June 18, 2010
More on BP
The Christian Science Monitor details 5 decisions by BP on the Deep Horizon drilling that saved costs but added to risks: (1) foregoing section casing and tiebacks, (2) using only 1/3 the recommended number of stabilizers, (3) failure to test the cement seal, (4) implementing only partial mud circulation, and (5) failure to secure the wellhead. And they don't even mention the acoustic shut-off switch.
Notwithstanding, the Wall Street Journal reports that the White House misrepresented the recommendations of a panel of experts from the National Academy of Engineering regarding details of a proposed moratorium. And I must say that I find the suggestion that the company should compensate oil workers from other firms put out of work by the government's moratorium deeply troubling. I see no economic or legal rationale for this, but I understand the politics-- let's use somebody else's money to buy off those groups that the government's own decisions may anger.
And just whose money shall we use? Well, BP's, of course, which stands for British Pensioners.
Posted by James Hamilton at June 18, 2010 07:05 AMdigg this | reddit
It's all in good fun. And we're just warming up anyway.
After all, we just screwed the longterm unemployed.
And soon we'll need to be screwing our own pensioners. First with Medicare, and next with SS.
Austerians Uber Alles!
Posted by: Beezer at June 18, 2010 08:17 AM
"And I must say that I find the suggestion that the company should compensate oil workers from other firms put out of work by the government's moratorium deeply troubling. I see no economic or legal rationale for this" -
Here's the issue. If BP had not done what it did then the government would not have to put in place the moratorium. The moratorium affects many more companies then just BP.
Should BP be allowed, through it's management decisions, to negatively affect other people and companies with not repercussions? Although standard free market theory the answer is yes, is dumping millions of gallons of oil in to the ocean standard free market theory?
Doing it through the courts would take years and then it would be too late for the worker who where put out of a job. They need a paycheck every week or so.
Is it perfect, no, but what is the other way? Having the taxpayers pay or having the oil workers go without any pay?
Posted by: John at June 18, 2010 08:53 AM
JH said: "And just whose money shall we use? Well, BP's, of course, which stands for British Pensioners." there is ~40% of the stock owned by Americans, many probably pensioners.
Posted by: CoRev at June 18, 2010 08:54 AM
This is the biggest federal government environmental failure in our nation's history. Much of the oil spill could have been relatively contained with proper management, but the federal government has botched the whole thing. The federal government is creating so many hardships on the states dealing with this that it almost appears intentional.
1. Miscommunication and disagreements between officials on federal, state, and local levels resulted in a lack of coordination and delays.
2. Federal officials changed their minds on key moves, sometimes more than once. Chemical dispersants to break up the oil were approved, then judged too toxic, then re-approved. By then the spill was out of control and weather prevented proper use.
3. The Obama administration criticized, debated and then partially approved a proposal by Louisiana politicians to build up eroded barrier islands to keep the oil at bay.
4. And critical mistakes were made in deciding where and when to lay the boom designed to keep the oil from reaching shorelines and precious wildlife breeding grounds. Initially the federal officials would not approve the booms. After LA Governor Bobby Jindal went public they approved 1% pending continued study. Today they have approved 40%.
5. The government didn’t have the right kind of boom. The contractors had adequate supplies of boom made for flat, open water, but they lacked even minimum supplies of boom built for the open ocean and its rougher seas.
6. Alabama authorities scoured the globe for the kind of boom they needed, they found it in Bahrain and flew it to the Alabama coast. Days later, the Coast Guard gave it to Louisiana.
7. The Coast Guard and Alabama authorities instead deployed lighter boom. And on June 10, oil breached Alabama’s Perdido Bay, an important fishing and tourism inlet.
8. Eight days ago, Louisiana Gov. Bobby Jindal ordered barges to begin vacuuming crude oil out of his state's oil-soaked waters. The Coast Guard shut down the barges because they said they needed to confirm that there were fire extinguishers and life vests on board, and then it had trouble contacting the people who built the barges.
And this from Okaloosa County Florida.
Okaloosa County isn’t taking oil spill orders any more.
