Wednesday, May 26, 2010

The End of Ultra-Deep Water Oil Production

The BP Horizon explosion and subsequent blowout in the Gulf of Mexico means the end of Ultra-Deep water Oil production - at least near the coasts of any of the industrialized, liberal democracies.

That is, to my mind, a given.

Now, what if TPTB - BP, The Coast Guard, the Military, the Federal Government et al - CANNOT shut the thing in? WHAT IF? I am not an environmental scientist, but it would seem to me that the GOM would be a biological dead-zone. It would also seem to me that the Oil industry (the ONLY industry in that region when you get right down to it... money comes into that industry and is then circulated through everybody else down wind) in that part of the country would take a significant hit along with all of the supporting cast around it.

(The level of economic ignorance displayed by the folks trying to take political advantage of this is fairly impressive. They began by publicly worrying about the fisherman and the restaurants... absent the oil industry there would be no fisherman nor restaurants as there would not be customer for thousands of miles for either group... the region would be as poor as Afghanistan... to say nothing of the fact that without the Oil production from the GOM the fuel for autos and transport fuel would be considerably less available for ALL of the U.S. It would be awfully cold this winter, too, as over 15% of U.S. Nat Gas production comes out of the Gulf.)

What would it mean to have 7 to 10 million gallons pouring into the Gulf every month, month in and month out, for the next several (or many) years? What if "Top Kill, Siphons, Top Hat's, relief wells, bombs, etc..." don't work? They might... but what if they do not?

Aside from the ecological disaster the other unknown consequences are fairly staggering when you think about them. I won't bore you... you don't need my help to think some bad things up.

I never thought deep water drilling was a terribly good idea. The simple fact is that the ultimately recovered Oil from these sights really was never worth the price of admission... all in I don't think deep water would supply more than 10 years worth of current world Oil consumption. Any rational risk/reward or cost/benefit analysis would come up short on that one.

The question is what are the political ramifications of this. Forget watching the candidates and office holders beat each other over the head with this... what will the reaction be from the "consumer" and/or the "voter"? Will all of this be forgotten when gasoline is $8 per gallon? Even if the GOM is a giant dead zone that smells like northern New Jersey did when I was a kid? Really? (BTW... Jersey does not smell anything like it used to... but back in the 60's and 70's it was pretty bad...)

Whatever the political reaction from the crew currently in power (in both parties) you can be sure it will NOT be a call for any shared sacrifice or a rational energy policy.... it will be a call to affix blame (this is NOT this administrations fault, nor GWB's, or Clinton's... every one of us that drives a car or drinks bottled water is in on this caper).

This is a hard one to put one's mind around... I need to noodle this a bit longer.


Dan said...

They are using the same Acme-esque bag of tricks that was tried in 1979, and getting the same Wile E. Coyote results. It doesn’t look promising.

westexas said...

And in any case, the actual production from many of these fields will be less than anticipated. Insofar as I know, the Houston Chronicle is the only MSM outlet reporting on the collapse in production from the main producing structure in BP's Thunder Horse complex.

Dan said...

One other thing that stands out is the sad fact that our government is FUBAR. The justification of governments is the common defense, yet here again the clowns are falling down on the job. Instead of standing watch over the commons, as they are being paid to do, they were again surfing porn and j@$%ing off as it all went up in flames. Nero ain’t got jack on these schlubs.

Donal Lang said...

You'll understand the irony of the 'Tragedy of the Commons' situation here, where until now the oil industry reaped the considerable rewards but the public ultimately takes the risk and potential costs of probable environmental degradation.

In this case the Gov't are blaming BP for this (and it could have been any oil company in this situation)but I think are being disingenious in distancing themmselves from this situation.

If we all want oil and the wealth it brings, we are all commonly responsible for the results of increasingly desperate technologies to get the stuff out. Just blaming BP when it goes horribly wrong conveniently ignores this.

I wonder, how many people really care where we drill, or how many species die in a spill, just so long as they can fill their tank for $50!

And I wonder what government would willingly be the ones to stand up and say, "Sorry guys, we've run out".

