At last report BP was making progress on the relief wells that are being drilled to plug the runaway well in the Gulf. The London Times reports that BP hopes to penetrate the casing of the leaking well and start pumping in well-sealing mud in about two weeks. Let's hope something works.
In the next few weeks, or if things do not go well, perhaps months, the leaking well will be plugged, fishing hopefully will resume, the tourists will return, and the whole matter will be left to lawyers who will spend decades arguing how much New Orleans strip clubs that lost business during the oil spill should be remunerated by BP.
Someday, however, it will become apparent that the real disaster is taking place 150 miles to the south at BP's multi-billion dollar Thunder Horse oil platform that was supposed to extract a billion barrels of oil at a rate of 250,000 barrels a day (b/d). Production at Thunder Horse began in May of 2008 and by the end of the year had reached 170,000 b/d. Then something unexpected happened; instead of production increasing to the rated 250,000 b/d, production began to drop at 2-3 percent each month so by the end of 2009 production was down to 60 or 70,000 b/d. As BP is under no obligation to tell us what is going on, little news other than mandatory federal production reports have been released.
While new oil discoveries are trumpeted widely, failing projects, especially multi-billion dollar ones, just seem to fade away. Another Gulf project know as Neptune is not doing too well either. Neptune was expected to produce 50,000 b/d. The platform peaked at 40,000 b/d in August 2008. Sixteen months later production was down to 16,000 b/d. It now looks as if the platform that was supposed to produce 150 million barrels of crude will produce on the order of 33 million. The pattern emerging here is that deepwater oil production is not only dangerous, it may not be all it is cracked up to be.
The international oil companies that are drilling in deep water certainly are not about to connect the dots for us, but independent observers say it is looking like our new deepwater oil wells are only going to be producing some 10 or 20 percent of initial estimates. Deep water oil is a whole different game with which no one has much experience. None of the deepwater fields have been producing long enough to have established any track record as to just how much oil can ultimately be recovered from deep beneath the sea where temperatures and pressures are extreme.
Now all this might be of academic interest until we recall that, outside of Iraq, there are few places left to drill on dry land with much potential. The few good dry land and shallow water sites left are firmly in the hands of national oil companies, whose first job is to ensure that their domestic oil market is fully supplied with cheap oil for their citizens. If there is any left over, they will be happy to sell it to foreigners.
The next question is what the fallout from the Deepwater Horizon disaster will be for deepwater oil.
A recently released BP document shows that before the Deepwater Horizon explosion, the company was basing its whole future on production from deepwater wells. There is little doubt that there is a whole lot of oil deep below the Gulf of Mexico, off the coast of Brazil and the east coast of Africa. The industry hype says there is at least 100 billion barrels or even more. Keep in mind that this is only three years of global oil consumption and even in the best of circumstances; it would take decades to extract.
Right now there are two issues regarding deepwater oil.
First is how much can be extracted. If it turns out that 10 or 20 percent of initial estimates is all that can really be recovered, then the cost of this oil will be prohibitive. Deepwater wells were running $100 to in some cases $200 million per well drilled. Platforms that drill and support multiple wells can easily get into the billions of dollars before they are producing. If these wells unlimitedly yield only a fraction of what their planners were hoping for, there are going to be some very broke oil companies, or some very expensive gasoline in our future.
The next question is what the fallout from the Deepwater Horizon disaster will be for deepwater oil. The U.S. has already imposed a moratorium on further drilling until the causes of the blowout are fully understood. This moratorium alone is almost certain to add substantially to the costs of drilling in deepwater. Add to this the new and most likely tougher drilling regulations and the development and deployment of a new generation of blowout preventers that work reliably and we are going to see some very high cost oil coming from offshore wells.
All this says that we may not be getting half of our oil from deepwater wells 10 or 15 years from now. Unless there are some major advances in vehicle mileage, the oil that we get from offshore just may be too expensive to put in our gas tanks.