Tags: Alternative Energy, BP, Commodities, Crude Oil, Don Miller, Energy, Gulf Oil, Oil, Oil Spill

Full Cost of Gulf Oil Spill Just Beginning to Surface

By , Contributing Writer, Money Morning •

As oil soiled the shores of Louisiana over the weekend, the costs of the oil spill in the Gulf of Mexico are just beginning to surface.

The effects of the spill, which may prove to be bigger than the 1989 Exxon Valdez disaster in Alaska, are proving to be widespread--and costly.

The oil threatens one of the world's richest fisheries, and could decimate entire species of wildlife and their habitat, while convincing the millions of tourists they attract to take their vacation dollars elsewhere.

It has already injured the prospects and fortunes of the companies directly involved in the spill and may eventually crimp global oil supplies and curtail the efforts of other companies involved in oil exploration and production.

And it could have a chilling effect on President Barack Obama's recently announced plan to increase offshore oil production.

No End in Sight

The monumental battle to staunch the leaking oil goes on but has shown little progress to date.

BP PLC's (NYSE ADR: BP) initial efforts to cap the leak with a submersible proved fruitless, and a plan to burn the oil off with controlled fires was scuttled by rough seas.

Despite a huge effort - described as the largest in the industry's history - to stop the oil from reaching the shore, oil began tainting the Louisiana shoreline Friday. U.S. authorities estimated the oil from the Gulf spill could push "tar balls" into the Mississippi river, and pollute the shoreline from west of New Orleans all the way to the beaches of Florida.

"It is of grave concern," Davis Kennedy of the National Oceanic and Atmospheric Administration told the Associated Press. "I am frightened. This is a very, very big thing.  And the efforts that are going to be required to do anything about it, especially if it continues on, are just mind-boggling."

Meanwhile, the well is said to be gushing out 200,000 gallons of oil per day, rather than the previous estimate of 40,000 gallons per day. 

At that rate, the spill could surpass the worst oil spill in U.S history - the 11 million gallons leaked from the Exxon Valdez, which ran aground in Alaska's Prince William Sound in 1989 - by the third week of June.

Eventually, the spill could grow much larger than the Alaska spill because Gulf of Mexico wells contain much more oil than a single tanker.
It now appears the only solution is to drill another well alongside it-a process that could take more than three months.

Extensive Environmental Damage to Hurt Fishing & Tourism Industries

The oil slick could become the biggest environmental catastrophe in decades, threatening hundreds of species of fish, birds and other marine life and their habitats.

"This has a danger of becoming an utter ecological disaster," Ken Medlock, a fellow in energy and resource economics at Rice University's Baker Institute for Public Policy in Houston told Bloomberg News. "This is going to result in remediation costs and is going to be burdensome, to say the least."

Louisiana Governor Bobby Jindal on Thursday declared a state of emergency to begin preparing for the oil.  He also requested a federal disaster declaration to aid commercial fisherman, providing funds and potentially suspending loan repayments to the government.

Jindal also requested federal funding for as many as 6,000 National Guard troops and demanded extra oil barriers from BP and the U.S. Coast Guard to protect wildlife reserves.  He said at least 10 wildlife preserves in Louisiana and Mississippi are in danger and billions of dollars invested in coastal restoration projects may be at risk.

The wildlife preserves nurture Louisiana's $1.8 billion seafood industry, the richest in the U.S. behind only Alaska.

Oil from the leaking well is lighter than the Alaskan crude spilled by the Exxon Valdez, Dagmar Schmidt Etkin, a Cortland, New York-based oil spill consultant told Bloomberg. 

"There are going to be more toxic impacts than the heavy black oil you saw with the Exxon Valdez," he said.

Shrimp boats were dispatched to fishing grounds east of the Mississippi River to harvest as much as possible after the state declared an early open to the season to beat the deluge.

"Maybe before it hits inshore, there can be a week or two of harvest and we'll get something out," Mike Volsin who owns Motivatit Seafood told The AP.
The Gulf of Mexico is also home to widespread and lucrative oyster beds and is the only spawning ground for bluefin tuna, which is at the peak of spawning season.

