The Potential Economic Impact of the Deepwater Horizon Blowout on the Organisations Involved in the Exploration, Production and Consumption of Oil and Gas



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The Potential Economic Impact of the Deepwater Horizon Blowout on the Organisations Involved in the Exploration, Production and Consumption of Oil and Gas

A Brief History of Deepwater Horizon:

The Deepwater Horizon oilrig was built in 2001 by Hyundai Heavy Industries for R&B Falcon which later became part of Transocean. Transocean operated the rig under the Marshallese flag of convenience and it was leased to BP on repeated leases that would have covered BP until 2013. The lease drawn up in 2001 showed the transfer value of the rig to be specified as US $340 million and the value the rig was insured for US $560 million; covering both the cost of replacement and the cost of wreckage removal (Eckhardt & Faherty – 2010). The Deepwater Horizon rig had a great success rate in finding oil wells; it found the deepest oil well in the world (Redall – 2009) and was described as ‘lucky’ at times. In February 2010 the rig commenced drilling at the Macondo Prospect; this was the project that Deepwater Horizon was working on when the violent explosion that led to the destruction of the rig occurred on the 20th April 2010 (Robertson & Robbins – 2010). These explosions caused the vast oil leak that BP say is close to being plugged. Although the rate of oil loss has now slowed, the well was losing 53,000 barrels of oil a day, causing a significant amount of damage to the environment and to the economy. In a press conference on 30th April 2010, BP claimed that they did not know the cause of the explosion. The cause is still under investigation.



Possible Causes:

After BP’s press release President Obama ordered an investigation of all 29 oil rigs in the Gulf of Mexico in order to determine the cause, but the true cause remains to be discovered. However, there are certain aspects of the running and working of the rig that are less than safe from speculation. Firstly, the Minerals Management Service was in charge of the regulation and inspection of the oilrig. According to an Associated Press investigation the examination was performed with a lack of detail, with lax regulations and poor record keeping. During the lifetime of Deepwater Horizon there were six citations of non-compliance, five relating to safety and the sixth, most recent citation was linked to electrical equipment. This citation was later withdrawn after the equipment was supposedly found to comply with regulations and be in full working order. Their poor inspection and record keeping could have led to small faults with the equipment on the rig going un-noted and consequently left as broken. Secondly, BP was investigated and criticised for having a "worse health, environment and safety record than many other major oil companies" (Mouawad – 2010). This could have been a large factor in the explosion and consequent destruction of the Deepwater Horizon oilrig. Finally, Transocean has previously had problems with blowout preventers. After more research into the possible causes it is suspected that the cause of the explosion was due to a problem with the blowout preventer. In spite of this, Transocean has demonstrated an excellent record of safety checks which has prevented the company from being blamed to date (Casselman – 2010).



Environmental Damage

Over a thousand miles of wetland and beaches are at risk from this huge oil spill. Fisheries will suffer for several years and many fragile species of organisms will be wiped out. The toxic hydrocarbons are putting over 600 species in the state of Louisiana alone at risk. Some of the natural gas will dissolve into the sea water and much of the oil will sink to below the surface. This creates a major problem as sunlight cannot reach the oil below the surface, therefore photo oxidation cannot occur and the oil takes far longer to disperse. The oil will also reduce oxygen levels in the water, having a dramatic effect on all sea organisms (Collins & Dearen – 2010). Eight weeks after the Deepwater Horizon blowout, the full impact on marine life became shockingly visible with pictures of dying hermit crabs and brown pelicans trapped, suffering and completely weighed down in dark, syrupy oil. The spawning of Atlantic blue fin tuna is threatened in the Gulf of Mexico due to the sheer quantity of oil and the rate at which it is spreading. The Gulf of Mexico is one of only two places in the world where blue fin tuna spawn. Further rows broke out after it emerged that endangered sea turtles and other marine creatures were corralled into 500 square-mile "burn fields" and burnt alive in operations intended to the contain oil. (Carus & Wearden – 2010). It was then argued by cleanup operators that the oil should be burnt rather than left to disperse, as this would save more animals. The oil spill has caused a huge amount of friction between parties - another long term effect that will fester after the oil has been cleaned up.

This environmental damage will be a significant contributor to the financial and economic impacts of the organisations involved with the Deepwater Horizon oilrig, due to the amount of money that will need to be spent repairing the damage to the environment and to stop more oil leaking. Plugging the oil leak could take up to three months, by which point “the equivalent volume of half a million barrels of oil could have escaped” (Wray – 2010). All of this coverage surrounding the damage to the environment has given the blowout even more negative publicity. Especially in this ‘eco-friendly’ century the oil spill will catch the interest of far more people. This means it is not just constructional repairs and cleaning up that needs to be done but repairs to BP’s, Transocean’s and the Minerals Management Service’s reputations also urgently need to be made.

