Monday, June 14, 2010

Leaking Gulf Well: Just 5 Days Worth Of Oil

The risks of drilling for oil offshore in deep water are becoming apparent. What are the benefits?

Bill McKibben, writing for The Huffington Post last week, said:
"BP has gone to all this trouble for a well that taps into what they now think may be 100 million barrels of oil. And that's... five days supply for the US?"
- Missing the Real Drama of the Deepwater Horizon Blowout, McKibben June 9
Five days? Our government let BP take this risk for 5 days worth of oil? Maybe that doesn't account for the gas, gas that is escaping and dissolving in the Gulf, being fed upon by bacteria, sucking huge amounts of oxygen in the process, oxygen fish and wildlife need for survival.

I guess the US is pretty strapped for homegrown sources of energy at the moment.

Here are some stats on the Deepwater Horizon drilling rig I picked up on Transocean's site:
  • It floats, rather, it used to float.
  • Could operate in water depths up to 8000 feet. (BP was drilling an exploratory well at a water depth of about 5000 feet, 41 miles off the Louisiana coastline.)
  • Could drill up to 30,000 feet.
  • Used a riser pipe 21 inches OD (outer diameter).
  • Was built by Hyundai in South Korea (Hyundai Heavy Industries Shipyard) in 2001.
  • Was powered by 6 Wartsila engines, 9755 horsepower each. Those engines drove 6 AC generators, 11,000 volts each.
  • VDL (variable deck load) of 8000 metric tons (17.6 million pounds). This is how much weight the rig could hold.
From Will Rodgers PowerStocks site:
  • The rig cost about $350,000,000 to build in 2001. It would cost at least double that to replace today.
  • BP was paying about $500,000/day to rent it (BP didn't own it, Transocean did), another $500,000 to operate.
  • The rig didn't use anchors to stay in place. It instead used thrusters controlled by satellites to position it.
  • According to Rodgers, the rig "was one of the most advanced engineering feats in the world, having drilled deeper than any other waterborne platform."


Bix said...

If a barrel of crude oil can fetch $75, then the well that's leaking in the Gulf could have fetched $7.5 billion dollars (100 million barrels x $75)? I can see why BP thought paying $1 million/day to extract it was worth the effort.

Anonymous said...

Your concept is correct, but you may not appreciate the risk and reward for this business. The reason BP and other companies are willing to risk money in deep water exploration is the economics of the project.

BP was willing to bid $34MM to acquire the lease in 2008 and drill a $100MM well to test the prospect. If successful they would continue to spend money on a development plan that would likely cost close to a billion dollars and include multiple wells and floating production facility. They would spend this 1.3 Billion over 3-5 years before first oil was produced.

If they were successful with a three well development you might expect each well to produce 20,000 BBLS/Day. That would be 60,000 BBLS/Day for the field which is $4.5MM/day gross, less the %18.75 royalty to the federal Government (nearly $850,000/Day leaves $3.6MM/day less operating cost with might be another 20-30% which would leave a net of around $2.7 MM/day to the 8/8ths.

That would give you a payout in about 1.3 years after first oil in say 2015. Ultimately in order to calculate the economics you have to run that future cash flow out for the life of the field and discount it back to present value to really understand the economic value of this project.

You must understand that BP was willing to risk spending nearly $150 MM just to test the prospect and possibly a total of $1.3 BB from 2008 through 2014 to put the field in production for likely a 3-5 times return on investment.

Most people do not understand this business; many think it easy and very profitable. This business is very profitable but it is commensurate with the willingness to take the capital risk.

Every oil and gas drilling opportunity is analyzed the same way. Geologist, Geophysicists, Engineers and Economists all attempt to quantify risk and reserves to calculate payout, and return on investment. If the project meets certain economic hurdles it attracts risk capital and gets drilled. There are many good prospects that get drilled that are non-commercial or dryholes. The successful companies have talented staff and management that select participation in these projects very carefully.

Most people that are critical of this industry because of the profits would not be willing to participate in drilling any prospect with some of their risk capital. This is a business unlike any other and it is not for the faint of heart.

One other point, the revenue to the federal Treasury from Royalty on production in federal waters one of the government’s largest sources of non tax income. The US system of revenue sharing is called a Tax/Royalty system. If you analyze the total revenue generated to the federal tresuary from this business, including the taxes, it is huge.

Angela and Melinda said...

It's a frighteningly monstrous-looking machine. I'm so glad we ditched our oil heat for geothermal.

Angela and Melinda said...

@Anonymous--oil industry economic experts interviewed on NPR's business show noted that BP, the 4th largest company in the world, makes a *pure profit* yearly of 20 billion dollars out of a 70 billion yearly income. So they are not hurting, regardless of the money they spend exploring and testing.

Bix said...

Anonymous ... great reading. I didn't know the government collected royalties, nor that they were so substantial.