County commissioners voted unanimously to give their emergency management team the power to take whatever action it deems necessary to prevent oil from the Deepwater Horizon spill from entering Choctawhatchee Bay through the East Pass.
That means the team, led by Public Safety Director Dino Villani, can take whatever action it sees fit to protect the pass without having its plans approved by state or federal authorities.
Commission chairman Wayne Harris said he and his fellow commissioners made their unanimous decision knowing full well they could be prosecuted for it.
Posted by: RicardoZ at June 18, 2010 08:55 AM
If BP were forced to pay the United States Government the full amount that BP plc (not just the North American subsidiary) owes in fines, it would go bankrupt. DOJ therefore has the leverage to extract any deal it wants because BP only exists at this point because of the mercy of the United States of America.
Posted by: jalrin at June 18, 2010 09:01 AM
If, as our host does here, one makes an argument based on an "economic or legal rationale", it is a bit of a change in rules to then care whether share holders are pensioners. If share holders are to exercise the influence over firms that class-thinking textbooks say they do, they need to be exposed to the risk of the firm's failure. They need to understand that their entire wad is at risk should the firm do something that is really, really stupid. Our host rather sneers at dragging politics into decisions about BP, but dragging in pensioners is dragging in politics.
Posted by: kharris at June 18, 2010 09:41 AM
"This is the biggest federal government environmental failure in our nation's history." - interesting point. You do make some point in your post but I noticed PB is no where to be seen in it. It is all the government did this. The government didn't do this.
The government is funded by taxpayers. Why does it need to keep booms? More exactly why does it need to spend taxpayer money on booms?
The government did not spill the oil. BP, through mismanagement, set the stage for it to happen.
The government should start throwing people in jail and hand the whole cleanup to two other oil companies. After 30 odd years of deregulation / self regulation it is in not position to do the actual clean up.
I still remember the whole Drill Baby, Drill chant. Well the government heard the call and did what the American people wanted. Opened the flood gate even more to allow more and quicker drilling by removing regulations.
It's my hope that blogs like this and others can show there are no simple answers to these types of questions but at least they give some of the facts and insight in to the thought process so folks can better understand the questions.
Posted by: John at June 18, 2010 10:09 AM
IMO,the BP blowout well has zero chance of being capped by the relief well because the steel casing collasped into the reservoir during the blowout. Per Matt Simmons (a 40 year expert in the oil business) this well will leak hundreds of millions of bbls of toxic oil/sludge for years. The ultimate cost of this blowout is trillions, not billions. The $20 BP funding over 4 years is nothing. In late July early August the American people will realize this is just the beginning and nothing can be done to stop the leak. Currently 2 mm bbls of oil are caught in a gaint circular GOM eddie and little oil is coming onshroe. This will soon change as the hurricane season starts and the near 90 degree water temperature creates massive storms. The President talked about the blowout in terms of the start of WWII. IT IS THE MOST SERIOUS THREAT TO THE USA SINCE WWII BELIEVE IT OR NOT.
Posted by: Jim at June 18, 2010 10:14 AM
BP can't be responsible for the actions of others, but that doesn't mean they are immune from the consequences. Whether a moratorium is justified or not, and it is rather dubious what a short term moratorium could reasonably accomplish or prevent any more damage than has already been done, those involved will bear the cost and rightly so since they are generating the risk. So while BP may not be responsible for all of it, they are still responsible for some of it.
Posted by: Lord at June 18, 2010 10:23 AM
that saved costs but added to risks:
As an engineer, I make this decision dozens of times a day. Just because someone saved costs and added risks doesn't mean they are (necessarily) irresponsible. And just because something bad happened, it doesn't (necessarily) mean that the decisions to add to risk were wrong.
We need to look at the corners they cut without the knowledge of what ended up happening in the end. Based on what I've read so far, it looks like BP did make the poor decisions.
If BP had not done what it did then the government would not have
This removes a serious amount of agency from the government.
If BP were forced to pay the United States Government the full amount that BP plc (not just the North American subsidiary) owes in fines, it would go bankrupt.