Financial Impact – Those who are Suffering:

BP:

BP reported that its own expenditures had reached US $3.12 billion so far on spill response, containment, relief well drilling, giving grants to the Gulf states, paying claims and federal costs (Breen – 2010). It was predicted that the total loss for BP could be as much as US $30 billion on clean up, claims, redrilling and liability costs. On June 25th 2010, BP's market value sank to the lowest point in a year. The company's total value has decreased by US $105 billion since April 20th. Investors saw their holdings in BP shrink to US $27.02, nearly a 54% loss of value in 2010. A month later, BP's loss in market value came to a total US $60 billion, a 35% decline since the explosion. At the same time, BP reported a loss of US $17 billion, its first loss in 18 years. This includes a one off US $32.2 billion charge, including US $20 billion for the fund created for repairs and US $2.9 billion in actual costs (Wardell – 2010). BP is suffering hugely from the oil spill due to blame accosting from the US and very bad publicity.



US Government:

The environmental damage to the Gulf coastline as a result of the oil spill, will severely harm the US economy. It may be BP that is paying out to clean up the oil spill but the repercussions of the disaster certainly stretch further than the oil companies themselves. The damage done to Louisiana’s fishing industry alone could have an impact of US $2.3 billion. This is down to the huge part that Louisiana plays in the American fishing industry – they make up 32.5% of oyster landings, 37.7% of blue crab landings and 38% of shrimp landings (Gunter – 2010).

The Government has been put in a very difficult position following the catastrophe. Immediate action was required as soon as the explosion happened, since the effects were terrible and could have become much worse if left even for a short period of time. It is impossible to pacify everybody but the US Government had to do the best they could in order to prevent political fallouts as well as those between companies and individuals. The White House is very conscious of the potential political costs presented by the disaster. The Bush administration took a blow to its reputability in the aftermath of Hurricane Katrina, when officials were shown to be “lackadaisical in their response” (Goldenburg – 2010). The loss of eleven lives also means that it continues to be a tender subject to have to act upon; if the Government makes any mistakes then the whole world will know about it in a matter of minutes.

The Government’s administration had been highly criticised for not having inspected the oil rigs sufficiently. Obama then had to make a number of press releases to attempt to keep the peace and handle the situation as best he could for the parties involved. This even involved him standing up and saying "I take responsibility." He acknowledged that his administration had failed to reform the Minerals Management Service, the agency that had essentially allowed the oil industry to self-regulate. "There wasn't sufficient urgency," the president said. "Absolutely, I take responsibility for that." He also confessed that he had been too trusting of the oil giants: "I was wrong in my belief that the oil companies had their act together when it came to worst-case scenarios." He then reiterated on the Louisiana coastline that "The buck stops with me." (Dickinson – 2010).

The Government is constantly criticised, often rightly so, as Obama may have accepted the blame but that does very little to prevent future oil spills. The public want action rather than words so until sufficient measures are in place for the prevention and reparation of the Gulf spill, the population of the states along the Gulf coast will not be pacified. The Government will be suffering from a lack of public trust; especially considering they have allowed BP to continue drilling on the rig in Atlantis. If a nation is unsettled then the economy follows suit. America needs to sort out the aftermath of the explosion as smoothly as possible so that their economy may recover and to prevent the disaster having too much of a knock on effect when it comes to trading. Therefore, the Government has one of the hardest jobs to do following the oil spill – to regain the people’s trust and keep the country running successfully, whilst repairing the damage done at the same time.

US Taxpayers and Consumers:

Regular consumers have also been hit hard by the explosion. Every year, energy companies such as BP pay the Government several billion dollars in royalties on the oil and gas they produce from offshore leases. A slowdown or reduction in offshore drilling will nearly always mean a decrease in the amount of royalty payments received by the Treasury and, consequently, the Government will have less money to spend. Furthermore, a prolonged slowdown or moratorium on offshore drilling will mean more imported oil, resulting in an increase in the US trade deficit - again lowering the amount the Government then has to spend. This can have a knock on effect on taxes and not just the obvious fuel taxes. Therefore, US citizens in particular will be paying for the disaster.

People’s livelihoods will also be affected. The tourist industry has been acutely damaged by the oil spill, meaning that many jobs have been put under severe pressure or earnings have decreased. The economies of the towns along the affected coasts have been harmed as the usual consistent income from tourists has decreased to almost nothing and unemployment has risen. People who depend on fishing to make a living are also suffering as fish are dying from the pollution and there is no longer the market for tourists to come and fish, nor the opportunity to make an income from fishing. States along the Gulf of Mexico, such as Florida, are deemed undesirable tourist destinations due to the preconceived level of pollution, even though the oil is 17 miles away. The tourism industry will still be suffering long after the oil spill has been cleaned up. "People outside of the U.S. look at Florida as one [beach] and don't understand if there's a little bit of oil in the Panhandle, they think it's all over the state," said Miami Beach Rep. Richard Steinberg (Kennedy – 2010). BP has taken note of this and given Alabama, Mississippi and Louisiana US $15 million and Florida US $25 million to spend on marketing to encourage tourism.

