Oil well may yet be a gold mine for BP

If it can trap oil, it can sell it

McClatchy NewspapersJune 4, 2010 

  • Late Thursday night: BP sliced off a pipe with giant shears Thursday in the latest bid to curtail the worst oil spill in U.S. history, but the cut was jagged. Late Thursday night, live video released by BP showed an inverted funnel-like cap being maneuvered into place over the pipe. However, the gushing oil made it difficult to tell whether the cap was fitting well. BP officials did not immediately return requests for comment.

    If the cap doesn't work, the next chance to stop the flow won't come until two relief wells meant to plug the reservoir for good are finished in August.

    Dunned: The White House said the federal government sent BP a $69 million bill Thursday for costs so far in the Gulf of Mexico oil spill. Spokesman Robert Gibbs said the bill is the first to be sent to the oil company. The White House has said BP will ultimately be responsible for all costs associated with the spill.

    Permits: The Minerals Management Service stopped issuing permits for new oil and gas drilling in the Gulf of Mexico, even as an administration spokeswoman denied that there is a formal freeze on drilling in shallow water. Kendra Barkoff said drilling may continue as long as environmental and safety requirements are met. Earlier in the day, a top official in the federal agency that oversees offshore drilling told a company seeking a permit that "until further notice" no new drilling is being allowed in the Gulf, no matter the water depth. A copy of the e-mail was obtained by The Associated Press.

    Unprepared: BP PLC's top executive acknowledged the global oil giant was unprepared to fight a catastrophic deepwater oil spill. Chief Executive Tony Hayward told The Financial Times, based in London, it was "an entirely fair criticism" to say the company had not been fully prepared for a deepwater oil leak. Hayward called it "low-probability, high-impact" accident.

    Coming ashore: Globs of oil were washing into Mobile Bay in Alabama and onto the white-sand beach at Fort Morgan, a Civil War fort. The coin-size globs could be seen Thursday in the water rolling along the bay's bottom. Soft, brown goo glistened in the sun on the sand near the fort. A hired cleanup crew waited nearby to begin work while two volunteers cleaned up the mess.

    The Associated Press

— BP's runaway deepwater well could still become a moneymaker for the company, even as it tries to stem the gush of crude oil that's fouling the Gulf of Mexico.

If the current containment effort works - and BP and the government say they're optimistic that it will - the oil giant will salvage much of the oil that's now spewing from the crumpled pipes on the ocean floor. That captured oil could generate more than $1.4 million in revenue for BP each day.

Once the oil is piped to the surface to the drill ship Discoverer Enterprise, it would be processed and sent by tanker to a refinery to be sold.

"It's exactly the same as if it's normally produced oil," BP spokesman GrahamMacEwen said.

Based on government estimates of the flow rate, the mangled well could produce oil valued at as much as $85 million over the next 60 days, until a relief well is complete and the well is capped permanently.

The people who own the deepwater site that's leased to BP - U.S. taxpayers - could see a more modest windfall. The Treasury could be due as much as $328,125 in royalties daily, or $19 million total over 60 days. Further, under its lease BP also must pay royalties on the oil lost in the spill, which would mean another $13.5 million.

McClatchy's calculationuses a government tally of 25,000 barrels flowing from the well each day and the 18.75 percent royalty rate applicable to oil from the BP well, and assumes that oil is selling at an average of $70 a barrel. Thursday's spot price hovered around $74.

The money that's due Uncle Sam and the added new revenue for BP from capturing the leaking oil raise many questions about the financial penalties that could be levied when something goes badly wrong with a deepwater oil well.

They also underscore the need for accurate measurements of how much oil has been flowing from the BP well since the disaster, a measurement that President Barack Obama acknowledged last week that the government was too slow to develop independently.

It remains unclear how much oil can be captured. An effort to cut the damaged pipe with a more precise diamond saw failed Wednesday, and underwater robots instead made a cruder cut Thursday with shears. So instead of the tight-fitting device the company hoped to use, it's installing a looser-fitting containment dome.

Still, oil executives continue to be optimistic about capturing most of the oil once the dome is in place, said U.S. Coast Guard Adm. Thad Allen, the national incident commander for the Deepwater Horizon spill response.

"In a perfect world, we want an absolute seal, where you put two pipes together with flanges, and you bolt it so there's absolutely no way where anything can escape," Allen said. "When you're dealing with these rubber seals and an irregular fit, there's a chance that the pressure of the oil going up through the pipe will be more than the pipe can tolerate at a particular time and would spill over and maybe get out through the seals."

Hard to measure

Getting a tally on the amount of oil that's flowing has been difficult. BP initially said the rate was 1,000 barrels a day. The government-appointed Flow Rate Technical Group put the rate at 12,000 to 25,000 barrels a day. Attaching the pumping apparatus probably would increase the flow by 20 percent.

"Obviously, when we start producing it to the ship, we will be able to more accurately tell what the rate is, but at the moment we can't tell," BP's MacEwen said. "We're pretty confident it will take the vast majority of the oil, but we can't be absolutely sure."

The Minerals Management Service wouldn't say whether BP will pay royalties to the U.S government on the oil if it's successfully captured and sent to a refinery for processing, but oil and gas lawyers and other experts in the field said there was no reason the company wouldn't pay the fees.

Nearly one in five barrels "is U.S. taxpayers' oil," said David Pursell, a managing director with the Houston-based energy investment and merchant bank Tudor, Pickering, Holt & Co.

BP's revenue from the crippled well is only a fraction of the cost of mopping up oil-soaked marshes and beaches, compensating fishermen and other business owners for lost business, and operating some of the world's most sophisticated underwater robotics in an effort to contain the spill.

BP already has paid out an estimated $1 billion, and this week the government ordered it to spend an additional $360 million to construct six barrier islands to prevent oil from reaching the Louisiana shoreline.

Nor will the revenue come close to the billions of dollars in value the publically traded company has lost as its stock has dropped 34 percent since the April 20 explosion.

Estimating the size of the spill has financial consequences for BP. From the day the rig exploded and killed 11 people, the company has underestimated how much oil is spewing from the broken well.

Accurate measurements are important because they're used as evidence when federal investigators consider fines and if juries impose damages on BP for the spill. BP also is responsible for paying royalties for each barrel of oil lost, and the measurements are needed to calculate the money that's due the government.

Federal officials continue to refine their estimates, said Jane Lubchenco, the administrator of the National Oceanic and Atmospheric Administration.

"The administration understands - for environmental, legal and financial reasons - how important it is to get good measurement of the flow rate," she said Wednesday.

So far, BP hasn't agreed with the estimates developed by the Flow Rate Technical Group, although the company has acknowledged that its initial estimates probably were low. When a riser insertion tool was in use last month before the company tried the "top kill" remedy that failed to shut down the well, BP collected about 5,000 barrels of oil daily. In total, the well produced 22,000 barrels.

No matter what, it owes the U.S. government, said Rep. Nick Rahall, D-W.Va., the chairman of the House Natural Resources Committee. He sent a letter Thursday to the Justice Department calling for it to recover any lost royalties.

The lost oil and gas "could end up costing taxpayers tens of millions of dollars in uncollected revenue," Rahall said. "I urge the department to take whatever legal action might be necessary to recoup these damages on behalf of the American public."

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