Do you have a refence for this? BP's cash flow is freaking huge, to say nothing of its assets.
If share holders are to exercise the influence over firms that class-thinking textbooks say they do, they need to be exposed to the risk of the firm's failure.
You are arguing for more companies like Wal*Mart and Microsoft and BP. They can afford big mess-ups.
Posted by: Dan Weber at June 18, 2010 11:05 AM
Cracks Show BP Was Battling Gulf Well as Early as February ---
BP Plc was struggling to seal cracks in its Macondo well as far back as February, more than two months before an explosion killed 11 and spewed oil into the Gulf of Mexico. It took 10 days to plug the first cracks, according to reports BP filed with the Minerals Management Service that were later delivered to congressional investigators. Cracks in the surrounding rock continued to complicate the drilling operation during the ensuing weeks. Left unsealed, they can allow explosive natural gas to rush up the shaft. ï¿½Once they realized they had oil down there, all the decisions they made were designed to get that oil at the lowest cost,ï¿½ said Peter Galvin of the Center for Biological Diversity, which has been working with congressional investigators probing the disaster. ï¿½Itï¿½s been a doomed voyage from the beginning.ï¿½
Posted by: rjs at June 18, 2010 12:25 PM
"As an engineer, I make this decision dozens of times a day. Just because someone saved costs and added risks doesn't mean they are (necessarily) irresponsible. And just because something bad happened, it doesn't (necessarily) mean that the decisions to add to risk were wrong." -
There are different levels of responsibility, it's not just yes or no. In the case of of decisions that case the death of someone there are murder or manslaughter and different levels for each.
The other challenge is, if for the sake of argument, lets say BP and the others involved did nothing wrong, who would then clean up the mess? Something similar to an "Act of God". Would it just fall to the tax payers by default? There is a flaw in the argument when it is framed up the above way. I think the real framing of the argument is who was involved with it pays the cost even if it was an "Act of God".
And then if there was too much risk taking, jail time.
Posted by: John at June 18, 2010 12:50 PM
1 million barrels is a slick 0.5 mi x 0.5 mi x 10 inches thick. Assuming it stayed in one place, you could sit on an (admittedly oily) surfboard and survey its entirety without binoculars.
BP's cash flow is about $8 bn per year, if I recall correctly. The cost of the spill is maybe 3-4 year's cash flow; bad, but not the end of the world. On the other hand, based on yesterday's testimony, I don't think BP will drill a new well in the Gulf for a long, long time.
BP should pay for its mess. The cost of the moratorium is an interesting question, since both BP (indirectly) and the govt (directly) are causes. Its allocation is a very interesting question.
What will the oil production companies in the Gulf look like in a few years? Will the smaller companies remain given the liability? Assuming BP divests its holdings, there may remain only a handful of players left. Right now, there are 13 companies with floating production platforms in the Gulf; of these, seven, including BP, can be considered in the 'supermajor' class.
The subprime meltdown was, and remains, an orders of magnitude bigger problem. If the Macondo well were capped, in three years, nature would have larger resolved the problem without much intervention. That the experience with a bigger spill at Ixtoc 1.
Oil prices in general also remain a much bigger problem, in my opinion. Historical, as well as April's, oil data suggest that , at $82 NYMEX oil, the US will shed oil consumption. We're back to $77 on pretty soft economic performance. I had earlier maintained that the US would fall back into recession if oil consumption expenditure exceeded 4% of GDP, or $82. (Jim had pegged the recession threshold at $130 oil.) Oil prices exceeded 4% of GDP in April, and May economics stats were pretty weak. In May oil prices fell substantially, by $10.50 to $73.50, and the economy seemed a bit better. So I think oil prices bear monitoring, and we should not assume they have a negligible impact on the US economy. At current oil prices, we have to assume that we have to re-hire the millions unemployed with very little incremental oil, if any. To my way of thinking, that may be a very serious issue.
The Gulf spill is a mess, visible and painful. But there are other issues less obvious, but more pervasive and with greater impact.