Deepwater Drilling Businesses:

Due to an increase of up to 150% on insurance and the necessity to buy more insurance, the Deepwater Horizon Blowout has significantly increased the cost of deep sea drilling. After the explosion, a six-month offshore drilling moratorium was enforced by the US Government. Following this, the Secretary of the Interior Ken Salazar ordered immediate inspections of every deep-water operation in the Gulf of Mexico. An Outer Continental Shelf safety review board within the Department of the Interior is to provide recommendations for conducting drilling activities in the Gulf (Brenner, Guegel, Hwee Hwee & Pitt – 2010). The new regulations and inspections suspended work on thirty-three rigs and these were consequently challenged by several drilling and oil service companies. The new cost of having to purchase replacement equipment if old equipment does not meet with new regulations has meant that the drilling organisations have been impacted and their line of business has become less lucrative. It has been argued that the moratorium will cause the industry to move overseas and harm the US economy (Carus & Wearden – 2010).



Financial Impact – Those who are Benefitting:

Lawyers:

Despite all of the damage that has been done and the resulting financial repercussions, there are parties involved which have benefitted greatly from the Deepwater Horizon Blowout. Due to the complexity of the disaster and the number of people being affected, over two hundred lawyers and law firms have been filed. Lawyers, therefore, will be making a huge amount of money (Sachdev – 2010). The fight for settlements will become increasingly complicated considering that there are four culpable parties – BP were leasing the rig; Transocean’s workers were on the rig; Halliburton were in charge of sealing the concrete around the oil drill and, finally, Cameron were responsible for creating the blowout preventer that is being blamed for the explosion. All parties involved will be represented by law firms; the value of the case is extremely high, which means the Lawyer’s commission will be at a premium.



Insurance Companies:

In the wake of the blowout, companies working offshore will have to renew their insurance cover prematurely, which will have risen significantly in price and be much harder to obtain. This will consequently raise costs for those drilling offshore and increase profit for the insurance companies. However, the companies that must pay out for the explosion will be suffering greatly.



Transocean:

The owner of the oilrig has made $270 million profit from insurance payouts for the disaster (Fortson – 2010). This revelation will cause even more of an uproar in an already turbulent political storm.



Construction and Inspection Companies:

Since tighter regulations are being enforced upon drilling rigs, more frequent inspections must now take place, which means there is more business available for the inspection companies conducting the tests. This has a knock on effect for construction companies; if problems are found by the inspection company then the construction companies are drafted in to make repairs and install more equipment. So construction companies will be receiving increased business from oil rigs which need updating after the moratorium, increasing their profits greatly.

To begin with, though, the construction companies may suffer since they will have to build and repair rigs according to new guidelines which the company may not be prepared for. It could be beneficial for the construction companies if the moratorium remains in place - the organisation which has contracted them to build the rig will have to pay out more and the net profit for the construction company will thus increase.

Short Term Measures:

BP has been spending an average of US $4 million a day to try and tackle the spill (Wearden – 2010). They have started digging a relief well in an attempt to isolate the original well, in addition to drawing up a moratorium for all oil rigs in the Gulf of Mexico. The need for a moratorium has made the Government reassess the existing regulations on oil drilling. Tighter measures have been put in place but these have not yet been declared permanent. Perhaps the disaster will ensure that these measures become permanent to protect our seas, ecosystems and economies.



Long Term Measures:

A plan to build and deploy a rapid response system to capture and contain oil in the event of a potential future underwater well blowout in the deepwater Gulf of Mexico, was announced today by Chevron, ConocoPhillips, ExxonMobil and Shell (Anon -2010).

The newly designed system will be easily adaptable, having the ability to begin mobilization within 24 hours. It can be used on a wide range of well designs and equipment, oil and natural gas flow rates and weather conditions. The new system will be used in deepwater depths up to 10,000 feet and have initial capacity to contain 100,000 barrels per day with potential for expansion.

The four organisations involved have given $1 billion to fund initial development costs of this system. It is being developed by a team of highly experienced marine, subsea and construction engineers from the four companies. This system will offer a significant, competitive advantage over current available technology for oil spill response. The system will be ready for rapid deployment in the deepwater Gulf of Mexico in the event of an emergency similar to that of 20th April 2010.

The April 20th explosion highlights the necessity for increased research to ensure that the technology to deal with spills of this magnitude will be readily available. The expected new regulations could lead to a much larger demand for this technical equipment and, consequently, a new industry will emerge.



