The BP Relief Wells … And the Two Nightmare Scenarios to Fear

[Editors' Note: Frequent Money Morning contributor Dr. Kent Moors is an advisor to six of the world's Top 10 oil companies and a consultant to some of the world's largest oil-producing nations. Read what he has to say about the BP relief wells ... and the 'Armageddon Scenario' we all should fear. Dr. Moors just launched his Energy Advantage advisory service.]

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Although the global energy sector is entering its most-promising stretch in decades – with more new technologies and more investment opportunities than ever before – I just can't seem to get away from BP PLC (NYSE ADR: BP) and its problems.

Take last Thursday, for instance. I began the day at FOX Business News, where the interviewer wanted me to explain what will happen if the BP relief wells fail. Then I spent an hour as the guest on a radio talk show from Johannesburg, South Africa, detailing what options are available to BP. Later still, I served as a consultant to a Wall Street investment crew – via conference call – once again on the status of the BP relief wells.

The BP relief wells are right now the dominant topic on everyone's mind. But there are two potential scenarios – of "nightmare proportions" – that investors need to know about.

Let me explain…


Problem No. 1: The Armageddon Scenario

Although news on BP's early success with a new oil-well cap really helped fuel investor optimism yesterday (Tuesday), the reality is that two other potential problems are unfolding.

And both will certainly affect how you invest in the oil sector.

In the days and weeks to come, the question that will dominate headlines is a simple one: Will the BP relief wells succeed?

I'm still giving the company no better than a 50-50 chance.

Surprised? Don't be. Take a step back and really think about what BP needs to do.

The bottom of the production casing (what's left of it) for the blown Macondo-1 Well is 18,360 feet down – about 5,000 feet of water followed by 13,000 feet of seabed below. The relief wells are going to intersect the current pipe at about 17,500 feet down. The idea is to interrupt the oil flow and then stop the leak by pushing down a considerable amount of drilling mud and fluid. This is called a "dynamic kill." It is not intended to stabilize the well for later production – it's intended to end it for good.

But this outcome is hardly a certainty. To put it in perspective, BP needs to drill down three miles – having to do so blind for the more than 70% of the operation that is below the seafloor – while hitting, at the correct angle, a target no bigger than a salad plate .

What if the leak cannot be plugged?

The relief wells may still siphon off some of the oil flow, but the leak will continue for quite some time.

The legendary oil firefighter Red Adair gave a series of lectures in Scotland, just as deepwater drilling was beginning in the North Sea some 30 years ago. Somebody asked him then the same question people ask me today: What happens if a relief well cannot stop a blowout?

His answer was direct: Nature will ultimately decline the pressure of the leak to a point at which the well can be capped. However, he added, that would take about three years.

Now here's my answer. Based on flow rate and initial BP production estimates, my current projection holds that, should the relief wells fail, a 1,015-day continuous flow awaits before the blowout suffers a natural death. That's about two years and nine months of spilling oil.

Additional relief wells would certainly be attempted in the interim. But each attempt would take two months or more.

Keep in mind, this is all dependent on whether the structure remains intact. And this introduces what is beginning to worry me more and more with each passing day.

I call it the "Armageddon Scenario."

We can see in the video feeds that the blowout preventer (BOP) is intact. It sits on top of the wellhead. The leak comes from the place where the connection between the BOP and the riser pipeline used to be.

What we cannot see is the stability of the production casing below the wellhead. We don't even know how much of that casing remains intact. The increasing oil flow over the past few weeks may provide some concerns about the continuing integrity of the well structure below the surface. If it begins to concave, the pressure will cause it to rupture, with debris and an accelerating oil flow moving into what is already a compromised annulus (the space between pipe and borehole surface) filled with cement. We already know the cement has fissures – that seems to be how the gas bubble reached the surface to cause the initial explosion back on April 20th.

Ruptured casing would cause the collapse of the surrounding ground, producing an implosion, a widening sinkhole, and a rapid rush of oil up to the surface.