Posted by: Steven Kopits at June 18, 2010 02:03 PM
The number one stockholder in BP is the BlackRock hedge fund which caters only to millionaires. Also at the top of the list are sovereign funds for Kuwait and China. Now, my mama used to tell me to think of the starving children in China but this is embarrassing. British pensioners, indeed!
When will investors learn that you are not rewarded for taking risk that can be diversified away? Any manager that held more than 2% of their portfolio in BP should be fired and/or sued for incompetence.
Posted by: Joseph at June 18, 2010 02:33 PM
Who believes BP is the only oil company that takes short cuts when drilling to save money?
We did hear every one of the other majors implying that everyone knew BP took short cuts and BP was headed for disaster.
But then again, no one is pointing to oil industry insiders, or critics, and saying, see people saw this coming and tried to warn us.
And what do we never hear in the media or blogosphere?
Why not a single word about those wacko radical environmentalists screaming about the oil pollution. After all, the environmentalists are never right about anything. They yell and scream that oil drilling pollutes the environment, but hey, who cares about some snail those lying anticorporate leftists say is endangered. Oil drilling is perfectly safe because the oil companies use technology to protect the environment.
So, clearly, the people who call for shutting down drilling are just doing it because the hate America, because no other oil company has ever polluted and they never will.
The oil industry had a quarter trillion in profits last year because they take high risks, so screw them, they take huge risk of losses and are more than royally rewarded for doing so. Suck it up, stop whining, and pay for losing one, oil industry. If you didn't want BP to spoil things, then you should have snitched on them, but you all have a no snitching code because you could all be where BP is today in just an instant.
Posted by: mulp at June 18, 2010 04:00 PM
Pensioners... and Too Big to Fail are the big problem we've got in that we've got a huge cohort of the population in several advanced countries that do nothing but watch their pension plan performance day in and out. The governments are in thrall to what the markets "want" to keep everybody's pension afloat-whether that is in all of our long term interest or not. We are all busily dancing our way off the cliff.
Posted by: Doc at the Radar Station at June 18, 2010 07:02 PM
The well casing has likely failed along most of the upper well. We are looking at 40-70 000 bpd depending on whether the pumping cap is working.
The relief well might stop some of the flow, but with the well damaged it won't be possible to cap it unless they can junk shot the well from below the damaged casing.
BP is facing $40 to $75 billion in costs and damages. The effect on pensioners is unfortunate but not a reason to not punish, especially considering who are really the main shareholders.
If we want cheap oil and are willing to pay for it with massive pollution, the oil industry should have to create a pool which funds cleanups. They would also fund an inspection agency. Toss in severe criminal sentencing guidelines for failures and you better believe we will get as close to risk-free drilling as is possible. And oil at $100/bbl, but that is the price we pay for not killing ourselves.
Posted by: Expat at June 19, 2010 01:55 AM
JDH makes two points. The first is to point to a WSJ opinion piece that says the Obama Administration misrepresented the conclusions of a blue ribbon panel of experts. Perhaps, but I think it's at least as likely that the panel itself may have misrepresented the scope of its portfolio. The panel agreed with a 6 month moratorium on new drilling; the disagreement is about a moratorium on existing wells. But the decision about extending the moratorium to existing wells is one that is largely outside the expertise of the panel of engineers. If you look at the reasons cited by Ken Arnold (an engineer and industry consultant) as to why the panel would have "balked" at a 6 month moratorium, it's pretty clear that all four of those reasons are largely outside of the expertise and portfolio of the engineering experts. The risk factor that the Administration was addressing wasn't just the risk of some disaster in the future, but also the risk of being able to handle all kinds of Gulf contingencies during hurricane season. Recovery resources are stretched to the limit right now; there's simply no wiggle room for another risk, even if the probability of failure is very low. It's a capacity problem as much as an engineering problem. The portfolio of the panel was to provide narrow engineering expertise; their portfolio did not extend to questions of economic risk. And in any event, it appears that the panel effectively agreed with a 1 month moratorium to allow new safety procedures to be implemented, so the argument is about 1 month versus 6 months. Pretty thin disagreement. The WSJ is desperate.
