Pickering:
OIL SPILL UPDATE (OIH $97, E&P $509, XOI $941, XNG $529)
· Stock performance – The manic/depressive market sat on BP once again (-9.7%), but interesting reaction to Congressional letter in APC stock (+0.5%) may indicate investors willing to bet that potential BP gross negligence lets Anadarko off hook. Transocean ($44.78 - A)...not so much (-4.4%). HAL and CAM performance in-line with general OIH malaise (-1.3%). Details of BP response to Coast Guard directive ("hurry up") contain plans of BOP choke/kill lines as additional flowback, with permanent risers set and larger containment device coming by mid-July. All looks good on paper, but execution obviously the key. Further roller coaster likely this week – Wednesday has potential for upside/pleasant surprise for spill stocks (BP/White House discussion might actually go OK), while Thursday could be ugly. See thoughts below on information and reactions.
· Buckle up – While the rhetoric around BP going bankrupt has (appropriately!) subsided, there is no question that the US government is going to keep pressing BP. The deadline for a contingency plan is one example of this heat, as is yesterday’s request for a reimbursement fund. The White House / BP meeting on Wednesday is another. The upcoming Waxman-Stupak hearings on Thursday is yet another. The writing has been on the wall and remains on the wall…the government thinks BP messed up and is going to keep pushing hard. This is not going to be a pretty week for BP…and we’d guess that they will start throwing people under the bus sometime soon (so don’t be surprised if you hear things in Thursday’s Hayward testimony about RIG’s decisions on the well and CAM’s BOP, etc). We stick with our prior commentary on this subject – BP’s well, BP’s decisions, BP’s liability / indemnification.
· White House and BP meeting (Wednesday) – Remember that there are multiple wings of the government now involved in the BP situation – with different agendas. Waxman-Stupak want answers and will push hard with lots of rhetoric. However, President Obama and his office have pushed about as hard as they can. Hard enough that the British government has reacted. Hard enough that the market spent some time questioning BP’s solvency. So, we wouldn’t be surprised if Wednesday’s White House meeting might actually result in some dovish commentary from the administration – “we think BP understands the gravity of the situation”; “we had constructive talks”; “we need to focus on the situation at hand – getting the well capped and the oil cleaned up”; “we think BP will do the right thing as it relates to those impacted by the oil spill”, etc. Will they leave these meetings with a reimbursement fund or any other concrete promises from BP – doubt it. But given how ugly things have been – isn’t diplomacy and softer talking the most likely Wednesday outcome?
· What the government thinks went wrong (Thursday) – Representatives Waxman and Stupak sent a letter to BP’s Tony Hayward in preparation for Hayward’s testimony Thursday June 17, 2010 before the Subcommittee on Oversight and Investigation. This letter contained no meaningful new information (at least not new information to those reading our daily updates)…but paints a damning picture of BP’s operating practices as it aggregates lots of information in a succinct letter (link). The government had access to lots of information that we had guessed at, suspected or heard about – confirming a process focused on going fast..and loose. Notably – this information is pointed directly at BP, with no negative comments or implications for any vendors associated with the process (RIG, CAM, SLB, SII, WFT, HAL). The letter points out five decision areas of focus and references previously undisclosed BP documents, Committee inquiries, and damning email commentary.
1) Well design – The decision to run a long string (production casing) instead of a more costly liner/tieback. This may have saved $7-$10mm. A mid-April internal BP document indicated a liner/tieback “is now the recommended option” (and not a long string). The main arguments against a long string were cement simulations indicated a successful cement job was unlikely, unable to meet MMS regulations of 500’ of cement above the top of the reservoir, and it creates an open annulus to the wellhead with the seal assembly as the only barrier. A BP Drilling engineer emailed a colleague “this has been a nightmare well which has everyone all over the place”.
2) Centralizers – BP ran fewer casing centralizers (6) than HAL recommended (21). Centralizers are run on the casing and help keep the pipe centered in the hole to help ensure 360 degree cement coverage (pipe leaning against the side of the hole is hard to cement and can lead to channels). HAL’s cement simulation indicated “SEVERE gas flow problem” with 6 centralizers and with 21 only a “MINOR gas flow problem”.
3) Bond log – BP’s decision not to run a bond log. BP had kept the SLB logging crew on standby (after running the open hole logs etc. a few days before) to run a cement bond log if needed. BP sent the crew home the morning of the explosion…their services were not needed. The Committee sought out the expertise of a failure consultant who suggested it was “unheard of” not to run a bond long with a long string design and described the decision not to run a bond log as “horribly negligent”.
4) Mud circulation – BP performed only a partial circulation of the wellbore prior to the cement job. Hole circulation (or conditioning) prepares the well for cementing by removing well cuttings/debris from the bottom of the well which could contaminate the cement. It also allows controlled circulation of any gas pockets which may be in the mud. The Committee letter states that BP only circulated only 261 barrels, just a small fraction of the mud in the Macondo well”…even though API recommended practices called for a larger volume to be circulated. Why a smaller circulation volume? A HAL representative suggested “the well would not have handled too high of a rate. So it would have taken a little bit…longer than usual”. This may be in reference to the lost circulation zone at the bottom of the hole, which would have required lower pump rates/pressures.
5) Lockdown sleeve – BP had not installed the lockdown sleeve on the 9 7/8” production casing hangar prior to the explosion. Although the casing hangar and seals are normally held into the wellhead by gravity, the lockdown sleeve prevents the casing from becoming “buoyant” if pressure were to build up in the production casing annulus. The Committee points to comments by RIG and HAL that the casing sleeve was not locked down. We would also point to the DRQ technician on the Horizon who testified to the Coast Guard (Sat May 29) that he had not locked down the casing hangar immediately following setting the production casing hangar/seals (as is customary) on instructions from BP.
· How will BP react to Waxman-Stupak letter? This is no longer talking head Lamar Mackay saying “I don’t know” or “I am not aware”. This is CEO Tony Hayward being confronted with specific issues and expected to answer. On the record. BP has almost no choice but to say: We thought the well procedure was safe. We didn’t think we needed the tests..so we didn’t run them. All the procedures were acceptable, had been done in other wells by other operators (not just BP) and were approved by the MMS. Expect BP to occasionally deflect toward vendors – Halliburton cement job, Transocean drilling decisions, Cameron BOP, etc. Will there be a smoking gun? Hard to see that as it would imply there is information that the government didn’t get a chance to review (can you imagine the steam from Waxman-Stupak ears if BP pulls out new documents). Additionally, after numerous gaffes, expect Hayward to be fairly tightly scripted..repeating statements numerous times to avoid spontaneous answers that might whiplash later.
· Additional Spill Containment – BP unveiled detailed spill containment plans (Link) which consist of several stages..the first implemented early this week via producing through the BOP choke line (again…fingers crossed). Additional modifications (thru June and into early July) involve increasing surface capacity, adding the BOP kill line (assuming flow thru the choke line is successful), and increasing “hurricane efficiency” by installing flexible lines and buoyancy canisters. |