Estimates now put the oil flow at as much as 80,000 barrels a day – including the volume being captured by BP. In my "Armageddon Scenario," that figure would immediately double or even triple. And any attempt to combat that kind of spill, either on the surface or at the shoreline, would be futile and pointless.

Let's hope that doesn't happen.

Problem No. 2: A Severe Global Oil Shortage

Even if the production casing remains intact, and Armageddon is avoided, there is another major difficulty coming into focus.

All indications point toward deepwater drilling as the source for a rising amount of crude oil needed internationally. This is the reason companies are assuming the great risk and expense of drilling considerably offshore – because that's where you find most of the major fields left undiscovered. The only net additions to U.S. production through 2015 were to come from deepwater drilling (800 to 1,200 feet) in the Gulf of Mexico. Worldwide, it was expected to accelerate – off of Brazil, Vietnam, Nigeria, Ghana, Russia, and a number of other locations. In five years, deepwater drilling was to have made up 10% to 12% of all global production.

And now, this is where the oil market impact of the Macondo blowout could have its most serious effect.

We are slowly moving out of a financial crisis that significantly cut oil demand. As the economic situation stabilizes, that demand will begin to return. It has already begun in a number of regions.

Total present worldwide crude supply tops out at about 91 million barrels a day (mbd), counting all of the Saudi spare capacity. Current demand is about 86.5 mbd – and rising.

Increased volume from deepwater drilling is an essential part of bringing additional supply online to meet that increasing demand. (Remember, the decline in demand resulted only from an international financial crisis. Not a sudden change in the oil market itself.) The collapse in oil prices in the fourth quarter of 2008, and their leveling off in the first quarter of 2009 – a period of less than six months – actually resulted in delaying new drilling by as much as two years.

Now, as demand levels surge, supply is questionable. That magnifies the problem from the BP spill. It is not the volume lost from that well alone. Rather, as the Macondo experience causes a rethinking of deepwater-drilling-production plans, the tragedy may result in the loss of a far greater volume of supply from elsewhere around the world.

With the demand-supply balance becoming a concern, another BP failure – this time at capping the well – would have widespread impact. And none of it will either lower prices or increase the available oil.

Against my better judgment … all this leaves me with no choice but to root for BP.

[Editor's Note: Dr. Kent Moors, a regular contributor to Money Morning , is the editor of "The Oil & Energy Investor," a newsletter for individual investors. In a career that spans 31 years, Dr. Moors has been consulting the energy industry's biggest players, including six of the world's Top 10 oil companies and the leading natural gas producers throughout Russia, the Caspian Basin, the Persian Gulf and North Africa. His experiences - as well as his unrivaled industry access, contacts and insights - will serve as the foundation for the Energy Advantage, an advisory service that debuts this week. For more information on that service, please click here.]

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About the Author

Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle

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  1. Steve Counihan | July 14, 2010

    In perspective, it is my opinion that the oil tycoons are controlling the Alternative Energy Sector!
    Ever since Obama says and pushes for alternative energy and not to mention other political administrations now for 20 some years, it appears to me that the major players in Alternative Energy providors, their capital (stocks) continue to struggle and or decline? Why is that?
    I feel that if there was such a push for Alternative Energy then why are the values of those companies declining? Maybe, it is because the current and previous administrations are still lining their pockets from the oil industry? On a simiilar note, Lithium Ion Phosphate batteries for example, there is a company that has patented a new battery that has 10 times the capacity and minutes to recharge rather than hours, yet, this companies value continues to decrease in market stock price? What gives?

    • Rudy | July 14, 2010

      Steve;

      Which battery are you referring to?

      If it is the Toshiba SCiB you have to learn to read the promoters press release more carefully. That product is more of a power capacitor than a battery. It has fast charging and high POWER density but its ENERGY density is low.

      ENERGY = POWER X TIME. No time, no energy.

      Also, Toshiba does nor provide the voltage curve of the product. In a capacitor the voltage is directly proportional to the charge. the battery may be rated at, say, 4 Ampere-hours but its voltage declines as it is discharged. This drastically reduces the ENERGY capacity and makes the power very difficult to use.

      POWER = AMPS X VOLTS. When the voltage goes down so does the power and energy.