The second point addresses the fairness of making BP compensate oil workers from other firms put out of work during the moratorium. So it would be better if the firms who didn't cause the spill should compenstate their workers instead of handing the bill to BP??? So collective punishment is the new standard of justice? Given that the Administration is imposing a 6 month moratorium, isn't it better to have BP compensate workers from other companies? Who else should pay? Which leads me to think that the fairness argument of having BP compensate idle workers, is really just a backdoor critique of the moratorium itself. The "fairness" argument only works if you first assume the Administration was wrong in imposing a moratorium. If you agree with the moratorium, then I don't see how it would be more fair to make all companies pay instead of just BP.
Posted by: 2slugbaits at June 19, 2010 06:09 AM
One other point about the regulations and safety procedures for existing wells that the panel did support. According to the WSJ's primary mouthpiece in the interview, the necessary changes could have been done in 30 days. Fine, except that's an engineering estimate as to how long it would take to apply the technical changes. As anyone who has ever worked in government can tell you (and I work in government), implementing the technical solution is the easiest part of the job. The policies, procedures and regulations that would have to be put in place before the technical solutions went out would take some time too. And that 6 month moratorium covers some of that time. You have to account for policy leadtime as well as technical leadtime.
Posted by: 2slugbaits at June 19, 2010 09:23 AM
in repsonse to Kpits above
he is wrong by three orders of magnitude
as I'm European I'll translate his measruements
half a mile by half a mile by 10 inches is basically 800 metres by 800 metres by .25 meters. This makes 160 000 litres. A barrel is approx 150 litres, i.e. a million barrels is 150 000 000 litres. 1000 times more
Kopic talsk nonsense
Posted by: fs at June 19, 2010 09:52 AM
What will the oil production companies in the Gulf look like in a few years? Will the smaller companies remain given the liability?
I'm not even sure they will be allowed to remain. BP has pockets deep enough to pay for this mess. Some of the others do not.
According to finance.yahoo.com, BP's Net Income is about $20 Billion a year. I'm a bit lost on the accounting, but the bulk of that goes into dividends and preparing new resources.
Posted by: Dan Weber at June 19, 2010 11:32 AM
Kopits is correct, and "European fs" is the one who is off by a factor of a thousand. 800m x 800m x 0.25 m = 160,000 m^3 = 160,000,000 liters = ~ 1,000,000 bbl.
Posted by: Warren at June 19, 2010 01:45 PM
2slugs makes an interesting point about why BP may be responsible, and should be held liable for, the moratorium - its episode has used up the emergency response materials. Other than that, the moratorium is either admission that existing regulations and procedures are not sufficient (if it is warranted), or it was not necessaary but instead came from political pressure to appease voters. If the former, by alerting us to this state of affairs (that the rewards are not worth the risks), BP should receive some compensation for its role in providing this information. If the latter, taxpayers should pay for the costs, for being so stupid they forced this unnecessary measure.
If BP is held to account, the episode may put TBTF in reverse - only small companies would do the drilling, owing to the asymmetry of risks and rewards (owing to limited liaiblity, the risk for a company is truncated at the value of its equity). Hence, as noted above, smaller companies should definitely NOT be allowed to participate in any further offshore drilling, unless they can post a bond from outside parties for potential damages.
Posted by: don at June 19, 2010 01:59 PM
Along the same lines as 2slugs: In the electric utility world, we build margin into the system for contingencies and operations and maintenance outages. When a contingency has already occurred or system reserves are tight, we have formal and informal moratoriums on doing normal operations which will increase the risk of another contingency or reduce reserves further. One of the formal mechanisms is called a "No-Touch-Day."
That firms be prohibited from running the same normal risks they would run with a ready response in the wings, when no such ready response exists, is hardly insupportable. As such the damage they suffer from the necessary moratorium has been caused by BP's catastrophic failure and the cost should be borne by BP.
Posted by: benamery21 at June 19, 2010 06:34 PM
I'm disappointed in this post. I haven't seen any news reports saying that President Obama forced BP to pay idled oil industry workers. It seems that BP is planning to do it on a voluntary basis. And when someone gives up $100M voluntarily, they usually expect something in return.
