil-filled water. While the test was successful, weather conditions deteriorated soon after, preventing any further burning from taking place. Other ideas for containing the leak include building a massive dome to be placed over the well, as well as drilling a second well at an angle to relieve the pressure of the leaking well, and intercept its contents. BP’s stock price has already fallen 13.8% since April 20th, the day of the explosion. But even more damaging to BP is that it is on the hook for the total cost of containment and cleanup, which is an unknown at this point but exceed $1 billion. Luckily for Transocean, it is insured for the total cost of the rig, $560 million, as well as $950 million in third-party liability coverage, but is responsible for any losses exceeding that figure.

It’s safe to say that we will see major changes in safety regulations for deep sea oil rigs, and eventually BP will be faced with fines and lawsuits related to the incident, but at this point the main concern is containing this massive leak and minimizing further damage. It also remains to be seen whether or not the government will scale back offshore drilling in general, mainly in the Gulf and off of the Atlantic.