      I think Toshiba would love to sell the product but nobody has figured out how to use it.

  2. john | July 14, 2010

    Yes the blame must be shared by many. Seems like no one including the regulators thought of the what if and did a plan B. Obviously they never heard of the term redundancy.

    Any plans for future off shore drilling must include a plan B regardless of the delays to the industry.

  3. Jim West | July 14, 2010

    Kent,
    You need to do a little more research on the methane release problem of the BP well.
    During our geologic past, massive amounts of methane were released into the atmosphere which caused catastrophic extentions. The methane held in the reservoirs beneath the ocean are huge. Some scientists are concerned the amount of methane being released by the BP oil reservoir could be on a scale to be significant. The arguments for and against this scenario are consdierable. While I'm not sure of the validity of these concerns, they merit further study since the consequences of a huge methane release from this geologic reservoir could be considerable.
    A large sudden geologic methane bubble release around the current BP well, would cause the water to be a large mixture of methane bubbles and water significantly reducing the water buoyancy and could cause anything floating in the area of the bubble to sink.
    The gas release would be toxic. Some are concerned the size of the potential methane release could impact life for many miles around. Again these queestions have no clear answers but definitely merit a better understanding.
    To me, this is worst case scenario to be concerned about.
    Thanks,
    Jim

  4. dave raby | July 14, 2010

    My company, Sysdrill Ltd., was the technical lead on the 6 relief wells planned ( 2 drilled ) by Occidental U.K. on the Piper Alpha disaster in the UKNS. Mr John Wright, formerly of Boots and Coots and now at the Macondo site, managed the directional drilling for Eastman Christensen Inc. that executed our plans. I can tell you unequivocally that the chances of the relief well(s) failing is very small indeed. I can give you chapter and verse on the technical issues but I have followed the progress of the effort and it is going by the textbook.

  5. Guna | July 14, 2010

    Excellent write-up

  6. Trey Gilmore | July 14, 2010

    Your fear mongering about the Macondo well is unwarranted. Relief wells work. Drilling is not blind. Directional drilling is used everyday. Dynamic kills are common. Relief wells don't siphon off the flow. They are used to kill the blowout. Furthermore, additional relief wells could be drilled through sidetracks of the existing relief wells, drastically reducing the number of days required. The oil industry is one of the most technologically advanced industries in the world.

    For part two, only the US deepwater is at risk because other countries don't let environmental wackos and political hacks control their energy policies. Brazil lost a full production platform offshore and a couple of rigs and never missed a political beat.

    Accidents happen and this one is a tragedy in every way but it most likely happened because of the behemoth bureaucratic ineptness of BP and the federal government.

  7. fallingman | July 14, 2010

    Thanks. Useful analysis.

    I believe one premise is flawed, however.

    "We are slowly moving out of a financial crisis that significantly cut oil demand. As the economic situation stabilizes, that demand will begin to return."

    The stabilization/recovery assertion, stated as a given above, is unsupportable. In fact, it's fantasy. Nothing more than official propaganda combined with a dose of wishful thinking by those who cling to the notion that the empire bulit on debt isn't in the throes of a complete collapse.

    My best guess, FWIW, is that oil prices take a hit and then severe supply issues, stemming mainly from export restrictions of a vital, strategic commodity by sovereign governments…and supply disruptions…take it to the moon. The loss of deepwater supply here sure won't help.

  8. fallingman | July 14, 2010

    Useful analysis. thanks.

    I take issue with one thing:

    "We are slowly moving out of a financial crisis that significantly cut oil demand. As the economic situation stabilizes, that demand will begin to return."

    The stabilization/recovery scenario is presented as a given. Hardly. More like a fantasy. Official propaganda mixed with wishful thinkg by those who are praying this empire built on debt and sleaze isn't in the process of completely disintegrating, but it is.

