The NY Times yesterday reported that the US Federal government is thinking about developing
...a kind of parallel technological universe in which government would have the robots, the coffer dams and the other tools necessary to help control a big blowout.
At the same time, BP seems to be running out of it's own options to stop the leak. BP is currently drilling a relief well (estimated completion in August 2010) as the last best solution to a deepwater well blowout. Relief wells have worked before (above is pictured the Montara wellhead platform in the Timor Sea which started leaking on August 21, 2009). The problem is that relief wells take a long time to drill and a lot of oil can leak while we're waiting.
Rather than have a parallel technological universe set up by the Federal government (expensive and unlikely to work when needed), the obvious solution seems to be drilling both wells at the same time. Yes, drilling two wells will be twice as expensive. The equation, however, is cost-benefit = 2 x (cost of oil) - 1 x (environmental catastrophe). Another benefit is that 2 x (cost of oil) for deepwater drilling will marginally increase the cost of gasoline which will marginally increase the incentives for carbon neutral technology. Seems like a win-win.
Unfortunately, the double-think proposal is a close-the-barn-door-after-the-horse-is-gone solution. Prince William Sound in Alaska has still not recovered from the Exxon Valdez spill. The Deepwater Horizon spill is much larger and the recovery will be much, much longer.
Can we count on markets to prevent future oil-spill catastrophes? BP will certainly be damaged by the event and other oil companies will be re-thinking safety procedures. However, markets fundamentally reward risk, cost-cutting and externalization of cost (government bailouts, environmental damage, pollution, etc.). Safety costs money and there will always be market pressure to cut corners.
Drilling two wells to begin with, I thought of that too and am surprised it hasn't been proposed as condition for new wells. Wells apparently cost some millions, maybe 100 or so, and all capital and operating costs would double(am assuming the relief well would need a platform, testing, staff, etc.). That might simply make it infeasible to drill the well in the first place. We can say they should be willing to pay for maintenance but we can't stop the companies from just not building anything b/c there's no ROR. Let us know if you find out more about this, I obviously speculating. g
ReplyDeleteSome back-of-the envelope: BP was paying 500,000 per day to Transocean for the Deepwater Horizon and the drilling started in 2008 so let's say the total cost of drilling was $66 billion. Deduct the $20 billion escrow account and an estimated $62.9 billion in criminal fines and we're still not to the point where it would break even to drill two wells. But, there's still a good chance that we'd get to $132 billion for the total cost of cleaning up the mess.
ReplyDeleteMeaning that Transocean incurred all the start up costs of drilling, equipment, etc. and the daily rate BP is paying is inclusive of all their costs? Is there a license fee of any kind to pay since I think US claims this is "their oil" that's getting drilled. Or should I say the taxpayers are going to get drilled? Gordon
ReplyDeleteThe Federal Offshore Mineral Revenue Collections were $1.698M in Q4200. The collections are from royalties, bonuses, rents and other revenues. Royalties are paid when production begins.The other revenues start when the lease is awarded .
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