The Real Gulf Disaster

The Falls Church News-Press has Tom Whipple, a former CIA analyst, as a contributor. I have posted links to his columns in the past. Today I saw a link at The Oil Drum to his latest effort and it is a reminder that Peak Oil is upon us.

If anything, the future is darker than before. Deep water drilling moratoriums aside, the real disaster in the Gulf is the apparent failure of deep water production wells to produce as advertised.

Someday, however, it will become apparent that the real disaster is taking place 150 miles to the south at BP's multi-billion dollar Thunder Horse oil platform that was supposed to extract a billion barrels of oil at a rate of 250,000 barrels a day (b/d). Production at Thunder Horse began in May of 2008 and by the end of the year had reached 170,000 b/d. Then something unexpected happened; instead of production increasing to the rated 250,000 b/d, production began to drop at 2-3 percent each month so by the end of 2009 production was down to 60 or 70,000 b/d. As BP is under no obligation to tell us what is going on, little news other than mandatory federal production reports have been released.

While new oil discoveries are trumpeted widely, failing projects, especially multi-billion dollar ones, just seem to fade away. Another Gulf project know as Neptune is not doing too well either. Neptune was expected to produce 50,000 b/d. The platform peaked at 40,000 b/d in August 2008. Sixteen months later production was down to 16,000 b/d. It now looks as if the platform that was supposed to produce 150 million barrels of crude will produce on the order of 33 million. The pattern emerging here is that deepwater oil production is not only dangerous, it may not be all it is cracked up to be.

The consequences of the low production and the Deep Water Horizon catastrophe are serious, and on the immediate horizon.

If it turns out that 10 or 20 percent of initial estimates is all that can really be recovered, then the cost of this oil will be prohibitive. Deepwater wells were running $100 to in some cases $200 million per well drilled. Platforms that drill and support multiple wells can easily get into the billions of dollars before they are producing. If these wells unlimitedly yield only a fraction of what their planners were hoping for, there are going to be some very broke oil companies, or some very expensive gasoline in our future.

The next question is what the fallout from the Deepwater Horizon disaster will be for deepwater oil. The U.S. has already imposed a moratorium on further drilling until the causes of the blowout are fully understood. This moratorium alone is almost certain to add substantially to the costs of drilling in deepwater. Add to this the new and most likely tougher drilling regulations and the development and deployment of a new generation of blowout preventers that work reliably and we are going to see some very high cost oil coming from offshore wells.

The reduction in demand in the US, up to about 1M bbl/day, has to do with conservation and improved efficiency. As a result, oil has stayed within the $70s, only briefing flirting with the $80s/bbl. If Whipple's analysis is correct, and it certainly makes sense to me, then we may see the return of $100+/bbl prices. Alternatively, we may simply find ourselves having to rework our lifestyles in order to live within our energy means, no simple feat.

Either way, the effects of Peak Oil are about to land in our laps. If you were expecting a return to a growing economy and BAU, forget it.