Perhaps they consider it a PR expenditure. But perhaps the Obama administration gave BP assurances that they would act in a manner that BP expects would limit its ultimate liability.
If that was the case, BP, the Obama Administration, and the political constituency of oil industry workers/the Gulf Coast would benefit at the expense of taxpayers/other claimants. This is the kind of back-room dealing I would worry about, not whether the Obama administration bullied BP into compensating workers idled by the moratorium.
Posted by: Basho at June 20, 2010 11:17 AM
So BP wanted to extract the oil at the lowest cost. Why is everyone surprised by this? Walmart wants to buy the products it sells at the lowest cost. Pfizer wants to develop new drugs at the lowest cost. This is how capitalism works. I don't see Americans complaining that their gas is too cheap.
Posted by: John Smith at June 20, 2010 01:01 PM
"I don't see Americans complaining that their gas is too cheap"
Don't get out much, do you? I'll go on record as complaining that gas is too cheap at the pump. So did everyone who voted for the climate bill. Most economists agree that a Pigouvian tax on oil is needed.
This points up another flaw in your rhetoric. BP wasn't in cost minimizing mode, they were in profit maximization mode. They didn't care what it cost, as long as it cost someone else.
Posted by: benamery21 at June 20, 2010 10:19 PM
This post wrankles a bit considering that the equipment and contractors were American. Obama has successfully politicised this unfortunate event.
PS... 40-50% of BP ownership is American so which pensioners suffer in this politicized situation.
Posted by: Colin Henderson at June 20, 2010 10:30 PM
I am sick of the BP = British Pensioners formulation.
First, it is absolutely untrue. Look at the top five shareholders. None of them represent pensioners anywhere. Why ignore the facts?
Second, no one who makes any claim of understanding economics or finance should be complaining. Whoever loses their BP common share value and dividends because of the colossal foolishness of BP's management has paid for a front row seat in the arena of free market capitalism. Common shares are risk capital, and BP's management lost the money fair and square.
One can simply say that James Hamilton just disqualified himself from any further credibility as a commenter on markets and capital.
Posted by: Dollared at June 20, 2010 10:30 PM
About 30% UK equities are held by UK pension funds.
These funds are c. 50% exposed to UK equities in portfolios of shares, property and bonds.
BP was the largest stock in the index (about 8%) at its peak.
So indeed these are UK pensioners and future pensioners (plus personal pensions, which would be buried in unit trusts aka mutual funds, and life insurers which are the leading providers of personal pensioners).
BP was about 4% of UK pension fund assets (50% X 8%) at its peak. And 14% of dividend income.
Posted by: valuethinker at June 28, 2010 09:48 AM
In a fit of deregulatory-justified largesse--pure, unbridled pork--Congress imposed a $75m limitation on any economic damages, completely justifying BP in what will undoubtedly prove to be negligence. But, laws are laws and should be upheld without backdoor ex post facto additions or repeals. Those ideologies/individuals creating them should be held responsible at the polls with any applicable policy reversals being on a going-forward basis only. For the same reason I was opposed to Bernanke targeting his helicopter only at investment banks (which is a monetary-accomodated but otherwise pure, massive, highly directed tax subsidy) & opposed to the IBank bail-outs (backdoor repeals of BK laws). As for the BP externalities, Coase Theorem bargaining does not apply for state governments as class-action proxies in Coasean private bargaining with BP et al via use of taxation as a negative bribe due to federal pre-emption but it does apply for subsidization. So BP was not subsidized enough by LA/MS to take greater caution. Alternatively, LA/MS got what they voted for, since they did not tax themselves adequately to give BP the proper positive bribe, ie, subsidy. The lost time to oil workers from a moratorium is a very legitimate portion of the BP externality; and, the moratorium itself is so eminently sensible in the context of strained response capabilities to another such crisis as to be as common business practice. Neither the lost time nor the moratorium should be an economic issue.
Posted by: d4winds at July 5, 2010 08:51 AM