  9. nestor g ramirez | July 14, 2010

    my comment is that if BP can not killl that well they better pack up their things and go, let someone else do it. this is highly improbable. it is just a question of days. what i would do is to keep the three wells on production, because the problem well can be a producer, excelent producer as a matter of fact. they can killl it but that does not mean they can not complete the wee to produce oil from it, there are very few if any wells with this kind of rate of production, it will be shame to shut it down and cement it, that would be what a government would do, but if it was my well i will do anythis to controll it firts, and then move on and make a completion to produce 40 o more thousand barrels of oil per day.
    what was written is pure speculoation. no wander this page is an investors page..
    chao, nestor g ramirez
    ex drilling superintendent of gulf oil corp in venezuela.

    • nestor g ramirez | July 14, 2010

      BP needs to make a completion of the three wells to produce about 100.000 b/d, or more, it will be a shame to cement this well whch is out of control.
      all they have to do is intercept it, killl it, and them move on it and make a completion. also complete the other two wells from the same producing horizon, there are very few wells in the gulf that make this kind of production.
      i bet BP is considering this, but since it is not pupular they are quiet about it, but you want to bet they will try this, their main problem is the government, but that can be, and always has been orverriden…..chao, nestor g ramirez

  10. Btorbik | July 14, 2010

    Matt Simmons has also postulated that the relief well will fail and that none of the original well casing remain in place. His proposed solution is to seal the well a small nuclear device, something he claims the Russians have had to do 4 times. Albeit, the devices exploded by the Russians were on land. Simmons further states that the heat from the explosion would seal the well, and that this is the method that will work.

    Much as I hope BP succeeds in its efforts, Plan B should include consideration of Simmons' suggestion.

  11. Trey Gilmore | July 14, 2010

    Nestor,

    This well blew out. It most likely has a bad cement job and probably has bad tubulars from ripping 80,000 BOPD through its casing and annulars. Plus it will have a nice sized hole in it from the intersect well(s). This well will be plugged but the intersect wells could be sidetracked to develop the reservoir after the Macondo #1 is cemented up.

    No puede utilizar este pozo.

  12. The R | July 14, 2010

    What Kent said. Entirely possible. At that point, I don't think there will be any concern about stock quotes or the potential blow up in the derivatives market. That'll be for the next species to inhabit earth to consider. That is the worst case, Armageddon scenario.

    IMHO

    Hopefully, we will not go their. Heck, they haven't screened the last Harry Potter and just who will be the next American Idol? Oh My. . .

  13. Drew - UK | July 14, 2010

    Thank god you dumb Americans have stopped blaming Britain for the disaster; as a Brit I roared with laughter when they were first at it. Even that clown Obama was at it.

    I mean, for god sake, if my boy Jonny gets sick after eating a McDonald's Hamburger, am I going to blame the Americans? Duh!!

    It has been a pleasure to read some sane comments on here and pragmatic suggestions.

    I put it to you all that some money would be better spent checking out the safety of each and every rig in US territorial waters and the effectivity of emergency procedures and the associated equipment. This is one first lesson to learn – go all out to prevent another!!

  14. Drew - UK | July 14, 2010

    None of this makes sense

  15. Drew - UK | July 14, 2010

    As Brit am sick of this biased two faced hypocritical American Crap over BP.

    Hope the bloody stuff keeps spewing out until you guys shut up and get real about your own culpability in this.

    Until then – moderate your one sided posts all you like. It doesn't reflect reality.

    • Jeffrey | July 22, 2010

      Drew, We will be bailing you out next and I hope you Brits like the 8 quid a liter, HAHA, it will never get that high here.

  16. M Miles | July 14, 2010

    Most do not realize what takes place when you stop drilling a well for any length of time.
    1) you have to withdraw all the drill string so that the drill bit does not get stuck down hole.
    This step alone takes time depending on the depth of the well . . .
    it doesn't make sense to stop drilling the relief wells at this time?
    2) More steps with respect to well casing as pulling the string.
    3) Start drilling again replace drill string, thousands of feet of string, and get mud back up
    through annulus to top of well; more time.

    You just DO NOT shut down a well. So what is going on? Shut down both relief wells?

  17. Hercial Vitalis | July 14, 2010

    I am a shareholder of BP and I am confident tht they will cap the well and have the technology to be economically successful in their relief efforts. what I am concerned about is
    the ecological disater of the marine fauna and flora. I think that bureaucracy should not interfere with the affected people wellbeing.

