Commentary By Ron Beasley
The Drumbeat over at The Oil Drum today is mostly about the explosion and collapse of the TransOcean LTD Deepwater Horizon Rig in the Gulf of Mexico. As companies are forced to go deeper and deeper for hydrocarbons both the costs and the risks go up.
Oil Producers Risk Blowouts in Search for Deep Fields
Energy companies delving miles beneath the seafloor for oil are risking pressure surges like the one this week that may have sparked the deadliest U.S. rig accident in 23 years.
Explorers began work on 17 new Gulf of Mexico wells last week in waters deeper than 1,000 feet (305 meters), spurred in part by a tripling in crude prices in the past decade. The threat of pressure surges, or blowouts, that can smash steel equipment and create gushing columns of fire increases as drillers probe deeper, Neal Dingmann, an analyst at Wunderlich Securities, said.
This accident occurred at the wrong time, right after Obama opened more offshore drilling. New regulations that will make offshore exploration and production more expensive are sure to follow. The risks of pressures surges was known.
Some companies aren�t willing to risk the danger of a
blowout. Exxon Mobil Corp., the world�s second-largest oil
company, abandoned its Blackbeard well in the Gulf of Mexico in
2006 after the company�s engineers became alarmed over the
pressure levels and temperatures almost seven miles beneath the
seafloor, Dingmann said.
Peak Oil Era: Why the Cost and Risk of Oil Exploration Will Keep Rising
Rigs like Deepwater Horizon will continue to push drilling depths merely
because the company has to. The days of easy-to-access oil are gone.
Now, companies like BP are faced with oil and gas exploration projects
that require operating in politically unstable regions or working in
technologically complex areas like the deep waters of the Gulf or
offshore Brazil. Protectionist measures from countries like Russia have
forced companies to look at friendlier, albeit more difficult and
costly, areas including the Canadian oil sands.BP�s Gulf of Mexico activities are an example of how far technology has come and how costly it�s getting to reach oil reserves. Leasing the Deepwater Horizon rig cost BP some $458,000 a day in March 2008. The adjustable rate was set to reach $517,000 a day by September 2010 before a new three-year contract between BP and Transocean began.
And now with the Deepwater Horizon oil rig sunk into the Gulf, an oil slick 1-by-5 mile long, and 11 workers still missing and feared dead � the costs are suddenly much larger.
So how much is too much. Transocean not only lost over a half million dollars a day but a rig that will cost 600 million dollars and years to replace. The cleanup will run into the millions. How much of that cost can be passed off to the consumer? Probably not that much. As Chris Nelder explains there is a limit as to high the price of oil can go before economic growth stops and demand dries up. We are uncomfortably close to that limit now.
Very simply, when oil got to $120 a barrel it cut into real
productivity, and forced the world's most developed economies to shrink.
At $147, it wreaked serious damage.........
As we enter the post-peak phase of global oil supply sometime around
2012-2014, the price that heavily import-dependent countries like the
U.S. would have to pay for that marginal barrel will become increasingly
intolerable. In a weakened economy, $100 a barrel (or less) could be
the new $120.The true import of peak
oil, therefore, may not be sustained high prices, but economic
shrinkage. Demand will be destroyed long before oil gets to $200 a
barrel, but it will not be destroyed by improved efficiency.
The bottom line is that deep offshore exploration may simply be too expensive.
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