I personally think it could destroy BP; the lawsuits will go on for decades, from destruction of whole local economies right down to Aunt Mabel getting oil on her beach towel!

bureaucrat said...

They are gonna plug the leak (finally) today. The doom and gloomers will have to find something else to complain about starting Friday. :)

But the big thing remains, and I'm sure westexas will confirm ... these deepwater wells have never produced very much oil, are wildly expensive and they peak quickly.

Nevertheless, in an oil shortage situation, this world will be screaming for more oil production no matter where the oil is.

Stephen B. said...

We may stop drilling, but we may not.

Several times in the past few weeks or so, I've responded to stories in the Boston Globe and Boston Herald with reader comments to the effect that BP isn't only to blame, that we all are, because we've known about the problems with producing and consuming copious amounts of oil along with knowing about the now real problem of oil production and supply decline. I stated that really, the only consistent and meaningful thing to do is to greatly cut back on personal gasoline, diesel, and natural gas usage if, for no other reason, then we're eventually going to have to anyway.

Rather predictably, the responses I have gotten have ranged from outright denial (there's still "plenty" of oil, "we can drill safely", it's BP/Obama's fault) that I only ride my bike because I don't have a "real" job, that it's impossible to fit all the kids on the handlebars when mommy drives them to soccer practice, etc.

(See here for just one example: )

Now, reader comments into newspapers tend to be more conservative and just plain reactionary, then for the populace as a whole I think, but still, such obstructionist, denialist opinions are much more the norm than I would have hoped for at this late stage in the game.

No, America will stand to defend its over-the-top use of oil for its outdated way of life, to the last man, woman, turtle, and fish.

Stephen B. said...

Regarding my posted link to the reader comments; it seems that the Herald has since removed the most offensive comments aimed at me, but there's still a couple of dissenters left just the same.


Lenny said...

FWIW, my brother-in-law drills these types of wells. Until last year he worked GOM--now in Brazil. He was the one that introduced the concept of Hubbert's Peak to me.
He told me 5 years ago that this was like going to the moon. The only way ultra-deep water, ultra-depth reservoirs remain undisturbed is if the industry cannot bring the oil to the surface in a consistent fashion.

westexas said...

Re: Stephen

My "Sixth Sense" Analogy (many ghosts don't know they are dead and they only see what they want to see):

For most of us, our auto centric ever expanding suburban way of life is dead, but most of us don't know it and we only see what we want to see.

Greg T. Jeffers said...


That is how I see it.

This is not the government's or any one company's issue. This is OUR issue. Our society is constructed so that any and all of us can remove ourselves from responsibility when something within the "system" does something heinous: execute a mentally retarded person? "It wasn't me". Drill holes in a fetuses head? "Only the unenlightened nose pickers from fly-over-land have a problem with this - its my body and my choice". Drop bombs on a city with real, live, innocent human beings? "What can you do? That's war." Oil is destroying our environment and putting our national security at risk? "Too bad. I NEED my car."

It seems to me that we have become inured to violence (unless we are the victim, then we yell loud enough) in all of its guises. But we do enjoy the "Blame Game", because no matter what: "It wasn't me!"

bureaucrat said...

Some people don't have enough time anymore to be sympathetic to every bad thing that occurs. If I gave a dollar to every bum in downtown Chicago, I'd run out of dollars.

But again, the world is NOT running out of oil. We may be running out of CHEAP oil. In a weekend, we could invade and take the Orinoco oil fields in Venezuela (and the rest of Venezuela as well if we wanted it -- we've done it before) and have more oil than even Canada and their oil sands. The question is .. how much you want to pay to do it.

Greg T. Jeffers said...

Dear Bur:

We are doing some "What If" work here... if you have a what if comment, by all means, let's hear it.

If you are taking up space by telling me what is going to happen - with certainty - and that "What If" is no longer valid, you are wasting your, and what is infinitely worse, my time.

I have NO IDEA what will work or not work in thE GOM right now... the question is, what will the reaction be if this, that, or the other thing occurs.