Shrimpers and fishermen on April 28 filed suit in federal court against BP and Transocean Ltd., (NYSE: RIG), the owner of the sunken rig. The lawsuits say Louisiana supplies 25% of the seafood for the continental United States, Bloomberg reported.

The Gulf also generates billions of dollars in revenue from outdoor recreation, sport fishing, and beach tourism, which could be decimated as the crude oil washes ashore.

Oil Companies Hit Hard

The spill could be devastating for the three oil companies most directly involved in drilling at the site 40 miles off the coast.

BP and Anadarko Petroleum Corp (NYSE: APC) partnered in developing the Macondo field where the rig was drilling, joined in the project by junior partner Mitsui & Co. (Nasdaq ADR: MITSY). The Deepwater Horizon drilling rig was owned and operated by Transocean.

The spill represents a huge blow to BP.  BP is the biggest oil producer in the Gulf, with output of more than 400,000 barrels a day.  It has been a driving force behind exploration in the deepwater part of the Gulf and has made several huge oil finds there in recent years.

BP's costs are now $6 million a day and will rise as it adds people and equipment.  It estimates the cost to drill the containment well will top $100 million.  The government will also bill the company for any assistance it provides.

BP, Anadarko and Mitsui may have to pay as much as $12.5 billion before tax to control and clean up the oil spill, Sanford Bernstein & Co. analyst Neil McMahon said in a note to investors obtained by Bloomberg. 

"The cost for BP will be heavily influenced by how much oil reaches the Gulf coast and where this occurs," McMahon wrote.

BP confirmed Friday that it is self-insured for any costs related to the spill, so the company will have to absorb those charges. BP stock has lost 10% since the rig exploded April 20.

Transocean will announce first quarter results on May 6, but has also lost 11% of its value in the aftermath of the spill.

The estimated costs do not include penalties that may be assessed in potential legal actions that are already pending.

Besides the lawsuit filed by the Louisiana fisherman, the families of some of the 11 workers killed when the rig exploded and sank also have filed suit.

"It is too early to quantify other potential costs and liabilities associated with the incident," BP said in a statement.

The Wall Street Journal reported Thursday that the doomed rig lacked a remote-control shutoff device commonly used in other major offshore oil-producing nations, which may serve to increase legal costs.

Obama's Plans for Expanded Drilling in Limbo

Meanwhile, the Obama administration began hedging its bets against a plan it had previously announced to expand offshore drilling in areas that had been off-limits to energy developers.

White House Press Secretary told The AP that depending on the cause, the spill could affect what areas would be viewed as acceptable for drilling - or even change the president's viewpoint on new offshore drilling.

"Before production moves forward in a new region of the Gulf of Mexico, the Mid or South Atlantic, or the Arctic Ocean, an area will have to undergo thorough environmental analysis, public input and comment, scientific study and review, and a careful examination of the potential risks and spill response capabilities in that area," a White House official told The Journal.

BP is bracing itself for a round of tough grilling on Capitol Hill, as lawmakers prepare to investigate the cause of the spill and BP's response. The company has pledged to cooperate with a joint probe launched by the Department of the Interior and Department of Homeland Security, and it has initiated its own investigation.

"Regulators will want to understand how this occurred and quite reasonably wish to introduce additional regulation, if that's appropriate, to prevent it happening again," Chief Executive Tony Hayward told The Journal. "You certainly won't see BP standing in the way of that."

Asked whether the spill could prompt calls for a moratorium on drilling in the Gulf of Mexico, he said: "I'm certain some people are thinking that might be necessary."

Senator Bill Nelson, D-FL, a longtime skeptic of offshore drilling, said he would introduce legislation to block the Interior Department from acting on the administration's drilling plan.  He also called for a halt to test wells and other exploratory operations in coastal waters.

Such a move could pinch global oil supplies.  Total Gulf of Mexico oil production was projected by the Department of the Interior to reach 1.7 million barrels per day in 2010, valued at $525.6 billion annually at current prices.  Total world production averages roughly 84 million barrels per day.

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