It Can't Be That Bad!
Research for Online Investors

by John Dalt

7/2/10

How bad can it be?  This question allows humans to minimize the impact of bad news or actions.  Except for the occasional pessimist, most of us try to ignore the negative and “accentuate the positive,” to borrow a phrase from an old song.  The longer a bad situation goes on, the more we minimize it, thinking it will go away and not bother us again.  This tendency is probably hard wired into our Rat Brain.

I am reminded of people that raise dangerous wild animal pets.  They love their cuddly little crocodile or boa constrictor, until it eats the neighbor’s dog, or worse.

We wrote about the BP accident on June 16 in Drill Baby Drill.  The BP gulf oil spill occurred on April 20 when the Deepwater Horizon exploded.  It will soon become the worst oil spill in the Gulf when it passes the Ixtoc 1 spill that occurred in 1979-1980 off the coast of Mexico.  The Ixtoc 1 spilled 139 million gallons of crude oil.  We are still short of the Iraq oil spill in 1991, estimated at 460 million gallons.  Hold on to your hats, the BP oil spill may pass the Iraq spill before it is sealed!

All efforts to stop the spill have been unsuccessful.  The blow out preventer didn’t seal it off.  Top kill didn’t stop it.  All BP has done is cut the top off the pipe, allowing more oil to flow, and install a fitting to capture as much as possible.

The problem appears obvious to some of the people I talk to.  The well below the seabed is compromised.  BP did not use enough “centralizers” to hold the drill pipe in the casing.  Halliburton did the cement job, but if the pipe was not held straight in the casing by “centralizers” an uneven amount of cement sealing the pipe may have developed air pockets or weak areas.  This would allow oil or gas to flow between the pipe and the casing.

If BP fears this happening, it would explain why they cut off the top of the pipe to remove as much restriction as possible.  By reducing the "backpressure" on the well they can reduce the flow of oil outside of the drill pipe.

When the cement is pumped to the bottom of the well to seal the drill pipe and casing, it also must flow outside the casing and push into the crevices between the casing and the surrounding rock.  This seals the casing in the rock.  Nitrogen was used in the cement, creating foam that forms a stronger bond in some types of rock.  This concrete keeps gas or oil from pushing up the outside of the casing and into the surrounding rock formations.  BP cancelled the contract with Schlumberger to log the cement work.

Why didn’t the ‘top kill’ procedure work?  Because the well was damaged during the initial blowout.  If the drill pipe is broke in the well then the blow out preventer or a top kill will not stop the oil from rising to the surface in the casing.  If you plug the pipe the oil will find a way out around the pipe!  This may be why BP elected to cut the riser pipe off.  BP needed to take the back pressure off the well as oil was being forced into the void and would blow out uncontrollably.

Crude oil is corrosive.  Liquid under pressure is abrasive.  An uncontrolled blow out under tremendous pressure lets the oil flow erode the pipe and casing.  The problem will get worse over time.

What could be worse than oil and gas flowing between the drill pipe and casing?  The pressure will push the oil outside the casing.  The oil will fill voids and work its way up the drill hole.  As the oil fills voids around the well and finds crevices and faults it will spread out from the well.  By the time it reaches the ocean floor the area leaking oil could be huge.

If the drill pipe and upper well casing are deteriorating from the abrasion and corrosion from the high flow of gas, oil and other liquids, the Blow Out Preventer sitting on top of the well could break off the top of the casing. If this happens the gushing oil could blow the drill pipe out of the well, opening up the full diameter of the casing for oil to flow through. At this point we go from 60,000 barrels a day to much, much more.

If this happens before the relief wells are completed in August or September, they may not be able to seal the well.  The other aforementioned possibility of oil flowing around the casing is even worse.  At this point the only end to the gulf oil spill will be when Mother Nature bleeds out. According to the New York Times, the reserve may contain two billion barrels of oil. Anadarko (a partner in the well) estimated 2.3 billion barrels in a report.

Our take on the research we have done today?  Yes BP is a large company, but may have drilled their balance sheet into oblivion.  The more we know, or don’t know, makes us want to short the stock.  They will have to sell assets, but I don’t know how they survive the legal liability of destroying the gulf coastal region and economy.  The only hope they have is that Mother Nature is very good at breaking down oil.

Breaking News:  Middle East sovereign wealth funds are talking to BP about investments that would benefit the company.  BP wants an investment in the company, up to $9 billion by some reports.  Funds may only want to buy assets, so they are not exposed to the clean up liability.

7/9/10 update:

Obama’s point man on the Gulf Oil Spill, Retired Coast Guard Adm. Thad Allen, admitted yesterday that “oil may be coming up through multiple layers (of pipe).” Adm. Allen didn’t admit anymore, but we think our worst case scenario is even closer to the truth. The oil is now flowing up outside the casing and penetrating the rock. As it fills the voids and spreads, the containment of the well becomes impossible. Why else would the administration demand this week that BP develop a new “hood” to capture more of the oil at the ocean floor?

I fear they know there is no stopping the gusher, and the best they can hope for is to collect as much as possible at the top of the well head.  If they place any restriction on the pipe it only pushes the oil farther out into the rock surrounding the oil well.

7/15/10 update:

In the last few days a new cap has been put on the well, but the government delayed BP from shutting the three valves that would increase the pressure on the well.  They were waiting on a seismic study of the ocean floor, and comparing it to a study done before the well was started.  The only reason to compare the seismic studies was to determine any changes in the ocean floor surrounding the well.

BP is scheduled to shut the valves today and monitor well pressures for 48 hours. If the pressure begins to drop, it is because the oil is finding other routes to escape. This could indicate the oil is flowing out into the rock surrounding the well. We will be watching to interpret the developments.

Read our 7/16/10 update on this story, Houston, We Have a Problem

700 feet long, ten stories tall, 500,000 barrels of oily water processed daily.
But can it pick up two billion barrels of oil?

Hurricane Alex has slowed oil spill containment this week.  Alex is more than 600 miles from the spill, but the high winds have forced oil collection boats to shore.  According to Coast Guard Cmdr. Randal Ogrydziak, “All this wave action is breaking up the oil very quickly.  Mother Nature is doing what she does best, putting things back in order.”

“It (unemployment insurance) is one of the biggest stimulus to our economy….creates jobs faster than almost any other initiative you can name…It is a job creator.”---Nancy Pelosi

Is it any wonder we are in trouble?

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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