Political Relationships:

Anglo-US relationships have suffered since the Deepwater Horizon blowout. The BP chief executive did not handle the incident as well as it could have been handled - he inflamed UK-US relations by saying that the oil spill was “relatively tiny” in comparison to the sea and stated that he “would like [his] life back”. David Cameron tried to smooth over the outrage when accusations of British arrogance and incompetence were thrown. He put international relations first and sympathised with the frustration of the US Government (Carus & Wearden – 2010). However, it is emerging that Britain is becoming irritated by Obama’s heavy handedness towards BP (Streich – 2010). The oil spill has strained international relations and, if the oil were to head further than the US - into Cuba - then the Deepwater Horizon disaster could create further tension between the Caribbean, USA and UK.



Effects on the UK:

If the spill is not completely repaired by the end of the year then the financial consequences for BP could be fatal. BP is Britain’s largest corporation - if they go under due to the expense of the disaster then Britain’s economy will suffer greatly. It is said that of every seven pounds paid out in dividends in Britain, one of those pounds can be accounted for by BP (Wearden – 2010). The UK may not be at too much risk though as it has been said by both David Cameron and Barack Obama that the oil giant must "remain a strong and stable company". It is in both countries’ interests for BP to remain steady and America ultimately has the power to ensure that BP will not go bankrupt. This is one thing that Britain and the US agree on but there have been many other disputes between the countries, such as American politicians attacking BP vociferously during their mid-term elections. Whilst Britain understands that BP is responsible for repairing the damage, it continues to ardently support the corporation.

The UK may suffer in the short term due to friction with the US over the Deepwater Horizon blowout. However, the aftermath of the oil spill is not likely to threaten US-UK relationships in the long-term. The dispute has certainly indicated some “major cultural and behavioural differences between the two countries” (Bleweis – 2010) which point towards the two countries needing to work towards finding a common ground to repair the damage. As a global community, we cannot afford to allow human negligence to cause such frequent catastrophes, which ultimately could have an even greater economic effect than the recent oil spill has had on America and, potentially, the UK.

(Word Count: 3,435)

References:

Anon (July 27 2010) “New oil spill containment system to protect Gulf of Mexico planned by major oil companies” www.shell.com

Bartley J. Eckhardt, PE & Arthur Faherty (20 May 2010). "Forensic Anatomy of the Events on the Deepwater Horizon"

Bleweis, Scott (June 11 2010) “UK Feels Backlash from BP Oil Spill: The View from Europewww.acus.org

Braden Reddall (2 September 2009). "Transocean says well at BP discovery deepest ever". Reuters.

Breen, Tom (2010-07-05). "BP costs for oil spill response pass $3 billion"Associated Press (Yahoo News).

Brenner, Noah; Guegel, Anthony; Hwee Hwee, Tan; Pitt, Anthea (2010-04-30). "Congress calls Halliburton on Macondo"Upstream Online

Carus, Felicity & Wearden, Marcus (July 1st 2010) “Q&A: BP Deepwater Horizon oil spill” The Guardian

Casselman, Ben (10 May 2010). "Rig Owner Had Rising Tally of Accidents"Wall Street Journal Online.

Collins, Jeffrey; Dearen, Jason (2010-05-16). "BP: Mile-long tube sucking oil away from Gulf well"The Washington TimesAssociated Press

Dickinson, Tim (June 8th 2010) “The Spill, the Scandal and the President” www.rollingstone.com

Fortson, Danny (May 9 2010) “Rig firm’s $270m profit from deadly spill” The Sunday Times

Goldenburg, Suzanne (May 5th 2010) “Deepwater Horizon oil spill: Obama attempts to limit political fallout” The Guardian

Gunter, Ford (April 28 2010) “An Explosive Situation” www.portfolio.com

Kennedy, Kelly (June 14th 2010) “Miami Fears Oil Spill Will Affect Tourism” abc News

Mouawad, Jad (8 May 2010). "For BP, a History of Spills and Safety Lapses"New York Times

Robertson, Cambell; Robbins, Liz (22 April 2010). "Oil Rig Sinks in the Gulf of Mexico". The New York Times

Streich, Michael (June 10 2010) “Gulf Oil Spill Affects British-U.S. Relations” www.news.suite101.com

Sachdev, Ameet (May 18th 2010) “Tide of Oil Spill Lawsuits Begins to Rise” Chicago Tribune

Wardell, Jane (2010-07-27). "BP replaces CEO Hayward, reports $17 billion loss"News & Observer



Wearden, Graeme (May 4th 2010) “Deepwater Horizon oil spill: City slashes another £5bn off BP's value” The Guardian

Wray, Richard (3 may 2010) “Deepwater Horizon oil spill: BP chief faces Washington grilling” The Guardian

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