All traders worth their salt ask themselves this on every trade, and on every day they are exposed (one of the reasons emails are so damning to hedge fund managers is that we AGONIZE endlessly about our positions - as well we should. But the PUBLIC just does not seem to grasp this. They seem to think its a horse race and we should be "rooting" for our positions, not second guessing them. That's why those folks do what they do and don't run funds.

Anyway, there are sure to be lasting effects even if they can plug the hole. What are they?

bureaucrat said...

I'm predicting that with 800 BP engineers working on the gulf thing in Houston, and with an unlimited budget, they will plug the hole today. With enough money, you can turn an egg into a battleship.

"What ifs" have to be based a LITTLE bit on reality. Otherwise, you are giving the Apocalyptos credence to their neverending "the world is coming to an end, but because I have a mountain of gold and bullets, me and my kin will be just fine."

What if it doesn't work? The gulf gets poisoned for years. The oil sucks all the oxygen out of the gulf water, and all the marine animals die (I heard this this week somewhere). China's friends' Cuba and Venezuela won't be happy.

What if Matt Simmons (who was on MSNBC earlier this week) says there are more oil holes on the gulf floor being ignored by BP and the media? What if we dropped a bomb on the hole to collapse it and stop it that way, like Simmons suggested?

The "what ifs" have to be at least realistic.

Anonymous said...

This post is a bit off point, but is instructive in understanding how these things happen.

This, like all such accidents will be traced to a long string of errors. Had any one of them not occurred, the accident would not have happened.

The Station Night club in Warwick RI burned a few years ago. 100 people burned to death. It was caused by pyrotechnics set off during a concert by the band "Great White."

The owner of the club illegally put some kind of cheap foam on the wall as a sound absorber. It turned out to be highly flammable. The building inspector saw the foam, but did not cite the owner on a number of occasions over several years. The band's manager did not apply for a permit for pyrotechnics at that venue (it would have been denied due to the size and construction of the building). The owner did not apply for a permit either. Some emergency exits were locked to prevent people from sneaking in.
The building was over crowded, but the police on site let it pass. Who is not to blame?


Coal Guy

Greg T. Jeffers said...

Precisely Coal Guy...

Complicated problems had complicated beginnings...

Worse, human error should be EXPECTED (eventually).

k said...

Along with "What if?", you can add, "How long?", "How long will the plug last?", "How long til the other shoe drops?"

bureaucrat said...

For those of you who want to watch the fun ...

bureaucrat said...

Crap ...

bureaucrat said...

And here we have Matt Simmons from yesterday ...

bureaucrat said...

I watched the video above a second time. REALLY good info. (Damn BP).

westexas said...


Combined net oil exports from Canada, Mexico & Venezuela fell from 5.0 mpbd in 2004 to 4.0 mbpd in 2008, and down to about 3.7 mbpd in 2009, depending on 2009 consumption numbers.

In 2008, all three countries showed declining net oil exports.

Regarding the US seizing foreign oil fields, we can certainly seize them, but getting the oil to our shores is a problem--since tankers make very attractive targets for any type of torpedo carrying submarine, not to mention explosives planted by divers.

As I have noted several times, my forecast for the US is that we are going to be forced to make do with a declining share of a falling volume of global net oil exports, basically a continuation of what we have seen since 2005--rinse & repeat.

westexas said...

Incidentally, it looks like the EIA has updated their numbers and the net export decline from Canada, Mexico & Venezuela is a little sharper than I thought.

One easy to model future net export declines is to extrapolate the rate of increase in consumption as a percentage of production. This method comes pretty close to the same range that Sam Foucher mathematically modeled (modeling consumption & production separately) for Saudi Arabia.

In any case, for Canada, Mexico & Venezuela (CMV), their combined consumption and production numbers for 2004 and 2008 were respectively as follows (EIA):

2004: 4.9 mbpd & 9.8 mbpd (50%)
2008: 5.4 mbpd & 9.2 mbpd (57%)

Consumption as a percentage of production rose at 3.3%/year over the four year period. Extrapolated out, CMV would be collectively approaching zero net oil exports (when the ratio approaches 100%) around 2025, 15 years from now.

