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Slick engulfs oil industry’s sense of optimism


At the World Economic Forum meeting in Davos in January there was standing room only at the session on the future of oil. Peter Voser, the chief executive of Royal Dutch Shell, sat alongside the head of the Saudi oil giant Aramco, Khalid al Falih, and the chairman of Total, Thierry Desmarest. In the middle was Tony Hayward, the chief executive of BP. The session was so popular, Davos staff had to turn people away at the door.

By Kamal Ahmed
Published: 9:02PM BST 01 May 2010

Mr Hayward spoke about the pressures the industry was under as it struggled to keep up with ever rising demand from the emerging economies. Such was the “supply challenge” companies would have to explore more and more difficult environments from which to gain oil – the lifeblood of markets around the world. A 40pc increase in demand would create the need for 15m barrels per day (bpd) increased production over the next two decades.

Mr Hayward was excited about the future. Iraq was developing as a major oil producer and new methods of extracting oil from tar sands across North America revealed that the business was keeping pace with demand. There was a third element to Mr Hayward’s narrative – deep drilling in the Gulf of Mexico.

That is the backdrop to the catastrophic rig collapse off the coast of Louisiana two weeks ago. Eleven people were killed and estimates of how many barrels are leaking into the sea vary from 5,000 to 25,000 a day. Such is the depth of the drilling site – 4,500ft – that no one really knows what is going on down there.

As BP, alongside Transocean, struggles to contain the spiralling costs of the clean-up operation following the explosion and destruction of the $500m (£327m) Deepwater Horizon rig, it is becoming clear that the whole of the oil industry is holding its breath.

Until now, the oil companies have been greatly advantaged by a relatively benign environment surrounding exploring in the oil-rich shelf off Louisiana and Florida. Local politicians and regulators welcomed the employment and wealth the industry bought. Even the shrimp fishers who are now launching multi-million dollar class actions against BP and Transocean often doubled as oil workers.

That is all now changing. Florida governor, Charlie Crist, said last week that he believed there should be clampdown on drilling in the Gulf. When President Barack Obama arrives in the area today he may well go further than the temporary suspension of new drilling already announced. Just as with the banks, the President is up for a fight with BP – “they must pick up all the costs” – ahead of the crucial mid-term elections.

Reading the long list of oil-spill incidents on the Minerals Management Service safety register it is clear that Deepwater Horizon had previous. All quite minor, but revealing, nevertheless, that working in deep water in an area prone to hurricanes engenders enormous risk.

In Febuary 2002, 103 barrels leaked; in June 2003, 994 barrels of oil leaked after a pipe disconnected in bad weather; in August the same year, 74 barrels leaked, three days later 138 barrels leaked after “equipment failure”; November 22 and 23 2005, 212 barrels leaked following “equipment failure and human error”. Interestingly, the last incident involved problems with a cement plug on the well, an issue that has been raised this time as a possible cause of the accident.

This is now not just a question limited to its impact on BP – one of Britain’s most successful companies, but to the whole of the sector.

An analyst note from Goldman Sachs on the possible impact sums it up:

“The tide of oil from the collapsed Horizon deepwater drilling platform threatens to disrupt shipping in the US Gulf of Mexico and inflict extensive environmental damage along the Gulf Coast,” it said.

“While the most substantial impact of the oil spill will likely be environmental and the impact it might have on future legislation around offshore drilling, the potential disruption of oil tanker traffic in the Gulf is already having an impact on oil prices.”

Mr Hayward appeared to enjoy Davos – and his message was positive. Now, as he contemplates the growing disaster of the spill in the Gulf of Mexico this weekend, he cannot be so sure.


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