Oil Spill Could Affect Onshore Refineries

The crude oil leak caused by the explosion and sinking of BP plc’s (NYSE:BP) Deepwater Horizon semi-submersible rig continues to pump about 5,000 b/d into the waters of the Gulf of Mexico. BP is seeking a way to stop the leak, and plans to try different methods to staunch the flow in the next few days.

Onshore refineries owned by Exxon Mobil Corp. (NYSE:XOM), Valero Energy Corp. (NYSE:VLO), Royal Dutch Shell plc (NYSE:RDSA), Chevron Corp. (NYSE:CVX) could be affected by the disaster as well as BP.  The spreading slick could have an impact on deliveries to the Louisiana Offshore Oil Port (LOOP), where about 10% of US oil imports are landed. So far, no oil deliveries have been affected, but two natural-gas wells have been closed and evacuated.

The price of crude oil has risen on the London market to $88/b for North Sea Brent on the [ The price hikes are the result of fears that production in the Gulf of Mexico will be diminished due to the leak, and that once the leak is stopped, the US government will force an evaluation of deepwater drilling procedures that could halt or reduce the flow of oil from the Gulf.

BP is still working to get the malfunctioning blow-out preventer (BOP) to work. The BOP is manufactured by Cameron International Corp. (NYSE:CAM). The following photo shows a robot arm working on the BOP, 5,000 feet below the surface.

The company is also considering trying to place a second BOP on top of this one, and diverting the flow of oil to the second BOP which would then be shut off. Before doing that, the company needs to gauge more accurately the pressure on the leaking pipe attached to the malfunctioning BOP. It could take a few days to determine whether this is possible or not.

BP has also called in a second rig to begin drilling a second relief well in the event that the first relief well is unsuccessful. The second rig is expected to arrive on site in 10-12 days. This photo shows the first of the relief well rigs, TransOcean Ltd.’s (NYSE:RIG) Development Driller III, in place.

The broken riser (pipe) has been leaking in three places and BP has succeeded in cutting off the end off the pipe at one of the smaller leaks and will attempt to install a valve there to stop the flow of oil from that spot.

The largest portion of the leak, though, is coming at the end of the pipe and the plan for that is to install a dome over the end of the pipe to contain the oil before it rise to the surface. Once the oil is contained it would be pumped to a tanker on the surface. Three such domes will be needed to contain the three leaks, and one is ready to be deployed within 6-8 days according to BP.

BP has successfully sprayed dispersant fluid at the oil leaking from the end of the riser, and hopes to drill into the pipe and spray the dispersant directly onto the flowing oil in an effort to mix more fully with the sea water and halt the formation of an even larger slick.

BP and the US government are coming under fire for not responding quickly enough to the disaster. The main issue, though, is not so much response time as it is how to stop the leaking well at such a great depth. Procedures that work in shallower waters have been assumed to work at depths an order of magnitude greater. But those procedures have never been called for in an emergency.

One certain effect of the disaster will be a review of the effect of drilling at such great depths under the surface and of drilling to depths of more than 3 miles below the sea floor. Are the temperatures and pressures beyond the ability of current equipment to handle? Can a fail-safe mechanism be devised that will guarantee that such a disaster can’t happen again? Will inspections be more thorough and more frequent?

The US gets about 20% of its domestic oil production from the Gulf of Mexico. We can’t simply turn that off, even for a relatively short period. Such a move would send the price of crude above $100/b in a heartbeat.

Paul Ausick

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