Donal Lang said...

In answer to your question, What if ....;
I don't think it matters much now if the leak is plugged, or if there's another leak. The pollution genie is definately out of the bottle and BP is going to be crucified in the Courts for years to come.
That will have several effects:
Insurance rates will rocket.
Everyone concerned, from drillers to supply companies to oil companies will be terrified of getting involved in future drilling (What fate the company that made the blowout preventer for example?).
Shareholders will put pressure on Boards to avoid these operations.
And of course governments will be scared to licence, and States will object to any drilling off their coasts.

I suppose the question is; what is the real value of that oil in human, community, wildlife, local economy terms? How much trade-off will people accept when its in their own back yard? I suspect not as much as they did a month ago.

Jeff BKLYN said...

For what it's worth and to pick up where Donal left off... I see the big 'what if' being 'how far will this mess spread?'

Summer is coming and I'm already thinking Jones Beach... Will I be seeing oil goblets at the beach or I can soak in the sun, splash around and just forget, for now...

Donal Lang said...

Here's an interesting comment from Mike Ruppert's blog;
"Kota said...
I've just been thinking, if the entire Gulf/Carribbean becomes a dead zone, drilling for oil with no safeguards AT ALL would be OK, right?

It was Haliburton that was working there at the time of the blowout.

Just thinking....... "

I think it was Catch 22 that said,'Just because you're paranoid doesn't mean they aren't after you!'

bureaucrat said...

(I saw Mike Ruppert's film last year. If you would strip out everything he obsessed about except what he had to say about peak oil, you'd have a decent interview-film. The stuff he bellyached about that wasn't peak oil-related was just paranoid, unsubstantiated garbage.)

bureaucrat said...

Westerntexas :) ...

I would have thought a learned man such as yourself would be checking EIA's monthly "Crude Oil and Total Petroleum Imports Top 15 Countries" report regularly. It's one of the few places we can be reasonably sure the numbers are accurate (you can't sneak in millions of barrels of oil).

I check that report every month, and two things stick out: that Canadian oil is now the bulwark of our oil imports, and that Mexico, Nigeria, Venezuela and Saudi Arabia (the U.S.'s top 5) are not sending us as much oil, for obvious reasons. It's a cool chart. :)

I do understand your ELM -- especially interesting how exports can fall even faster than the exporter's decreasing production.

However, we have to take the behavior of the exporting nation into account as well. Those nations have two choices: charge 20 cents per gallon for gasoline and keep the people happy, or sell the oil for $70 per barrel overseas and invest in a security state to shut the people up.

Canada has a reasonable democracy. Saudi, Nigeria, Venezuela and Iran sell gasoline internally for pennies but have oppressive security states. Other countries like North Korea and Zimbabwe spend what little government money there is on their security states.

I don't think we can guarantee that any oil producing state will necessarily offer their own oil/gasoline to their own people first at cheap prices, when security states can become very expensive to fund.

And where will dictatorships find the money for their dragoons? The oil-thirsty Americans and Europeans, which means increasing exports.

westexas said...


Canada is a large oil exporter from Western Canada and a large oil importer into Eastern Canada.

When you total everything up, Canada showed a decline in net oil exports in 2008, and perhaps in 2009 too, depending on consumption.

bureaucrat said...

But the handy-dandy EIA "Top 15 import sources" chart says Canada reliably sends us almost 2 million barrels a day of (mostly oil sands) oil, and has for over a year.

I think that amount will shrink only if the environmentalists finally succeed in their quest to make average Canadians realize they are destroying a forest the size of Florida to send oil (sands)to the damn Americans. :)

Plus 2 million is not the 20 million we need every day.

Crossing our fingers that Iraq starts quadrupling their oil production ASAP.

westexas said...

I believe that there are also plans to build a pipeline to the West Coast of Canada, so that Canada can easily ship bitumen and upgraded oil to China.

bureaucrat said...

Likely, tho I have conflicting info. on whether NAFTA allows that.

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