  18. MICHAEL EVANS | July 15, 2010

    CAN SOMEONE PLEASE TELL ME THE NAME OF THE COMPANY THAT PRODUSES LITHIUM BATTERIES THAT POWER LPTOPS + I PHONES NOTEBOOKS AND A LOT OF FUTER INVENTIONS THAT WILL NEED LITHIUM BATTERIES. I WOULD BE VERY GRATFULL IF YOU CAN TELL ME THE COMPANIES NAME WHO OWN THE RIGHTS TO MOST OF THE LITHIUM COMING OUT OF THE GROUND. THANKYOU VERY MUCH FOR YOUR CO-OPPERATION AND ANY INFO WOULD BE GRATFULLY RECIEVED! MY REGARDS , MICHAEL EVANS

  19. Dan | July 15, 2010

    In point #1, as you surely know, drilling companies now have the directional drilling ability (and GPS abilities) to pretty much pinpoint the exact spot they want to go. Did you not know this, or why are you trying to overdramatize this point? The casing still being in tact is another matter.

    In point #2, "We are slowly moving out of a financial crisis that significantly cut oil demand". We are? Regardless of this dubious (at best) statement..the BP situation will have little to no impact on other countries (Petrobrass, CNOOC) future deepwater drilling plans….You know this as well.

  20. James | July 18, 2010

    Just amazing that no one in this very serious debate about Peak Oil really addresses the issue of conservation. Very simple. Walk a little bit instead of constantly driving and consume less. "Happy Motoring" and suburban sprawl are coming to an ignoble end and China and India coming late to the party are only seriously exasperating the issue. The bikes have gone from Shanghai and Beijing, actually outlawed. Funny how leadership has such short-term vision. When it all caves in, they and we will be utterly amazed (even though M. King Hubbert laid it all out for the geographical area of the US and even as difficult new discoveries and oil sands processing are too damaging and costly to prolong output over demand in the new geographical area which is the whole globe).

    Of course, everything is price. Currently it is based on there being mythical low cost new discoveries close on the horizon and the belief in falsified reserve estimates. Things are changing though as Volvo, the US military and Sir Richard Bronson have all recently come out in support of already here or very close Peak Oil.

  21. Dean Malone | July 18, 2010

    Moors final remark is INSANE.

    We have had the answer for many years. It's just the tip of the iceberg.

  22. DONALD MCcURDY | July 18, 2010

    Lithium car batteries are being made by AONE company in southern Michigan.

    BYDDF IN CHINA is the most likely involved for a loong time !! ( these are market symbols )

  23. Mike & Lesley Recker | July 19, 2010

    Hi Guys ! I think it highly likely that this horrific oil spill may unfold as far worse than presently imagined. Could one of these "nightmare scenarios" actually develop ? Who knows ….. I would not rule out any outcome at this point. Thought you would be keenly interested. Please let me know if you would like me to stop "Forwarding along" similar financial and other newsletters, mainly from services I pay to subscribe too. I was so informed of this last night from another on my list of people I care about. Am now thinking I should ask everyone on my list if my emaillings are actually being well received …… or am I becoming merely a nuisance. Do let me know. I promise my feelings will survive. My intentions are always good. Bye for now, Carl (feeling a bit The Fool….today).

  24. Dr Ross Grainger | July 23, 2010

    BP's problems in the Gulf of Mexico have only highlighted the fact that even very large corporations and multinationals are not big enough and do not have the capacity to safely undertake deep sea oil drilling. Such large scale environmental catastropheres as that of BP in the Gulf of Mexico can only be handled by large national governments with, possibly international cooperation. Despite the fact that China is not as technically advanced as most Western countries only it has demonstrated that it has the capacity to deal with such disasters. The recent Dalian Oil Spill and the Yushu and Sicuan earthquakes are just three examples. For me, the most notable feature of the Gulf of Mexico oil disaster is how powerless the Obama Administration and the US Government are in general to do anything positive to bring the problem to an end.

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